The issue presented to the Delaware Supreme Court in Flood v. Synutra International, Inc., Del. Supr., No. 101, 2018 (Oct. 9, 2018), was whether it was proper for the Court of Chancery to apply the MFW standard by: “(i) allowing for the application of the business judgment rule if the controlling stockholder conditions its bid on both of the key procedural protections at the beginning stages of the process of considering a going private proposal and before any economic negotiations commence; and (ii) requiring the Court of Chancery to apply traditional principles of due care and to hold that no litigable question of due care exists if the complaint fails to allege that an independent special committee acted with gross negligence.” See page 1.

The “MFW standard” was announced by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), which was highlighted on these pages.  That standard allowed for the deferential business judgment review that be applied to a merger “proposed by controlling stockholder conditioned before the start of negotiations on ‘both the approval of an independent, adequately-empowered Special Committee that fulfils its duty of care; and the uncoerced, informed vote of the majority of the minority stockholders.’” Id. at 644.

The high court concluded, in its majority opinion, that the interpretation of MFW standard based on the foregoing principles was correct, and cited with approval, for support of its conclusion, the high court’s previous affirmance in Swomley v. Schlecht, 128 A.3d 992 (Del. 2015) (Table).

Highlights:

Although this majority decision could be the subject of a lengthy analysis, especially in light of the vigorous dissenting opinion–which is an indication that reasonable people could easily differ on the conclusions in this case–I will provide highlights only in this short post, via bullet points, to allow a quick reference to key parts of the ruling. Those interested may read the whole opinion for a complete understanding of this important decision:

  • One of the issues in the case was whether or not the prerequisites that must be satisfied in order for the MFW standard to apply must be imposed as a condition of the deal at the absolute beginning of the negotiations–or if the imposition of those conditions at the “beginning” of negotiations can be more flexibly determined as a matter of chronology, as opposed to a “bright line test” requiring a specific point in time. See pages 9 to 21.
  • This issue arose because of the description in the Supreme Court’s initial announcement of the MFW decision that the prerequisites that must be a condition of the deal need to be announced “ab initio” which can be translated as “at inception” or “at the beginning.”
  • The court used several descriptions to explain why a more flexible approach should be used for exactly when in the chronology of a deal the conditions must be imposed, by referring to many situations where the word “beginning” does not refer to a specific point in time, such as the “beginning of a book” that extends beyond just the first word in a novel, and may at least include the first few pages of a novel, for example.
  • The court reasoned that a more flexible approach is sensible in terms of focusing on the more meaningful point in a deal when “substantive economic negotiations take place,” as in this case when a second offer letter was sent and no prior economic substantive negotiations had taken place after the first letter, but before the second offer letter was sent.
  • The second issue addressed was whether due care violations were pled in the complaint.
  • This ambiguity was raised by footnote 14 in the original MFW opinion of the Supreme Court, but which was clarified by this case which essentially nullified the dicta in footnote 14 of the original MFW opinion of the court. See pages 23 to 25, where the majority opinion in this case explains why that footnote 14 should not be relied on, and why no due care violation was adequately pled in this case.

A recent post on the Harvard Law School Corporate Law Blog, (on which I have published several articles as a contributing author), reviewed the Court of Chancery’s decision in Olenik v. Lozinski, C.A. 2017-0414-JRS (Del. Ch. July 20, 2018), in which a modification of the “ab initio” requirement of the MFW framework was applied in order for the challenged transaction to enjoy the benefit of the business judgment rule’s presumption. The MFW framework, and the cases that explain it, have been discussed in several posts on these pages. As the above-linked post describes it:

MFW provides for judicial review of a merger between a controller and the controlled company under the deferential business judgment rule standard (rather than “entire fairness”) if, among other things, “from the outset of negotiations” (the so-called “ab initio requirement”), the controller conditioned the transaction on approval by both an independent special committee and a majority of the minority stockholders

This is the tenth year that we are providing our annual review of the key corporate and commercial decisions from Delaware’s Supreme Court and Court of Chancery. This year we decided to pick only the top five among the more than 200 or so opinions that we highlighted. We encourage readers to suggest cases that should be added (or deleted) from this list. Reasonable people may differ on our selections, and we could have added many more important decisions if we did not limit the list this year to five. Prior annual summaries are linked in the right margin of this blog. A revised version of this summary appeared as an article for the ABA publication called Business Law Today.

(The Supreme Court’s stately building in Dover is featured in the photo from the Court’s website.)Photo of the Supreme Court Courthouse in Dover Hyperlinks below lead to both a fuller synopsis and each slip opinion.

C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, Del. Supr., No. 655/657, 2014 (Dec. 19, 2014). This Delaware Supreme Court opinion is noteworthy because it clarifies the version of fiduciary duties known as the Revlon standard that apply to a board of directors when they are selling their company, or there is a change in control. A shorthand reference for this opinion is that: a formal auction is not required to satisfy the Revlon standard. It also features a rare reversal of the Court of Chancery, and clarifies the standard that Chancery must follow when granting a mandatory injunction.

