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December 03, 2025 | By Patrick T. McCloskey
In Macomb County Retiree Health Fund v. MSC Industrial Direct Co Inc. et al.,1 the New York County Commercial Division denied motions to dismiss claims related to an equity reclassification on grounds the complaint alleged facts sufficient to invoke the entire fairness standard. Evaluating the so-called MFW procedural safeguards2 endorsed by the New York Court of Appeals in Kenneth Cole Productions, Inc.,3 Justice Andrew Borrok ruled the complaint alleged reasonably conceivable facts that many of the safeguards were not satisfied. As a result, the court concluded the defendants did not satisfy their burden of demonstrating entire fairness.
Background
MSC Industrial, a New York corporation, had a dual class voting structure. Its Class A shares are listed on the NYSE and are entitled to one vote per share. Its unlisted Class B shares were held by family controlling shareholders before the reclassification and were entitled to 10 votes per share. The reclassification resulted in the holders of the Class B shares receiving 1.225 Class A shares for each Class B share—a premium of 22.5%. The plaintiffs characterized this premium as “an improper $156 million windfall.”
Despite approval by a special committee of the board and approval of a majority of the minority shareholders, the court applied entire fairness due to a flawed process, conflicts between the controlling shareholders and the special committee members, and, perhaps most problematic, the failure of the proxy statement to disclose an existing certificate of incorporation provision that gave the Class B holders the right to convert into Class A stock on a one-for-one basis (i.e., with no premium).
A poisoned process
Citing Kenneth Cole, the court stated, “a controller, conflicted transaction, such as the one here, must be conditioned at inception on both special committee approval and an uncoerced, informed majority of the minority [shareholder] vote.” The court distinguished Kenneth Cole, where the Court of Appeals ruled the business judgment rule applied, pointing out that in MSC the principal controller did not engage the full board from the outset. Instead, the principal controller “approached [a] longtime family friend, associate and Board ally, and schemed with him as how to reclassify the [family’s] Class B shares into Class A shares at a substantial premium.” For the court, there was “a poisoned process” because the principal controller and his longtime friend who was independent “in name only” were alleged to have “sought from the outset to disempower the Board from making an informed review of the exchange of [] the Class B shares at a substantial premium not provided for in the Certificate of Incorporation.”
A conflicted special committee
Citing In re Cadus Corp. S’holders Litig. 4 in support of the second MFW procedural safeguard, the court conveyed that a conflicted controller transaction must be “approved by a special committee that is free from the controller’s influence [] such that their personal, financial, or professional ties could not compromise their judgment.” The court recited some of the alleged conflicts that each of member of the special committee had with the conflicted controllers, including a prior case where the chair of the special committee was found to have been involved in an “egregious” stock option backdating scheme that benefitted the principal conflicted controller.
The special committee was not sufficiently empowered
Citing MFW,5 the court articulated the third MFW procedural safeguard as follows: “a special committee must [] have genuine authority to select its own advisors and reject the controller’s proposal.” In finding this safeguard was not satisfied, the court pointed out the lawyers for the special committee were pre-selected and not vetted for conflicts.
In addition, the court focused on the special committee’s initial response to the conflicted controller’s opening premium proposal of 35%, pointing out that despite the one-for-one conversion provision in the certificate of incorporation, the special committee’s initial response was a 12.5% premium (instead of no premium).
Uninformed vote of the minority
Citing MFW and City of Sarasota Firefighters’ Pension Fund v. Inovalon Holdings, Inc.,6 the court wrote that for the fifth MFW procedural safeguard, “a vote of the minority shareholders must be fully informed.” The court found “[t]his did not occur” because “material information was omitted the proxy.” Specifically, the proxy statement failed to disclose the certificate of incorporation provision that entitled each Class B holder to convert its shares into Class A shares on a one-for-one basis. The materiality of this provision cannot be overstated because under the charter the company was under no obligation to give any Class B holder more than one share of Class A stock upon conversion a Class B share. Put another way, the reclassification gratuitously gave the Class B holders a premium of .225 Class A shares per Class B share.
The court did not address the sixth MFH procedural safeguard and there was nothing in the court’s decision suggesting the minority stockholders were coerced.
Exculpated claims and standing
Aside from the MFW procedural safeguards, the court ruled the complaint adequately alleged breaches of the duty of loyalty and rejected the defendants’ argument that the claims were exculpated under the certificate of incorporation. The court also ruled that the plaintiffs’ claims were direct, not derivative, and therefore the plaintiff was not required to make a demand on the board. However, the court found that even if the claims were derivative, the complaint alleged facts sufficient to plead demand futility (citing Plymouth County Retirement Ass’n v. Schroeder, 576 F. Supp. 2d 360, 369 (EDNY 2008)).
