Entire Fairness Test
When the business judgment rule does not apply — because directors are interested or not independent — courts apply the entire fairness standard of review. The defendant bears the burden of proving the transaction was entirely fair. Entire fairness has two components: (1) fair dealing and (2) fair price.
Elements
- Fair dealing: how the transaction was timed, initiated, structured, negotiated, disclosed to the board, and how the approvals of the directors and shareholders were obtained
- Fair price: the economic and financial terms of the transaction — value of the corporation’s assets, market value, earnings, future prospects, and any other relevant factors
Both elements are considered together; a transaction may be entirely fair even if the process was imperfect, if the price was clearly fair. However, a grossly unfair price is difficult to cure with a perfect process.
Triggers
Entire fairness applies when:
- A majority of the board is interested in the transaction
- A controlling shareholder is on both sides of the transaction (squeeze-out merger, parent-subsidiary transaction)
- A management buyout (directors are acquiring the company)
- Any transaction where the BJR presumption has been successfully rebutted
Burden of Proof
Default: The defendant (interested party) bears the burden of proving entire fairness.
Burden shifting: The burden shifts to the plaintiff to prove unfairness if:
- The transaction was approved by a fully empowered special committee of independent directors, OR
- The transaction was approved by a majority of the minority (disinterested shareholders), after full disclosure
MFW standard (Kahn v. M&F Worldwide Corp.): If a controlling shareholder conditions its merger proposal from the outset on both (1) approval by a fully empowered SPC and (2) a majority-of-minority shareholder vote, and both conditions are satisfied, the standard of review is the business judgment rule (not entire fairness).
Policy
- Entire fairness review deters self-dealing by placing the burden on interested parties to justify the transaction
- Requires defendants to prove both process and price were fair, providing a comprehensive review of conflict transactions
- The MFW/burden-shifting framework incentivizes the use of protective mechanisms that approximate arm’s-length bargaining
Key Cases
| Case | Rule |
|---|---|
| Weinberger v. UOP, Inc. (Del. 1983) | Articulates entire fairness standard for freeze-out mergers; DCF and other modern valuation techniques allowed in appraisal |
| Kahn v. Lynch Communication Systems (Del. 1994) | Controlling shareholder bears entire fairness burden; special committee does not shift burden unless fully empowered |
| Kahn v. M&F Worldwide Corp. (Del. 2014) | MFW: BJR applies to controlling-shareholder mergers where SPC + MOM conditions set from the outset |
| In re MFW Shareholders Litigation (Del. Ch. 2013) | Applied MFW framework; both procedural conditions must be in place before any substantive economic negotiation begins |