June Edition 2023

56 In order to alleviate the court’s increased scrutiny, it is of utmost importance that the board of directors of the Target forms a special committee, comprised solely of independent directors unrelated to the controlling shareholder, to examine the transaction, negotiate the terms of the transaction, and recommend to the board of directors whether to enter into the merger agreement and whether the merger consideration proposed to the shareholders is reasonable and fair. An effective and comprehensive process by a special independent committee would imitate an arms-length negotiation between the Target and its controlling shareholder and would ease the concerns of conflict of interest. In a recent Supreme Court opinion, the court ruled that if the approval of the merger was based on the recommendation of a special independent committee which acted effectively, the decision of the board of directors would be scrutinized according to the “business judgment rule”, meaning that if the directors made an informed good faith decision, with no personal interest, the decision itself would not be subject to scrutiny. This standard would apply also if there were minor immaterial defects in the conduct of the special independent committee. If, on the other hand, the special independent committee breached its fiduciary duties, acted for the benefit of the controlling shareholder or simply neglected to apply due process (e.g. did not retain advisors or did not review alternative transactions or structures), the transaction would be scrutinized according to the “entire fairness” standard, and the court would review all the terms of the transaction to ensure that they are fair to all shareholders. In intermediate cases, where there were substantial defects in the process of the special independent committee which do not rise to the level of breach of fiduciary duty, the court would apply an “enhanced scrutiny rule”, an elastic standard of review, which is adjusted to the magnitude of the defects in the conduct of the special independent committee. In applying the “enhanced scrutiny rule”, the court would review the terms of the merger to ascertain whether they were reasonable. The more serious the defects in the conduct of the special independent committee, the wider this review would be, and vice versa. Case law provides guidance on how to ensure that the process at the special independent committee be adequate enough to ensure that its decision is warranted the “business judgment rule” treatment. The special independent committee must be constituted of independent board members and must be authorized to retain its own independent legal counsel, who will participate on its behalf in all related discussions and negotiations between the controlling shareholder and the Target, alongside other economical advisors and experts on its behalf. Moreover,