Takeaways
This case is significant because it was not a change of control or a going private transaction, yet the court still applied Kenneth Cole and evaluated the MFH procedural safeguards.7 In addition, this case shows that the MFH procedural safeguards are not just boxes to check. The MSC board formed a special committee that had its own legal and financial advisors, the special committee obtained a fairness opinion, and the deal was even conditioned on the affirmative vote of a majority of the minority shareholders. Nonetheless, the conflicted controller tainted the process by initially going to a director ally instead of addressing the full board at the outset. In addition, the members of the special committee were found to be conflicted. Most importantly, the special committee tiptoed around a provision in the certificate of incorporation that gave the Class B holders the right to convert their shares on a one-for-one basis. Not only did the special committee and its advisors fail to take this provision into consideration in negotiating the transaction, this provision was not disclosed in the proxy statement that ran 98 pages plus annexes of roughly 117 pages.8
DGCL amendments
One interesting sidenote to the MSC decision is that the March 25, 2025 amendments to Section 144 of the Delaware General Corporation Law (DGCL) modified certain of the MFW procedural safeguards. Among other things, the amendments relaxed the requirements applicable to conflicted controller transactions that are not going-private mergers (i.e., the category applicable to MSC). Under the new DGCL 144, the business judgment rule will apply to such transactions if either (i) the transaction is approved by a special committee or (ii) the transaction is approved by a majority of the minority stockholders. The DGCL amendments are retroactive except for lawsuits pending before February 17, 2025. The complaint in MSC was filed in March 2025, so technically the DGCL amendments would have retroactively applied if MSC were a Delaware corporation. Even though MSC is not a Delaware corporation, the court’s heavy reliance on Kenneth Cole and MFW raise an interesting issue as to whether the conflicted controller analysis under New York law should be modified considering the recent DGCL amendments.
The DGCL amendments were not referenced in the MSC decision, and it seems unlikely the amendments, even had they been considered, would have changed the outcome. As referenced above, the MSC court found that both (1) the special committee was conflicted, and (2) the majority of the minority shareholder vote was uninformed. Nonetheless, it will be interesting to see if the DGCL amendments come up in future conflicted controller transactions governed by New York law.
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This post is for general informational purposes only and does not constitute legal advice. No one should rely on the information in this blog post without seeking appropriate legal, accounting, tax or other appropriate advice from an attorney, accountant or other professional properly licensed in the applicable jurisdiction(s).
1 2025 NY Slip Op 51839(U) (November 14, 2025).
2 This is a reference to the safeguards meant to preserve the business judgment rule in a conflicted controller transaction. These safeguards are derived from Kahn v. M & F Worldwide Corp., 88 A3d 635 (Del. 2014), a Delaware Supreme Court decision upon which Kenneth Cole is based. In Kenneth Cole, the New York Court of Appeals recited the MFH procedural safeguards as follows: “(i) the controller conditions the procession of the transaction on the approval of both a special committee and a majority of the minority stockholders; (ii) the special committee is independent; (iii) the special committee is empowered to freely select its own advisors; (iv) the special committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.” (quoting MFW).
3 27 NY3d 268 (2016).
4 189 AD 3d 437, 437 (1st Dept 2020).
5 88 A3d at 645.
6 319 A3d 271, 288 (Del. 2024).
7 In a footnote, the court acknowledged “[a]s discussed, the transaction at issue in the underlying case is a conversion transaction at a premium ratio, which diluted the minority Class A shareholders’ interest in the Company as opposed to the one-for-one conversion ratio provided for in the Certificate of Incorporation — not a proposed buyout of the minority class A shareholders. Nonetheless, the Court assumes for the purpose of this motion that business judgment rule protection would be available if there was not a reasonably conceivable set of facts that the MFW procedural safeguards were not satisfied.”
8 Interestingly, the proxy statement was included in a Form S-4 that registered the issuance of the Class A shares to the former Class B shareholders. Item 601 of Regulation S-K requires a Form S-4 to include a hyperlink to the registrant’s certificate of incorporation. The MSC Form S-4 included a hyperlink to the form of restated certificate of incorporation (i.e., the one to be effective after giving effect to the reclassification), but not the existing certificate of incorporation, which is the document that contained the one-for-one conversion provision. The Form S-4 incorporated MSC’s last Form 10-K, which is also supposed to contain a hyperlink to the certificate of incorporation, but that document has an odd footnote for the certificate of incorporation that reads, in part, “[t]his exhibit was originally filed in paper format. Accordingly, a hyperlink has not been provided.”
