20 May 2021

New Chancellor’s First Decision Reaffirms the Robust Protections Afforded to Transactions Following the MFW Roadmap

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Last week, newly sworn-in Chancellor McCormick issued her first decision in her new role, Franchi v. Firestone, granting a motion to dismiss a shareholder complaint regarding a going-private transaction with a controlled shareholder. In doing so, the new Chancellor affirmed that the MFW roadmap continues to provide robust protection to such transactions, so long as they meet the formal requirements set out in MFW

Prior to the 2014 decision by the Delaware Supreme Court’s decision in Kahn v. M&F Worldwide (affirming the Chancery Court’s In re MFW Shareholders Litigation decision), mergers with interested directors were reviewed under the strict “entire fairness” standard. The MFW case supplied a roadmap by which going-private transactions with controlling shareholders may qualify for protection under the business judgment rule, so long as they are conditioned “ab initio” (i.e., from the outset) on: (1) the approval of an independent and fully-empowered special committee that fulfills its duty of care and (2) the uncoerced, informed vote of the majority of the minority stockholders.

The transaction at issue in the Firestone litigation, which was structured to require approval by a special committee and a majority-of-the-minority vote under the standard set out in MFW, was a going-private transaction involving a company, Voltari, that was controlled by Carl Icahn through several affiliated entities, which owned a combined 53% of Voltari’s shares.

After receiving approval by the independent special committee following several months of negotiations with the Icahn entities, Voltari filed a proxy statement describing the terms of the proposed transaction. The statement announced that the stockholder vote on the transaction would take place on August 20, 2019. But when the time came, Voltari announced that the meeting would be adjourned to September 12 due to lack of support among the shareholders. When September 12 arrived, Voltari again announced that the vote would be adjourned—this time until September 24. Finally, on September 24, 2019, a slim majority of the unaffiliated shareholders voted to approve the transaction.

Several months after the deal closed, two former Voltari shareholders filed a complaint against the corporate directors involved and the Icahn entities, alleging all defendants breached their fiduciary duties to Voltari. The plaintiff shareholders argued, among other things, that the business judgment rule should not apply because the special committee was not truly independent from the controlling shareholder. One of the members was, for example, involved in making a documentary about Icahn, among other past business dealings with him, while the other had served on the boards of multiple Icahn-controlled companies. Although the Court found the documentary involvement “unusual” and the extensive business relations and recent board memberships “a close call,” Chancellor McCormick ultimately found the directors independent. The Court emphasized that the vast majority of the committee members’ dealings with Icahn had ended years before the Voltari going-private transaction, and noted that they were “of the sort of ordinary past business relationships … that this court has deemed insufficient to cast doubt on a director’s independence.”

With regard to each prong of the MFW standard, the Voltari transaction was a close call: the transaction received bare majority-of-the-minority approval after multiple failed attempts, and multiple directors on its special committee presented a “close call” with regard to independence. Nonetheless, because the transaction met the MFW standards, the Court dismissed the complaint, noting that, “[w]hen the business judgment standard applies, ‘dismissal is typically the result.’” This result demonstrates that the MFW guidelines supply bright-line rules, which provide strong protection from shareholder challenge for transactions falling on the right side of the rule—regardless of how far over the line they fall.