A well-functioning special committee can play a key role in helping to protect against fiduciary duty claims in transactions involving controlling stockholders. What’s a “well-functioning” special committee? Well, it’s complicated – and that’s why Debevoise’s “Special Committee Report” reviewing 2020 Delaware decisions involving special committees is a helpful resource. Here’s an excerpt:
In 2020, the Delaware Court of Chancery rejected the applicability of MFW, and thus of the business judgement rule, to transactions where the controller had undertaken negotiations with certain minority stockholders prior to committing to the MFW conditions and with the future financial advisor to the special committee prior to the formation of the committee, determining in each case that these discussions caused the transaction to fail the requirement that the MFW conditions be in place from the start. In other cases, the Court of Chancery held that coercive or domineering actions by the Controller precluded the application of the business judgment rule or rendered the special committee members not independent and thus subject to liability.
The Delaware courts also held in 2020 that a 35% stockholder with certain contractual rights pursuant to a stockholders agreement may be a de facto controller of the company and that even where a stockholder has de facto control of the company prior to a transaction, other stockholders can suffer damage as a result of an unfair transaction that does not otherwise affect them if it results in the controller acquiring actual (i.e., greater than 50% voting power) control.
The report summarizes 9 Chancery Court decisions addressing the formation and operation of special committees in connection with controlling stockholder transactions decided during 2020. Debevoise plans to publish new issues of this report periodically to cover future developments in this area.
– John Jenkins