On November 20, 2014, the First Department issued a decision in Matter of Kenneth Cole Products, Inc., 2014 NY Slip Op. 08105, holding that a going private transaction was subject only to business judgment rule.
In Matter of Kenneth Cole Products, the plaintiff challenged a transaction by which a public corporation went private. The First Department affirmed the trial court’s decision, rejecting the plaintiff’s argument that the trial court was
required to apply the “entire fairness” standard to the transaction by which Mr. Cole (the majority shareholder of former defendant Kenneth Cole Productions, Inc. [the Company], a New York corporation) took the Company private. Alpert v 28 Williams St. Corp. (63 NY2d 557 ) — on which plaintiff principally relies — states, “Corporate freeze-outs of minority interests by mergers occur principally in three distinct manners: (1) two-step mergers, (2) parent/subsidiary mergers, and (3) going-private’ mergers where the majority shareholders seek to remove the public investors. This court does not now decide if the circumstances which will satisfy the fiduciary duties owed in a two-step merger will be the same for the other categories”. Alpert involved a two-step merger where the merger plan did not require approval by any of the minority shareholders. By contrast, the merger in the case at bar required the approval of the majority of the minority (i.e., non-Cole) shareholders.
Although Mr. Cole had a conflict of interest, he did not participate when the Company’s board of directors voted on the merger. Plaintiff has not alleged that the remaining members of the board (Blitzer, Grayson, Kelly, Peller, and Blum) were self-interested.
Plaintiff does contend that the members of the special committee which the Company established to evaluate Mr. Cole’s proposal (Blitzer, Grayson, Kelly, and Peller) were controlled by Mr. Cole. However, at least under Delaware law, which all parties urge us to consider, it is not enough to charge that a director was nominated by or elected at the behest of those controlling the outcome of a corporate election.
. . .
In this particular case, pre-discovery dismissal based on the business judgment rule was appropriate since there are no allegations sufficient to demonstrate that the members of the board or the special committee did not act in good faith or were otherwise interested.
(Internal quotations and citations omitted).