December 15, 2023

Controllers: Does MFW Apply Beyond Squeeze-Outs?

Delaware’s MFW doctrine was originally developed to offer a path to the business judgment rule for squeeze out mergers.  Over time, however, its use has expanded into a variety of other settings.  MFW’s expansion has attracted some pretty high-profile opposition.  Most notably, former Chief Justice Leo Strine, former Vice Chancellor Jack Jacobs and Penn Law School Prof. Lawrence Hamermesh authored an article in which they argued that Delaware courts had misapplied MFW by extending it to other transactions involving controlling stockholders.

Now, according to a recent Morgan Lewis memo, it appears that the Delaware Supreme Court may address this issue in considering an appeal of the Chancery Court’s 2022 decision in In Re Match Group Inc. Derivative Litigation, (Del. Ch.; 9/22):

In the course of the appeal, the Delaware Supreme Court took the unusual step of asking the parties for supplemental briefing (including accepting additional briefing from numerous amici curiae) on an issue not raised in the Court of Chancery: whether MFW should apply outside the context of a parent-subsidiary merger, or whether a less-cumbersome “cleansing mechanism” may be employed in nonmerger transactions with a controlling stockholder for the company to enjoy the protections of the business judgment rule.

In its briefing and at oral argument, the company argued against “MFW creep,” or the expansion of the MFW Doctrine outside of the squeeze-out merger context. Specifically, the company reasoned that Delaware courts have historically required companies to use only one of three so-called “cleansing mechanisms” to invoke the protections of the business judgment rule for a conflicted transaction: (1) approval by a majority of independent directors, (2) approval by a special committee of independent directors, or (3) approval by a majority of disinterested stockholders.

Accordingly, the company argued that MFW’s holding should be cabined to apply only to squeeze-out mergers, and other controlling stockholder transactions should be entitled to deference under the business judgment rule so long as the company meets one of the three traditional cleansing mechanisms.

The memo says that the plaintiffs countered by characterizing the company’s argument relied on a “revisionist narrative of Delaware law” and claiming that it is well settled that MFW applies to all transactions with a controlling stockholder. The plaintiffs argued that to hold otherwise would “administer a coup de grace by rendering entire fairness inapplicable to all controller transactions except freeze-out mergers.”

John Jenkins