New York companies seeking to go private with a controlling shareholder may now be less vulnerable to shareholder

litigation.

On November 20, 2014, the New York Appellate Division, First Department, affirmed a New York trial court’s dismissal of a minority shareholder challenge to the going- private transaction of Kenneth Cole Productions, Inc. (KCP). In the transaction, Kenneth Cole, founder and controlling shareholder of KCP, acquired all other outstanding shares of KCP. Key to the decision was the KCP board’s implementation of procedural safeguards to protect minority shareholders, namely, (1) empowering a special committee of independent directors to negotiate the deal and (2) requiring approval by KCP's minority shareholders. The court found that these minority shareholder protections entitled KCP and its directors to rely on the deferential “business judgment rule” in lieu of the more stringent “entire fairness” standard of review. The case is consistent with Delaware’s evolving jurisprudence on the same topic (cf.Kahn v. M&F Worldwide) but marks the first time a New York state court has applied the business judgment rule in a challenge to a going- private transaction with a majority shareholder.

Factual Background -

On February 24, 2012, KCP announced that Mr. Cole, who then held approximately 46 percent of the company’s common stock and 89 percent of its voting power, had submitted a proposal to purchase, at a price of $15.00 per share, the publicly traded shares of KCP stock that he did not own. This price represented a premium of 17 percent over the price of KCP’s stock during the previous trading day. KCP’s board of directors immediately formed a special committee of four independent directors to negotiate the deal with Mr. Cole. When the special committee and Mr. Cole agreed on a price of $15.25 per share, the transaction was expressly conditioned upon approval by a majority of KCP’s minority shareholders. Ultimately, 99.8 percent of KCP’s minority shareholders voted in favor of the acquisition, and the transaction was consummated.