Key Learnings Regarding the Protectiveness of the MFW Process for Controlling Stockholder Transactions
The Delaware Court of Chancery’s recent decision in City Pension Fund for Firefighters and Police Officers in the City of Miami v. The Trade Desk, Inc. et al., which granted the defendants’ motion to dismiss, demonstrates how protective the MFW process of both an independent special committee of the board and a majority of the minority stockholder vote can be in a transaction with a controlling stockholder. This post provides a reminder concerning the MFW process and highlights two key learnings from the Trade Desk decision, one concerning independence and the second concerning the minority vote.
The Trade Desk decision addressed an amendment to The Trade Desk, Inc.’s (“Trade Desk”) certificate of incorporation that extended the duration of its dual-class stock structure to permit the company’s co-founder and CEO to remain a controlling stockholder through high-vote Class B shares beyond the originally set dilution trigger. The plaintiff alleged that the absence of adequate consideration, among other things, rendered the transaction unfair. Because the controlling stockholder was personally interested in this transaction, the court ordinarily would review the transaction under the exacting entire fairness standard of review, rather than under the deferential business judgment rule.
The Delaware Supreme Court in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), held that if the following process elements are all present, an interested transaction with a controlling stockholder will avoid entire fairness review and be reviewed instead under the business judgment rule:
(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
MFW, 88 A.3d at 645.
The Trade Desk board followed MFW by establishing a special committee of the board to negotiate the amendment with the controlling stockholder. In negotiating the amendment, the special committee extracted certain governance improvements — but no monetary consideration — for the company. The amendment was then put to a vote for approval by the minority stockholders and following initial failures to obtain approval, ultimately was approved.
Because the Trade Desk board complied with the MFW process, the court did not “second guess the ultimate ‘give’ and ‘get’” between the controlling stockholder and the company and limited its inquiry to a “process analysis.” C.A. No. 2021-0560-PAF, at 44. Concluding that the plaintiff failed to allege that any of the MFW process elements were deficient, the court granted the defendants’ motion to dismiss the case.
A Majority Independent Special Committee Satisfied MFW
Importantly, the court held that the plaintiff had failed to allege that the special committee lacked independence because it did not allege facts impugning the independence of a majority of the directors on the special committee. The plaintiff meaningfully attacked the independence of only one of the directors on the special committee. The court held that even if the complaint adequately alleged that that director lacked independence, the special committee still satisfied MFW because the plaintiff had not adequately alleged that the other two directors lacked independence or that the allegedly beholden director dominated the process. The court stated that it was not expressly holding that a special committee need not be entirely independent in the MFW context, but noted that the plaintiff did not raise that argument. Nevertheless, Trade Desk supports respecting the special committee’s conclusions even if facts arise after the special committee is formed that shed some doubt on a particular member’s independence as long as a majority of the committee was independent.
Notably, if one member of the special committee may lack independence, a majority of the special committee can be independent only if the committee has at least three members. Boards may want to consider empaneling special committees of at least three directors where possible to take advantage of the possible application of the majority rule on independence.
Minority Stockholder Approval Obtained After Meeting Was Adjourned for the Company to Solicit Additional Votes Satisfied MFW
By the time of the December 7, 2020 special stockholder meeting held for Trade Desk stockholders to vote on the amendment to the certificate of incorporation, an insufficient number of stockholders had voted in favor of the amendment to secure majority of the minority approval. The company therefore adjourned the meeting and reconvened the meeting on December 22, 2020, by which time it had mustered support and the amendment had been approved by 52% of the minority stockholders. In spite of the adjournment and the company’s efforts to obtain additional minority votes in favor of the amendment, both of which were within the board’s legal authority, the majority of the minority vote was held to satisfy MFW.
The court also held that the board was not required to disclose to the stockholders that it had actively sought the “yes” votes of significant Trade Desk stockholders because Delaware boards of directors have the authority to advocate for the actions they request of stockholders that they have deemed to be in the best interests of the company.
It is instructive that these general principles of law regarding stockholder voting were found to apply in Trade Desk to minority stockholder votes under MFW where the minority stockholder approval is particularly important in removing a transaction from heightened judicial review for entire fairness.