August 23, 2021
Controllers: No MFW For Expiring Procedural Commitments
In order for a squeeze-out merger to qualify for business judgment review under Delaware’s MFW doctrine, the transaction must be conditioned from the outset upon the approval of both an independent special committee and a majority of the minority stockholders. But what happens when there’s a time limit on those commitments?
In her recent transcript ruling in The MH Haberkorn 2006 Trust v. Empire Resorts, (Del. Ch. 7/21), Chancellor McCormick determined that the looming expiration of a controller’s commitment to these procedural requirements was a deficiency that resulted in the inapplicability of MFW to the deal. Here’s an excerpt from this Shearman blog on the case:
Here, the controller and the Company entered into a letter agreement in 2016, which provided that the controller would not engage in a going-private transaction unless the transaction was subject to approval of both (i) a majority of disinterested board members or a special committee and (ii) a majority of shares entitled to vote that were unaffiliated with the controller. At the time the Company agreed to the transaction in August 2019, the term of the letter agreement was set to expire in February 2020.
The Court held that this impending expiration constituted a deficiency as to the timing requirements of MFW, even though the conditions were in place prior to the commencement of negotiations. The Court also noted that, according to the complaint, the controller signaled to the special committee that it would not commit to the MFW conditions beyond the contractual term. The Court explained that “for the ab initio requirement to mean anything and to accomplish the goal of eliminating otherwise-present bargaining pressures, the condition must be irrevocable.”
The blog goes on to explain that the Chancellor found other deficiencies in the process, including the failure to satisfy the majority of the minority requirement due to the inclusion of shares held by the company’s joint venture partner in the calculation, as well as potentially coercive actions by the controlling stockholder.
– John Jenkins