July 29, 2021

Controllers: No Shortcuts to MFW Cleansing

Under Delaware’s MFW doctrine, a controlling stockholder and target board can avoid application of entire fairness review to a transaction on which the controller stands on both sides if, among other things, the transaction is conditioned from the outset upon both the approval of a well-functioning, independent special committee & the uncoerced, informed vote of a majority of the minority stockholders. A recent Delaware Chancery Court decision makes it clear that there aren’t any shortcuts around these requirements.

In Berteau v. Glazek, (Del. Ch.; 6/21), a special committee that approved such a transaction tried to persuade the Chancery Court that MFW should apply notwithstanding the fact that a merger with a controller wasn’t conditioned on approval by a majority of the minority stockholders.  Vice Chancellor Fioravanti rejected that argument. This Sidley blog explains his reasoning:

Members of the Special Committee (but not the other director defendants) argued that the business judgment rule should apply pursuant to the MFW doctrine. The Court held that this argument “ignore[d] the history of the MFW doctrine and what it was intended to address.”

In MFW, the Delaware Supreme Court held that a controlling stockholder transaction would be subject to the business judgment rule where “the merger is conditioned ab initio upon both the approval of an independent, adequately empowered Special Committee that fulfills its duty of care, and the uncoerced, informed vote of a majority of the minority stockholders.” MFW thus created a pathway for controller transactions to obtain a pleading-stage, pre-discovery dismissal where (1) a special committee was formed to create a “bargaining agent who can negotiate price and address the collective action problem facing stockholders” and (2) a majority of the minority voted approvingly, thus giving stockholders the “chance to protect themselves.”

Because the defendants in Berteau had completed the transaction without a vote of TPB’s minority stockholders, let alone conditioning it on their approval, the Court reasoned that MFW’s business judgment protection could not attach, and found no principled reason to depart from, MFW’s dual mandate.

John Jenkins