CLIENT ALERT: Delaware Supreme Court Clarifies MFW’s Ab Initio Requirement
In a significant development for controlling stockholder transactions, the Delaware Supreme Court has held that the MFW ab initio requirement is satisfied so long as the controller conditions its offer on both of the requisite procedural protections prior to the commencement of any economic negotiations between the special committee and the controlling stockholder. In Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), the Supreme Court established that the business judgment rule will apply to a going private transaction proposed by a controlling stockholder when the controller conditions the transaction ab initio on two key procedural protections—approval by an independent, adequately empowered special committee that complies with its duty of care and the uncoerced, informed vote of a majority of the minority stockholders.
Confronted with a situation where the controller did not include the requisite conditions in his initial written offer, the Court nevertheless found that the MFW requirements were satisfied because the controller’s second offer contained the requisite conditions and preceded any economic negotiations with the special committee. Further, the Court overruled its prior dicta in footnote 14 of the MFW opinion in which the Court suggested that a plaintiff, in asserting a due care claim, may avoid application of the business judgment rule by challenging the sufficiency of the price. The Court clarified that “a plaintiff can plead a duty of care violation only by showing that the Special Committee acted with gross negligence, not by questioning the sufficiency of the price.”
The Synutra International case involved a proposal by Liang Zhang to acquire the approximately 36.5% of the stock of Synutra International that he did not already own. Zhang’s initial offer to Synutra was not conditioned on either special committee approval or a vote of a majority of the minority stockholders. Shortly after the formation of a special committee, however, Zhang sent a second letter to the newly-formed special committee that did contain these requisite conditions. As the Supreme Court explained in affirming the Court of Chancery’s dismissal of the action based on compliance with MFW, this second letter satisfied the ab initio formulation, coming as it did in the “beginning” of the process and before economic negotiations commenced. As the Court stated, “so long as the controller conditions its offer on the key protections at the germination stage of the Special Committee process, … and has not commenced substantive economic negotiations with the controller, the purpose of the pre-condition requirement of MFW is satisfied.”
In a lengthy dissent, Justice Karen Valihura took issue with the Majority’s adoption of a “when the negotiations begin” test. In Justice Valihura’s view, in order to obtain the benefits of the MFW standard, the dual protections must be contained in the controller’s initial formal written proposal. Advocating for a more bright-line approach, Justice Valihura observed that the Court may have “muddied the waters” when it summarily affirmed a dismissal in Swomley v. Schlecht, where the dual MFW conditions were satisfied at the start of the negotiations. Justice Valihura indicated that her “initial formal written proposal” approach would aid the courts in ascertaining the proper standard of review.
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