(Article from Securities Law Alert, August 2018)
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On July 20, 2018, the Delaware Chancery Court held that the business judgment rule applied to an alleged controlling stockholder transaction even though discussions about the possibility of the transaction had taken place before the alleged controller conditioned the transaction in compliance with MFW’s requirements.[1] Olenik v. Lodzinski, 2018 WL 3493092 (Del. Ch. 2018) (Slights, V.C.). The court reasoned that the discussions, “while extensive, never rose to the level of bargaining” but were instead “entirely exploratory in nature.”
MFW’s Conditions Must Be in Place at the Time a “Definitive Proposal” Is Made
MFW holds that the business judgment standard of review applies to a controlling stockholder transaction if the transaction “is conditioned ab initio upon the approval of both an independent, adequately-empowered [s]pecial [c]ommittee that fulfills its duty of care, and the uncoerced, informed vote of a majority of the minority stockholders.” 88 A.3d 635. The Olenik court explained that in order “to mimic arms-length dealing, and to neutralize the controller’s influence, these two conditions must be [in] place . . . before any negotiations take place.” 2018 WL 3493092.
The Olenik court stated that “for purposes of the MFW analysis, in most instances, ‘negotiations’ begin when a proposal is made by one party which, if accepted by the counter-party, would constitute an agreement between the parties regarding the contemplated transaction.” Applying this standard, the court found that the receipt of a definitive proposal (in the form of an Offer Letter) “marked the appropriate time at which to announce the MFW ab initio conditions.” The court rejected plaintiffs’ contention that negotiations began for MFW purposes when the CEO engaged in “substantial preliminary discussions” with the alleged controller. The court found “[t]his argument . . . ignores the important distinction between ‘discussions’ about the possibility of a deal and ‘negotiations’ of a proposed transaction after the ‘discussions’ lead to a definitive proposal.”
The Transaction Structure Satisfied MFW’s Requirements
The court held that the transaction structure at issue met MFW’s conditions because the special committee was “well-functioning,” and the stockholder vote was adequately informed and uncoerced.
The court explained that in order to question a director’s independence, plaintiffs must “show[ ] that a specific director’s independence is compromised by factors material to” that director. Here, plaintiffs claimed, inter alia, that there were financial ties between two of the directors and the alleged controller. The court found these allegations insufficient because plaintiffs failed to “even attempt” to plead that these factors were material to those directors.
The court further found that the special committee had appropriate authority and acted with due care in negotiating the deal price. The court stated that “the [s]pecial [c]ommittee did not rubber-stamp a fully-baked deal that [the CEO] had negotiated.” Rather, “[i]t was actively engaged in the process, called its own shots and interfaced directly with management and its legal and financial advisors throughout the negotiations.”
[1] The parties disputed whether the stockholder at issue was a controlling stockholder. The court found it unnecessary to resolve the question because it found the business judgment rule applicable under MFW. Please click here to read our discussion of the Delaware Supreme Court’s decision in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (MFW).