## Facts

- CONSOL Energy Inc. controlled CNX Gas Corporation, owning about 83.5% of CNX’s shares; the CNX board had four directors, three affiliated with CONSOL and one independent director.
- CONSOL initiated a controller freeze-out using a two-step structure: (1) a tender offer for the public minority at $38.25 per share and (2) a short-form merger at the same price if CONSOL reached 90% ownership.
- The tender offer included a non-waivable majority-of-the-minority condition, excluding shares held by CNX/CONSOL officers and directors.
- Before launching the offer, CONSOL entered into a tender/support agreement with T. Rowe Price (a large CNX minority holder and also a CONSOL stockholder) obligating it to tender its CNX shares at $38.25.
- CNX formed a one-member special committee consisting of the independent director; the committee initially lacked authority to negotiate and ultimately did not recommend the transaction.
- Minority stockholders filed a consolidated class action seeking to enjoin the tender offer and short-form merger.

## Issues

1. What standard of review applies to a controller-initiated, two-step freeze-out structured as a tender offer followed by a short-form merger.
2. Whether business-judgment review is available when the transaction includes a special committee and a majority-of-the-minority condition, but the committee does not affirmatively recommend the deal and the minority condition may be compromised by a lock-up with a significant minority holder.
3. Whether plaintiffs satisfied the requirements for a preliminary injunction based on alleged unfairness, coercion, or inadequate disclosures.

## Decision

- The court held the transaction would be reviewed under entire fairness, applying a unified controller freeze-out approach requiring both (i) an affirmative recommendation by an independent, empowered special committee and (ii) approval by a majority of unaffiliated stockholders to obtain business-judgment review.
- Because the special committee did not recommend the tender offer, business-judgment review was unavailable.
- The court found a reasonable basis to question the effectiveness of the majority-of-the-minority condition due to the tender/support agreement with a large, potentially conflicted minority holder.
- The court denied a preliminary injunction, concluding that any harm could be remedied through post-closing damages under entire fairness, there were no viable disclosure claims, and the tender offer was not coercive.

## Legal Principles

- A controlling-stockholder freeze-out is subject to entire fairness unless conditioned on both an affirmative recommendation from an independent, fully empowered special committee and a meaningful majority-of-the-minority approval.
- A special committee must be constituted and empowered from the outset to function as an arm’s-length bargaining agent; neutrality or non-recommendation does not satisfy the committee requirement for business-judgment review.
- A majority-of-the-minority condition may be discounted where side arrangements with significant minority holders effectively assure deal success or call into question whether minority approval reflects unconflicted stockholder choice.
- Preliminary injunctive relief is generally disfavored where post-closing monetary relief under an entire-fairness claim is adequate and the record does not show material disclosure violations or tender-offer coercion.

## Conclusion

The Court of Chancery allowed the controller’s two-step freeze-out to proceed but held that, because the special committee did not affirmatively recommend the deal and the minority-protection mechanism was reasonably questioned, the transaction would be evaluated under entire fairness with any remedy to be addressed primarily through a post-closing damages action.


In re CNX Gas Corp. S’holders Litig., 4 A.3d 397 (Del. Ch. 2010)