February 8, 2023

Controllers: MFW Isn’t Just for Squeeze-Outs

Debevoise recently published the latest edition of its Special Committee Report, which surveys transactions announced during the period from July through December 2022 that used special committees to manage conflicts & cases ruling on issues relating to the use of special committees. The report also reviews the continuing evolution of the MFW doctrine, and highlights the fact that it has utility well beyond the squeeze-out merger setting in which it arose.

The report notes that examples of the use of MFW outside this setting include the Chancery Court’s decisions in In re Martha Stewart Living Omnimedia S’holders Litig., (Del. Ch.; 8/17), which involved a 3rd party sale, and IRA Trust FBO Bobbi Ahmed v. Crane, (Del. Ch.; 12/17), which involved the recapitalization of NRG Yield, Inc. Both of those transactions required stockholder approval under Delaware law, but this excerpt notes that Delaware courts have made it clear that MFW can be used in situations where stockholder approval wasn’t necessary:

The Martha Stewart and NRG decisions involved transactions that were mandatorily subject to stockholder approval under Delaware corporate law, but the Delaware courts have held that the MFW protections can also be used in transactions that are not otherwise subject to stockholder approval. For example, in a challenge to an incentive compensation award by Tesla to its controller Elon Musk, the Court of Chancery found that the grant of the award—involving stock options with a potential value of over $50 billion—was subject to entire fairness review.

However, the court went out of its way to note that if the parties had utilized the protective provisions of MFW, the case might have been dismissed at the pleading stage: “Had the Board conditioned the consummation of the Award upon the approval of an independent, fully functioning committee of the Board and a statutorily compliant vote of a majority of the unaffiliated stockholders, the Court’s suspicions regarding the controller’s influence would have been assuaged and deference to the Board and stockholder decisions would have been justified.

The report also points out that the Chancery Court has recently applied MFW in the context of a challenge to a corporate charter amendment and says that controllers & their advisors should consider using the path to business judgment rule laid out in MFW in any transaction with the controlled company where entire fairness review is possible.

John Jenkins