‘MFW’ Just Turned 10, but Is It Worth the Candle?
July 3, 2024
Publication| Corporate Transactions| Corporate Governance| Mergers & Acquisitions| Special Committees & Investigations| Corporate & Chancery Litigation
In 2014, the Delaware Supreme Court held in Kahn v. M&F Worldwide (MFW) that the business judgment rule applies to a transaction that would otherwise be subject to the exacting entire fairness standard of review due to the presence of a conflicted controlling stockholder so long as the parties condition the transaction at the outset (the “ab initio requirement”) on approval by a fully empowered committee of disinterested and independent directors who comply with their duty of care (the “committee requirement”) and approval by a majority of disinterested stockholders voting on a fully informed and uncoerced basis (the “majority-of-the-minority requirement”). At the time, practitioners generally lauded MFW as a welcome development that rebalanced the litigation risk landscape in a manner that enabled controlled companies to pursue a greater range of value-maximizing transactions. And in the decade that followed, many companies have taken advantage of the MFW framework to do just that.
While running an MFW-compliant process has potential litigation benefits, it is not a cost-free exercise. The corporation will incur significant costs associated with forming a special committee that in turn must hire and solicit advice from its own independent legal and financial advisers. Delays are also likely to occur because the special committee will need sufficient time to get up to speed and evaluate the transaction, and because the company will need to take the necessary steps to hold a meeting and solicit votes of minority stockholders in favor of the transaction. The majority-of-the-minority requirement may encourage controlling stockholders to offer higher prices than would be available in a non-MFW-compliant transaction, but also introduces execution risks in light of the recent rise of passive retail stockholders who are less likely to cast votes at all and gives opportunistic and activist stockholders a greater opportunity to block what may otherwise be a value-maximizing transaction for all stockholders.
Despite all of these up-front costs, there is no guarantee that following MFW will actually result in business judgment review because a reviewing court can—and often does—find that one of the MFW requirements has not been satisfied. And in several recent cases, the Delaware Court of Chancery found MFW satisfied and dismissed a complaint under the business judgment rule, but the Delaware Supreme Court subsequently reversed on appeal and arguably made the requirements of MFW more difficult to satisfy. See In re Match Group Derivative Litigation (holding that the committee requirement was not satisfied where stockholder-plaintiffs sufficiently pleaded that one of three members of the committee was not independent); City of Dearborn Police and Fire Revised Retirement System v. Brookfield Asset Management (holding majority-of-the-minority requirement was not satisfied due to the failure to disclose granular details about potential conflicts of legal and financial advisors); City of Sarasota Firefighters’ Pension Fund v. Inovalon Holdings (same).
There have been at least 26 Delaware cases (including published opinions and transcript opinions made available to us) addressing an MFW defense, and the 10-year anniversary of the decision presents a good opportunity to review the outcomes of those cases and general trends that have developed over time in MFW cases. For purposes of the statistics set forth in this article, a trial court decision and any opinion on appeal from such a decision is considered to be one “case.”