ATP Tour, Inc. v. Deutscher Tennis Bund, Del. Supr., No. 534, 2013 (May 8, 2014). The Delaware Supreme Court decided certified questions of law from the District of Delaware regarding whether it was consistent with Delaware law for a bylaw provision to provide for shifting attorneys’ fees to an unsuccessful plaintiff pursuing intra-corporate litigation. Short Answer: Such a bylaw provision is generally enforceable subject to equitable exceptions. This opinion has generated copious commentary among academics and others. Legislation addressing the issues in this opinion is expected to be considered in the Delaware Legislature during its 2015 session that ends in June.

Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, Del. Supr., No. 614, 2013 (July 23, 2014). This Delaware Supreme Court en banc opinion requires Wal-Mart to produce documents about an alleged bribery scandal involving their Mexican subsidiary. Even though the initial focus of this case was on DGCL Section 220 and what documents a stockholder of Wal-Mart could demand, the most noteworthy aspect of this decision is that for the first time the Delaware Supreme Court directly addressed and recognized an exception to the rule that documents protected by the attorney/client privilege do not need to be produced. It is referred to as the Garner exception after a case of that name from the Fifth Circuit.

In this case, the Delaware high court ruled that the well-established attorney/client privilege does not apply to bar production, or the privilege is subject to an exception, if a stockholder needs the otherwise inaccessible information to sue a director for breach of fiduciary duty. A similar analysis was applied to documents otherwise protected by the work-product doctrine. This opinion will have lasting importance for corporate and commercial litigators regarding this topic.

Kahn v. M & F Worldwide Corp., Del. Supr., No. 334, 2013 (March 14, 2014). The Delaware Supreme Court affirmed the Court of Chancery’s decision granting summary judgment to the defendants under the business judgment standard of review (and not the entire fairness standard) where the controlling stockholder, MacAndrews & Forbes, conditioned its offer upon the MFW Board agreeing, ab initio, to two procedural protections: approval by both a Special Committee and by a majority of the minority stockholders.

In Re Rural Metro Corporation Stockholder LitigationC.A. No. 6350-VCL (Del. Ch. Mar. 7, 2014). The Court of Chancery found RBC Capital Markets LLC liable for aiding and abetting the breach of fiduciary duties of directors by advising simultaneously Rural/Metro Corp. on the value of the company in connection with a sale to Warburg Pincus LLC, while other bankers at RBC were pitching their services to Warburg in an effort to gain fees by helping Warburg finance the same deal. In a subsequent opinion, substantial damages were assessed against RBC.

SUPPLEMENT: We are thrilled and honored that the venerable Professor Stephen Bainbridge, one of the nation’s top corporate law scholars and a favorite of Delaware courts and this blog, has graciously linked to this post on his blog, along with a very flattering description. It doesn’t get much better than this for someone who makes his living practicing corporate litigation.

In re Cornerstone Therapeutics Inc. Stockholders Litigation, Cons. C.A. No. 8922-VCG (Del. Ch. Sept. 10, 2014). This Chancery decision is noteworthy for its analysis of the applicable standard for a motion to dismiss members of a special committee when the challenged transaction would otherwise be subject to the entire fairness standard. This opinion provides a helpful review of the history of the standard and a discussion of when the burden of proof shifts to the plaintiff even when that standard applies, though initially the burden rests with the defendant.

The opinion also features one of the first applications of the recent Supreme Court opinion in M&F Worldwide, highlighted here, which provides that a deal with a controlling shareholder, in order to enjoy the business judgment rule standard of review, be conditioned ab initio on a majority of the minority approval, and approval by an independent special committee.

Prizm Group, Inc. v. Anderson, C.A. No. 4060-VCP (Del. Ch. May 10, 2010), read opinion here.

Issue Addressed

Whether shares were either void ab initio or merely voidable due to a lack of proper consideration paid for them.

Holding

The Court of Chancery determined that the board of Prizm Group properly exercised its right to void the shares due to the failure of the alleged shareholder to provide any consideration for them.

Procedural Posture

This is a post-trial opinion based on a suit by a corporation to seek a declaration that shares were either void or voidable due to the lack of consideration paid for them, or alternatively, to ask the Court to cancel the shares for the same reason.

Discussion

The Court applied the version of DGCL Section 142 that was in effect prior to the 2004 amendments. That pre-2004 version provided that unsecured promissory notes were not valid consideration for stock.

The Court determined that it need not decide the distinction between stock that is voidable and stock that is void ab initio. In this case, the Court determined that no adequate consideration was provided for the shares at issue and that they were properly voided by the corporation. The Court also reasoned that they stockholder waived his right to challenge the board action due to his failure to take any action for a substantial period of time despite his awareness of the board decision.