DealLawyers.com Blog

A recent Richards Layton article notes that 2024 marks the 10th anniversary of the Delaware Supreme Court’s decision in Kahn v. MF&W Worldwide, which gave boards and controlling stockholders a path to business judgment review of transactions with a controlling stockholder. The article reviews the experience that companies asserting compliance with the MFW framework as a defense have had in the Delaware courts over the past decade.

Under the MFW framework, transactions between a company and its controlling stockholder will be entitled to review under the deferential business judgment standard if the controller conditions the transaction ab initio on the approval of both a special committee and a majority of the minority stockholders, the special committee is independent, empowered to freely select its own advisors and to say no to the proposed transaction and satisfies its duty of care in negotiating a fair price. In addition, the vote of the minority shareholders must be fully informed and uncoerced. This excerpt from Richards Layton’s article summarizes how company’s have fared in MFW litigation over the past decade, and notes where the Delaware courts have most frequently found shortcomings in the process:

Overall, during MFW’s 10-year history, MFW defenses succeeded in 10 of 26 cases for an aggregate success rate of 38.5%. In the first nine and a half years after MFW, the Delaware Supreme Court reversed a lower court dismissal under MFW only once, but it has done so three times in the last three months. Causes of MFW defenses’ failure, listed in decreasing order of frequency, were the ab initio requirement (eight cases), the majority-of-the-minority requirement (seven cases), and the committee requirement (four cases) (again, these amounts do not sum to sixteen because multiple MFW factors failed in some cases).

Thus, whereas plaintiffs successfully challenged the first two factors with roughly comparable success rates, corporate defendants generally had the most success satisfying the committee requirement, as that component was either not challenged or held satisfied in 84.6% of litigated cases. With that said, plaintiffs have successfully challenged every factor and almost every sub-factor of the MFW test. Comparatively obscure grounds for the MFW defenses’ failure include that the special committee was not fully empowered or fully functioning (two cases), coercion of the special committee or disinterested stockholders (three cases), and wrongful inclusion of certain stockholders in the majority-of-the-minority stockholder vote tabulation (two cases).

The article says that defendants have been less successful in asserting MFW as a defense in more recent cases. From mid-2019 to the present, the defense succeeded in only four of 15 cases (27%). Of those 11 cases in which the defense failed, the majority-of-the minority vote failed in six, the special committee requirement in four, and the ab initio requirement in two. In these more recent cases, plaintiffs have typically challenged compliance with the majority-of-the minority vote requirement on the basis of allegedly defective disclosures.

The article goes on to point out that recent Delaware Supreme Court decisions are likely to increase the focus on whether the independence of any single member of the committee can be called into question and on disclosure of potential conflicts of the committee’s legal and financial advisers.

– John Jenkins