April 18, 2018

Controller Deals: Delaware’s Updated Ground Rules

Not too long ago, trying to understand what was necessary to defend a deal involving a controlling shareholder was like trying to drive home through a thick fog. You had a general idea where the road was, but it was still easy to end up in a ditch. That fog’s lifted quite a bit in recent years, and this Ropes & Gray memo reviews Delaware’s current ground rules for controller deals. Here’s the intro:

The Delaware Supreme Court’s 2014 decision in Kahn v. M&F Worldwide Corp. (“MFW”) provided business judgment rule protection for controlling stockholder transactions that are conditioned from the outset on certain procedural protections being utilized, including approval by (1) a fully-empowered independent special committee that meets its duty of care and (2) a fully-informed, uncoerced vote of a majority of the target minority stockholders unaffiliated with the controller.

While MFW provided helpful guideposts for avoiding entire fairness review in controlling stockholder transactions, as with any new doctrine, questions remained as to the application of MFW to different types of deals and negotiations, and the consequences of small deviations from strict adherence to MFW. Recent guidance from the Delaware Court of Chancery has given way to updated ground rules for controlling stockholder transactions: (i) MFW also applies to deals where the controller is only on the sell-side; (ii) other conflicted controller transactions besides mergers, such as recapitalizations, are eligible for MFW protection; and (iii) small, alleged foot faults will not cause the business judgment rule protection afforded by MFW to be lost.

Now, once we can actually figure out who is & who isn’t a controlling shareholder, we’ll have this thing licked!

John Jenkins