August 1, 2018

MFW: When Does “From the Beginning” Begin?

This Paul Weiss memo discusses the Delaware Chancery Court’s decision in Olenik v. Lodzinski (Del. Ch.; 7/18), which addresses MFW’s requirement that a deal must be conditioned upon approval by an independent committee & an uncoerced majority of the minority shareholder vote “ab initio” – from the beginning. Here’s an excerpt:

MFW’s “ab initio” requirement mandates that the controller condition the transaction on final approval by the special committee and a majority of the minority stockholders “before any negotiations [take] place,” which is when a “proposal is made by one party which, if accepted by the counter-party would constitute an agreement between the parties regarding the contemplated transaction.” The Olenik opinion is particularly notable for helping to clarify this timing mandated by the ab initio requirement. While the court noted that, consistent with prior decisions, “ab initio” requires that the protections be in place at the outset of negotiations, it clarified that they may be agreed to after certain discussions between the parties that are merely “exploratory in nature.”

Here, Earthstone first included these conditions at the outset of negotiations in its first offer letter to Bold. The fact that Earthstone’s CEO engaged in discussions with EnCap and Bold before that point, however, was not fatal to the transaction’s satisfaction of the ab initio requirement. Although the court labeled these pre-offer discussions as “extensive,” they were not negotiations defined by “bargain[ing] toward a desired contractual end” and were “exploratory in nature.” Thus, the court found that the ab initio condition had been met.

As the memo notes, the Chancery Court’s decision is consistent with prior case law interpreting the “ab initio” requirement to apply once negotiations have commenced, but demonstrates the Court’s willingness to apply this requirement in a flexible manner.

John Jenkins