A large body of law addresses corporate decision-making, particularly where a board of directors decides “yea or nay” on a merger transaction. When litigation ensues, the standard of judicial review that applies for determining the validity of the transaction is critical. The well-known “business judgment rule” gives great leeway to a corporation’s board. However, in certain circumstances, a more exacting “entire fairness” standard governs. In its recent opinion in In re Kenneth Cole Productions, Inc., Shareholder Litigation,1 the New York Court of Appeals, following Delaware’s lead, announced a new approach for reviewing going-private mergers derived from these two standards. Specifically, the court held that the board-friendly business judgment rule should apply to the challenge of a going-private merger if certain shareholder-protective conditions are met. The opinion sets forth a road map for how parties can structure such a merger to pass legal muster.

Transaction and Lawsuit

The litigation involves the well-known fashion business founded by Kenneth Cole, organized as a New York corporation named Kenneth Cole Productions, Inc. (KCP). KCP had two classes of common stock, class A (entitling the holder to one vote) and class B (entitling the holder to 10 votes). Kenneth Cole held approximately 46 percent of the class A shares and all of the class B ones. These interests gave Cole 89 percent of the shareholder voting power. Cole served on the board of directors. The class A shareholders elected two other directors. Class A and Class B shareholders together elected two more directors, enabling Cole as sole owner of the class B shares effectively to control those two director slots.

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