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On October 9, 2018, the Delaware Supreme Court held that MFW does not impose a bright-line rule requiring a controlling stockholder to condition a proposed transaction on the satisfaction of MFW’s two “key procedural protections” in the controller’s initial offer. Flood v. Synutra Int’l, 2018 WL 4869248 (Del. 2018) (Strine, C.J.). The court found MFW’s ab initio requirement is satisfied if the controller “conditions its bid on [these] protections at the beginning stages of the process . . . before any economic negotiations commence.” The Delaware Supreme Court further held that if the transaction satisfies the MFW standard, then plaintiffs can state a duty of care claim only by alleging that the independent special committee acted with gross negligence. Plaintiffs cannot plead a duty of care violation based solely on an allegedly inadequate deal price.

MFW’s Ab Initio Requirement Does Not Impose a Bright-Line, First Offer Rule

The MFW court held 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 Special Committee that fulfills its duty of care, and the uncoerced, informed vote of a majority of the minority stockholders.” Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (MFW).[1] In Synutra, plaintiffs argued that MFW’s ab initio requirement is satisfied only if these two conditions are in place from the controller’s first offer. Plaintiffs contended that “if a controller’s first approach does not contain the required conditions, then it is stuck with entire fairness review, even if the controller still commits itself to MFW’s requirements early on before any economic negotiations.” The Delaware Supreme Court rejected this “cramped reading” of the ab initio requirement, and explained that the purpose of this rule is simply to ensure that the controller cannot use MFW’s conditions as “bargaining chips” once “negotiations to obtain a better price from the controller have commenced.” The court held that the ab initio requirement is satisfied “so long as the controller conditions its offer on the key protections at the germination stage of the Special Committee process” before the start of “substantive economic negotiations.” The Delaware Supreme Court stated that its decision was consistent with its summary affirmance of the bench ruling in Swomley v. Schecht, 2014 WL 4470947 (Del. Ch. 2014), aff’d, 128 A.3d 992 (Del. 2015) (TABLE). There, the Delaware Chancery Court found the ab initio requirement was satisfied even though the controller’s first proposal did not condition the transaction on MFW’s protections. The Swomley court found it sufficient that the controller announced MFW’s conditions “before any negotiations took place.” Swomley, 2014 WL 4470947.

Plaintiffs Cannot Plead a Duty of Care Violation Based on an Inadequate Price

In MFW, the Delaware Supreme Court stated in a footnote (footnote 14) that the complaint at issue may not have survived a motion to dismiss because “allegations about the sufficiency of the price call[ed] into question the adequacy of the Special Committee’s negotiations.” MFW, 88 A.3d 635. Plaintiffs in Synutra relied on MFW’s footnote 14 to argue that a duty of care violation may be “based on an insufficient price.” Synutra, 2018 WL 4869248. In Synutra, the Delaware Supreme Court expressly overruled MFW’s footnote 14 to the extent it suggests that “a due care violation can be premised . . . on a court’s after the fact sense that the committee should have extracted more price concessions.” The court held that if the transaction complied with MFW’s requirements, then a plaintiff may not “avoid the business judgment rule by raising questions about whether the Special Committee . . . was adroit in bargaining.”

The Synutra court explained that “the entire point of the MFW standard is to recognize the utility to stockholders of replicating the two key protections that exist in a third-party merger: an independent negotiating agent whose work is subject to stockholder approval.” The court reasoned that “if [the MFW] standard injects the reviewing court into an examination of whether the Special Committee’s good faith efforts” were effective, then controllers would have “no incentive to use the approach most favorable to minority stockholders.” The court reaffirmed the holding in Swomley that if a controlling stockholder transaction was conditioned ab initio on MFW’s two procedural protections, then “a plaintiff can plead a duty of care violation only by showing that the Special Committee acted with gross negligence, not by questioning the sufficiency of the price.”