Nature of the Case
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Facts
Zhang (D) controlled 63.5% of Synutra (D). Zhang (D) proposed to take Synutra (D) private by acquiring the rest of the stock he did not control and proposed purchasing the remaining shares at $5.91, but he did not include a requirement that the sale be conditioned on the approval of a special committee and an affirmative vote of a majority of the minority stockholders. Zhang (D) retained Davis Polk & Wardwell LLP. Davis Polk was traditionally Synutra's (D) corporate counsel, Synutra's (D) CFO agreed to waive Davis Polk's (D) conflicts of interest before the Board met to discuss Zhang's (D) proposed merger. One week after the proposal, the Board met and formed a Special Committee. Before the meeting, the Board 'agreed that it would not substantively evaluate' the proposal. Davis Polk advised the Board at this meeting on its fiduciary duties. The only substantive action P alleges was taken at the meeting was the decision to establish the Special Committee. Two weeks after the initial offer, and only one week after the Special Committee was formed, Zhang (D) sent a second letter to the Special Committee stipulating that he would not proceed with the transaction unless it was approved by the Special Committee and approved by the holders of a majority of the voting stock not controlled by Zhang (D). No negotiations had commenced as of that time; the Special Committee had not met and the complaint is devoid of any facts suggesting that the Special Committee and Zhang (D) had engaged in any economic negotiations. P does not allege any negotiations or other meetings occurred before Zhang's (D) second offer, which conditioned the take-private offer on Kahn v. M&F Worldwide Corp. (Kahn) dual requirements. Under Kahn business judgment review applied to a merger proposed by a controlling stockholder conditioned before the start of negotiations on 'both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.' The Special Committee then hired Houlihan Lokey and Cleary Gottlieb as its independent financial and legal advisors. Houlihan met with the company's CFO to discuss what was needed for Houlihan to advise the Special Committee. The Special Committee met, received an update from Houlihan, and discussed Davis Polk's preparations of an initial draft of the merger agreement. Houlihan received the company's financial projections on April 22, 2016, met with the company's management on April 28, 2016, to discuss the projections, and provided the Special Committee with 'preliminary financial discussion materials' on June 3, 2016. The Special Committee met again on July 20, 2016, and decided to have Houlihan initiate a market check. None of the 25 potential bidders Houlihan contacted were interested, which is not surprising given Zhang's 63.5% voting control and the lack of any promise that he was a willing seller. After seven months of analysis and consultation with its advisors, the Special Committee authorized Houlihan to negotiate a higher price. Zhang (D) agreed to increase his offer to $6.05 per share. The Special Committee met again on September 22, 2016, and ultimately agreed to accept the $6.05 price, a 2.4% bump from Zhang's (D) original offer, a 58% premium to the trading price of Synutra's (D) stock when the offer was first made public, a 31% and 20% premium to the 30- and 60-day volume-weighted trading averages, respectively, and a price that Houlihan viewed as fair. P argued that this price was not fair. P failed to allege any lack of independence on the part of the Special Committee and admits that the Special Committee met 15 times over a nine-month period and was advised by independent financial, legal, and economic advisors. P did not allege that the majority-of-the-minority vote secured to approve the merger was coerced or not fully informed. P sued and the court held that the business judgment rule applied and dismissed P’s lawsuit. P appealed arguing that, because Zhang's (D) initial offer letter did not contain the Special Committee approval and majority-of-the-minority vote conditions, the business judgment rule does not apply. P claims if a controller's first approach does not contain the required conditions, then it is stuck with entire fairness review, even if the controller still commits itself to Kahn's requirements before any economic negotiations. P grounds its argument in the language of our opinion in Kahn that says both procedural protections must be in place 'ab initio' and the Court of Chancery's decision in Kahn uses the phrase 'from inception.' P argues for a quite specific and exacting reading of that language. Rather than meaning that the conditions be in place at the beginning of the Special Committee's process and before economic bargaining occurs, P argues that it means that the controller must include the conditions in its 'first offer' or else lose out on the business judgment rule. Ds argue that what Kahn requires is that these conditions be in place at the early stages of negotiations and that they be in place before any substantive economic negotiations take place so that the proffer of the conditions cannot be substituted for price concessions.
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