Gregory V. Gooding, Andrew L. Bab, and Jeffrey J. Rosen are partners at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Mr. Gooding, Mr. Bab, Mr. Rosen, Michael Diz, and Maeve O’Connor, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).
This post surveys corporate transactions announced during the period from July through December 2021 that used special committees to manage conflicts and key Delaware judicial decisions during this period ruling on the effectiveness of such committees.
While four of the 12 special committee transactions surveyed in this issue involved the proposed acquisition by a controlling stockholder of a controlled corporation, in only two of those did the controlling stockholder agree to subject the transaction to the vote of a majority of the unaffiliated stockholders. In the other two transactions the special committee approved the transaction notwithstanding the unwillingness of the controller to agree to the committee’s request for a majority of the minority approval condition. That unwillingness should not be surprising. As discussed further below, if the special committee has to negotiate for this condition—as opposed to it being offered by the controller up front—the benefit to the controller of agreeing is limited.
MFW’s Ab Initio Requirement: When Does the Beginning End and How Long Must It Last?
The Delaware Supreme Court’s 2014 MFW decision [1] provided a path by which a going-private merger—as well as other conflicted transactions between a Delaware corporation and its controlling stockholder—may be subject to business judgment review rather than the exacting test of entire fairness. MFW set forth six conditions required for a transaction to receive business judgment rule treatment, the first of which is that the controller condition the transaction ab initio on the approval of a special committee of independent and disinterested directors and on a majority-of-the-minority stockholder vote. [2] While one may debate the contours of the “independence” and “disinterest” required of the directors serving on the special committee and which stockholders are properly considered part of the “minority,” the requirement that MFW’s procedural protections be in place “from the beginning” presents particular conundrums. At what point is it too late to be ab initio? And why is this a requirement at all?
