With its recent decision in In Re Kenneth Cole,1 the New York Court of Appeals expressly adopted the standard from Delaware’s highest court in its 2014 Kahn v. M&F Worldwide Corp. (MFW) decision,2 governing transactions in which a controlling shareholder proposes to take a public company private.3 But perhaps not enough attention has been paid to these two influential courts’ having put the proverbial nail in the coffin of the proposition that ad hoc judicial inquiry provides better protection of shareholder rights than a properly run corporate process, overseen by independent fiduciaries. (The authors represented the independent directors of Kenneth Cole Productions in this case.)
For many years, attorneys, supported by influential academics and judges, have criticized the deference to the business decisions made by corporate directors as poor public policy and harmful to shareholders. Many claimed that application, and expansion, of the business judgment rule was symptomatic of a “race to the bottom” in corporate law. That theory, most famously asserted by William Cary, chairman of the SEC from 1961 to 1964,4 posits that states introduce rules favoring managers that permit the appropriation of the firm’s surplus at the expense of the shareholders.
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