This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Chancellor of the Delaware Court of Chancery recently presented a challenge to controller Jeffries Financial Group Inc.’s going-private acquisition of HomeFed Corporation because Jeffries negotiated the support of a key HomeFed investor before implementing the shareholder protections of the seminal MFW decision in In Re HomeFed Corporation Stockholder Litigation, No. 2010-0592-AGB memorandum opinion issued (Del. Ch. July 13, 2020).

Chancellor Andre Bouchard’s July 13 opinion denied dismissal motions by defendant Jeffries directors, finding plaintiff HomeFed shareholders may prove the 2019 squeeze-out merger does not qualify for the deference of the business judgment rule and must be examined under the exacting entire fairness standard. That could shift the burden of proof – and the risk of losing – to the defendants.

Under the Delaware Supreme Court’s framework in Kahn v. M & F Worldwide Corp., proponents of a deal involving a controlling shareholder must prove both the negotiation and price was entirely fair unless they employed the dual protections of a fully empowered director negotiating committee and majority-of-the-minority shareholder approval. Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).


The directors of Jeffries, a holding company that owned 70 percent of Delaware-charted HomeFed, a multi-state real estate developer, claimed they did just that when they sought to acquire the remaining 30 percent beginning in 2017. They argued, in support of dismissing the breach of duty charges, that the merger effectively started over again when talks with HomeFed’s special director committee resumed.

But the Chancellor pointed out that although merger talks were suspended for nearly a year in 2018, Jeffries directors continued to talk to Beck, Mack and Oliver, LLC, the largest HomeFed investor next to Jeffries and key to winning shareholder approval.

He found that whether there were two rounds of merger negotiations or just one with a pause, at the pleading stage, the plaintiffs make a reasonable case that Jeffries directors negotiated a proposed 2-for-1 stock swap proposal with BMO before they officially committed to the dual MFW protections for the deal.

MFW if-and-only-if list

Chancellor Bouchard said under MFW, the business judgment standard of review will be applied if and only if:

(i) the controller conditions the procession of the transaction 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 empowered to freely select its own advisors and to say no definitively;

(iv) the special committee meets its duty of care in negotiating a fair price;

(v) the vote of the minority is informed; and

(vi) there is no coercion of the minority.

“The complaint’s factual allegations support more than a reasonable inference that three of the six conditions required under MFW were not satisfied,” the Chancellor wrote.

He said that in a very recent decision in In re Dell Technologies Inc. Class V Stockholders Litigation, the court noted that the MFW decision requires the dual protections to be established at the very outset of talks. In re Dell Technologies Inc. Class V Stockholders Litigation 2020 WL 3096748, at *17 (Del. Ch. June 11, 2020).

“[T]he purpose of the words ‘ab initio,’ and other formulations like it in the MFW decisions, require the controller to self-disable before the start of substantive economic negotiations, and to have both the controller and special committee bargain under the pressures exerted on both of them by these protections,” he said, quoting the Dell decision.

Therefore, the Chancellor said, the transaction does not qualify for business judgment review and the motion to dismiss on that basis is denied.

Cornerstone doesn’t work

Finally, the court also denied a separate motion to dismiss filed by two HomeFed directors who claimed they were protected from liability by an exculpatory provision in the company’s charter. He said under the Cornerstone decision, evidence that those two board members voted against the interests of the HomeFed shareholders is enough for those claims to survive a motion to dismiss. In re Cornerstone, 115 A.3d at 1179-80.

“Plaintiffs have plead facts supporting a rational inference that, by voting to approve the transaction, Patrick Bienvenue and Paul Borden acted to advance the self-interest of an interested party (Jefferies) that stood on both sides of the transaction from which they could not be presumed to act independently,” the Chancellor said.

In addition, the complaint says Bienvenue served in a variety of executive roles for Jefferies from January 1996 until April 2011, and has served on the HomeFed Board since 1998, and Borden was a Jefferies Vice President from August 1988 to October 2000 and served as HomeFed’s President for 20 years, he noted.