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.

Delaware’s Court of Chancery recently threw out an attempt to undermine activist investor Carl Icahn’s claim of business judgment protection under the seminal MFW ruling for his buyout of Voltari Corp.’s minority, finding plaintiffs failed to prove a special director committee lacked independence or that a shareholder vote was uninformed or coerced in Franchi, et al. v. Firestone, et al., No. 2020-0503 KSJM, order issued (Del. Ch. May 10, 2021). 

Newly-appointed Chancellor Kathaleen St. J. McCormick’s May 10 order dismissing a combined shareholders’ breach-of-duty lawsuit provides an updated application of a key Delaware Supreme Court opinion on the requirements shareholder plaintiffs must meet to force an interested majority shareholder like Icahn to show that a deal’s price and negotiation were entirely fair to investors.   Kahn v. M & F Worldwide Corp. 88 A.3d 635 (Del. 2014)(“MFW“), overruled on other grounds by Flood v. Synutra Int’l, Inc., 195 A.3d 754 (Del. 2018).

The crux of that touchstone high court ruling was that in a challenged controller-backed deal the defendants could get benefit-of-the doubt deference – and a much-improved chance of winning — only if the controller insured that the minority’s interests were protected by:

(i) conditioning the transaction on the approval of both a special committee and a majority of the minority stockholders; 

(ii) making the special committee independent; 

(iii) empowering the special committee to freely select its own advisors and to say no definitively; 

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

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

(vi) barring any coercion of the minority vote.


Plaintiffs’ suit claimed the $7.7 million Icahn and his allies paid in 2019 for the 48 percent of Voltari they did not yet own undervalued the commercial real estate investment company and resulted in a “windfall” to Icahn in the form of $78.7 million in tax savings from Voltari’s past losses called “net operating loss carryforwards”

The combined complaints of former shareholders Adam Franchi and David Pill charged that: Icahn was unjustly enriched by coercing a deep discount price for the NOL’s, the Voltari directors breached their duties by wrongly approving the merger and that along with Icahn and his companies, they comprised an improper control group.

They claimed that:

(i) the Special Committee lacked independence;

(ii) the Special Committee failed to exercise its duty of care; and

(iii) the vote of the minority was not informed

No unreasonable, reckless actions

The Chancellor ruled in favor of dismissal of the challenge to the special committee’s independence because, “To plead that a director is not independent “in a manner sufficient to challenge the MFW framework, a plaintiff must allege facts supporting a reasonable inference that a director is sufficiently loyal to, beholden to, or otherwise influenced by an interested party so as to undermine the director’s ability to judge the matter on its merits.”

She said, “If the complaint supports a reasonable inference that [any] member [of the special committee] was not disinterested and independent, then the plaintiffs have called into question this aspect of the MFW requirements.” 

But the complaint here fails to show “conduct that constitutes reckless indifference or actions that are without the bounds of reason.”  Disagreeing with a special committee’s strategy is not a duty of care violation, nor is a “windfall“ allegation that amounts to “questioning the sufficiency of the price,” the Chancellor noted.

No controlled mindset

The fact that the special committee “met seven times, engaged and consulted with independent advisors, came to a reasoned decision to negotiate a transaction with Icahn, and successfully bid the deal price up by 48% percent” does not support the allegation that it fell under a “controlled mindset,” the court held.

No material disclosure left behind

Under MFW, the board’s consideration and rejection of a special committee candidate who had been an employee of an Icahn company did not need to be disclosed in the buyout proxy because it would not have been material to the average investor, the Chancellor ruled, finding that, “This alleged omission does not render the vote of the minority stockholders uninformed.”

Only gross negligence claims survive

Finally, the chancellor dismissed the unjust enrichment charge because it only involves ordinary negligence and since it has been determined that the business judgment standard applies, under MFW, only claims of gross negligence could survive the motion to dismiss.