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Delaware Supreme Court Explains the Ab Initio Requirement of MFW

Posted In M&A

Flood v. Synutra Int’l, Inc., C.A. No. 101, 2018 (Del. Oct. 9, 2018)

 Under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), commonly referred to as MFW, a controller may gain the benefit of business judgment review when it conditions a transaction—from the outset (i.e., ab initio)—on two procedural protections.  Those involve approval by (i) an independent special committee and (ii) a majority of the minority stockholders.  The point of the timing requirement is that the controller disables its influence from the beginning, instead of using the option as a bargaining chip when negotiating economic terms.

This decision makes clear what from the beginning means.  It is not necessarily at the first expression of interest; rather, it is before any economic negotiations occur.  Thus, even when the majority stockholder’s initial offer does not include the MFW protections, it may add them before actual negotiations occur.  This flexible approach is consistent with the policy of increasing real-time protections for minority stockholders in conflict scenarios.  But, as the dissenting opinion points out, it does leave more room for dispute in litigation.  The majority’s decision also clarifies that a challenge to the special committee’s exercise of its duty of care is measured by a gross negligence standard.

Tags: M&A