Delaware Supreme Court Explains 'MFW' Timing Requirement
When challenged, transactions involving a corporation and its conflicted controlling stockholder invoke Delaware's rigorous form of judicial scrutiny, known as entire fairness review.
May 08, 2019 at 09:00 AM
5 minute read
When challenged, transactions involving a corporation and its conflicted controlling stockholder invoke Delaware's rigorous form of judicial scrutiny, known as entire fairness review. But not always. With the right procedural protections in place, at the right time, even they can get the benefit of Delaware's default deferential analysis, known as business judgment review. Business judgment review usually equates to an early dismissal in litigation.
Under Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014), referred to as MFW, a conflicted controller transaction may get business judgment review when conditioned on two procedural protections. Those involve approval by an independent special committee and a majority of the minority stockholders. To effectively neutralize the controller's influence and avoid the safeguards becoming bargaining chips, MFW includes an important timing requirement. MFW's dual protections cannot be tacked on mid-negotiation; they must be imposed “ab initio,” i.e., “from the beginning.”
Recently, in Flood v. Synutra, 195 A.3d 754 (2018), the Delaware Supreme Court explained what “from the beginning” is. There, the court declined to adopt a bright-line test, holding that the dual MFW protections need not be part of the first expression of interest. Rather, under Synutra, it is enough that they are in place early and before substantive economic negotiations occur. Applied in that case, the rule permitted business judgment review in circumstances where the controller agreed to the MFW protections shortly after its initial expression of interest but before substantive economic negotiations.
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