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Controlling shareholders can compel the sale of minorities’ shares in freezeouts, potentially to their financial detriment. To limit controllers’ opportunism and support the value of minorities’ investments, the Delaware supreme court has endorsed strong minority shareholder protections under the rubric of 'Entire Fairness' – the governing standard for cash-out mergers. However, the court of chancery has refused to apply Entire Fairness to tender offer freezeouts, and is advocating unifying freezeout doctrine around a looser, deferential standard of review. The influence of popular and Congressional concern over excess plaintiff lawyers’ fees and discovery costs is likely making itself felt, although the true extent of these litigation agency costs is unknown and likely overstated. This influence is evident in three recent court of chancery cases analyzed herein (Pure, Cysive and Cox), which advocate lesser scrutiny of controllers’ transactions. There are several problems with the court of chancery’s proposed reforms, including that they conflict with Delaware supreme court precedent. A fair price duty is crucial to minorities’ bargaining leverage with controllers, and controllers’ power financially to oppress minorities if their freezeouts are thwarted ('inherent coercion') remains a genuine concern for equity. Lack of minority consent is still a problem that equity should be responsive to. This Article presents the case for applying Entire Fairness review to cash-out mergers and tender offer freezeouts. The sole exception should be when a controller authorized an independent committee to conduct an auction or market check and agreed to sell if a substantially higher offer for the company surfaced.


New York Law School Legal Studies Research Paper Series 09/10 #3