Delaware Supreme Court Holds MFW Is Applicable To Controlling Stockholder Transactions Even Outside Of Freeze-Out Context
M&A and Corporate Governance Litigation
This links to the home page
  • Delaware Supreme Court Holds MFW Is Applicable To Controlling Stockholder Transactions Even Outside Of Freeze-Out Context


    On April 4, 2024, in an opinion authored by Chief Justice Collins J. Seitz, Jr., the Supreme Court of Delaware sitting en banc held that the framework articulated in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) applies to a controlling stockholder transaction, even if it does not involve a freeze-out merger. In re Match Group, Inc. Derivative Litigation, No. 368, 2022 (Del. Apr. 4, 2024). The Court reached this conclusion in considering the Delaware Court of Chancery’s dismissal of breach fiduciary duty claims asserted by pre-transaction minority stockholders relating to a reverse spin-off transaction. The Delaware Supreme Court clarified that “entire fairness” is the “presumptive standard of review” for a controlling stockholder transaction and that only compliance with the “procedural safeguards” of MFW changes it to “the more deferential business judgment standard.” The Court further held that the special committee required by MFW must be “wholly independent.” Because the complaint adequately pleaded that one of the special committee members was not independent of the controller, the Court reversed the dismissal.

    This litigation stemmed from a reverse spin-off transaction in which, among other things, the former controlling corporation’s operations—including its internet and media business—was spun off into a new entity; and the subsidiary—which held online dating businesses—merged into the former controlling corporation (the “Company”). The controller’s stockholders received shares of both entities, while the pre-transaction minority stockholders primarily received shares in the Company. As a result of the transaction, the Company became “widely held,” i.e., non-controlled and “highly leveraged.” Plaintiffs alleged that the former controller had engaged in an unfair process yielding an unfair price and leaving minority stockholders with a “slightly larger piece of a much less substantial pie.” 

    In an effort to take advantage of business judgment review under MFW, the controller had “conditioned the transaction on the approvals of a fully empowered, well-functioning special committee of independent directors and the uncoerced, fully-informed vote of the minority stockholders.” However, one of the special committee members was the controller’s former CFO and had other alleged connections to the controlling corporation and its respective controlling stockholder. 

    The Delaware Supreme Court first clarified that the use of either of the two central protections of MFW—a well-functioning independent special committee or approval of a majority of the minority stockholders—is sufficient to shift the burden to plaintiffs “to prove that the transaction was not entirely fair.” But it does not change the standard of review for a controller transaction from entire fairness to business judgment, even if the transaction does not involve a freeze-out merger and the minority stockholder retain an equity interest. Instead, business judgment applies to such transactions only when in accordance with MFW:

    (i) a controlling stockholder conditions a transaction from the start on the approval of both a special committee and a majority of the minority stockholders; (ii) the special committee is independent; (iii) the special committee is fully empowered; (iv) the special committee meets its duty of care; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.

    The Court explained that this is what is necessary to “replicate arm’s length bargaining.” Moreover, the Court held that all members of the special committee must be independent.

    The Court thus reversed the dismissal because the complaint adequately pleaded that the controller’s former CFO “lacked independence” and, therefore, MFW was not satisfied. The Court highlighted among other things his decade-plus employment with and substantial compensation from the controlling corporation, as well as comments of mutual respect both by the former CFO and the controlling corporation’s controlling stockholder. The Court explained that “[l]ongstanding business affiliations, particularly those based on mutual respect, are of the sort that can undermine a director’s independence.”

Links & Downloads