Procedure Prevails When Applying MFW Framework to Interested Merger

The Delaware Court of Chancery recently issued an opinion that reminds controlling stockholders they can successfully implement a going private merger even when a competing bidder makes an offer that is substantially higher than that offered by the controlling stockholder. The court dismissed a lawsuit brought by former Eidos Therapeutics, Inc. stockholders against Bridgebio Pharma, Inc. and three of its directors over a merger in which Bridgebio, as Eidos’s controlling stockholder, acquired the remaining minority shares of Eidos stock. Smart Loc. Unions & Councils Pension Fund v. BridgeBio Pharma, Inc., No. 2021-1030-PAF, 2022 WL 17986515 (Del. Ch. Dec. 29, 2022).

Prior to the contested merger, Eidos was a publicly traded development-stage biopharmaceutical company focused on developing a single medication. Bridgebio owned a majority of Eidos stock and was a publicly traded company focused on developing and commercializing treatments for genetic diseases, with each drug development program housed in a separate subsidiary. When Bridgebio first expressed interest in acquiring the outstanding shares of Eidos stock in the summer of 2019, it conditioned the transaction both on the approval of a special committee of independent directors and a majority of the outstanding shares of the company not held by BridgeBio. A special committee was formed and promptly retained independent financial, legal, and industry advisers. The special committee subsequently rejected an offer by BridgeBio and negotiations came to an end without a merger agreement in place.

In 2020, a large third-party international pharmaceutical company proposed a licensing and collaboration agreement with Eidos. The Eidos Board rejected this offer, and BridgeBio subsequently disclosed renewed interest in a merger. The transaction was again conditioned on approval by a special committee and a majority of the minority shareholders, and another special committee was formed and retained advisers. The third-party company offered to buy all of Eidos’s outstanding equity, including BridgeBio’s stake, at a substantial premium to the terms of the proposed BridgeBio merger agreement and later offered a substantial premium to acquire the minority shares if BridgeBio was willing to provide certain governance rights. After extended negotiations between BridgeBio, the special committee, and the third-party competitor, BridgeBio made it clear that it would not grant governance rights, sell its shares in Eidos, or increase the consideration it was offering to Eidos under the merger agreement. Ultimately, the special committee approved the proposed BridgeBio transaction at a lower price than the third-party proposal, and in January of 2021 the majority of Eidos’s minority shareholders voted to approve the merger with BridgeBio. Suit was filed contesting the transaction.

Plaintiff’s case rose and fell on the standard applied by the court to review the merger. The parties did not dispute that the merger was an interested transaction, and such transactions are presumptively subject to the entire fairness standard, which requires the controlling stockholder to prove the transaction was the product of fair dealing and resulted in a fair price. Controlling stockholders can avoid this, however, if they comply with a set of six procedural requirements laid out by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”). If the requirements are met, the court will apply the business judgment rule in place of the entire fairness standard. These requirements are that (1) the controller conditioned the transaction on approval by both a Special Committee and a majority of the minority stockholders; (2) the Special Committee was independent; (3) the Special Committee was empowered to freely select its own advisors and to reject the transaction; (4) the Special Committee met its duty of care in negotiating a fair price; (5) the vote of the minority was informed; and (6) there was no coercion of the minority. The SMART Local Unions court ultimately found that BridgeBio satisfied its MFW procedural responsibilities as the controlling stockholder and concluded that the transaction was entitled to review under the business judgment rule rather than the entire fairness standard. The court accordingly dismissed the lawsuit in its entirety.

The Court began its analysis by rejecting Plaintiff’s initial policy argument that the MFW framework should never apply to transactions where a competing bidder makes an offer that is substantially higher than that offered by the controlling stockholder and the controller refuses to sell control. The court reiterated that Delaware law does not require a controlling stockholder to accept a sale to a third party or give up its control, and such a refusal does not preclude business judgment review under the MFW framework.

The court then walked through each of the six MFW factors and found that the first two MWF requirements were satisfied by BridgeBio’s conditioning of any transaction on the approval of a committee and majority of minority shareholders from the outset of negotiations. The Court then found that the third requirement, special committee empowerment, was satisfied because the special committee rejected three proposals from BridgeBio before making a counterproposal. Thus, Plaintiff’s assertion that the committee was not empowered because it ultimately approved the merger was focused on the quality of the Special Committee’s decision making rather than its degree of empowerment.

The Court found that the fourth requirement, duty of care, was satisfied because it was undisputed that the Special Committee retained independent financial, legal, and industry advisors. The Special Committee met twenty-four times over the course of four months. Additionally, the Special Committee negotiated with BridgeBio, explored the third-party competitor’s alternative proposal to acquire publicly held Eidos shares, and arranged for BridgeBio and the third-party company to meet and discuss potential terms. Given these facts, Plaintiff did not have a basis to claim that the Special Committee acted with the gross negligence or recklessness needed to run afoul of MWF’s requirements, and the fact that a competitor’s acquisition proposals reflected a substantial premium over the merger price did not by itself establish a lack of due care.

The court found that the fifth requirement was met because the vote of the minority shareholders was adequately informed.

Finally, the court found that there was no coercion of minority votes. The court rejected Plaintiff’s situational coercion theory, noting that Eidos was a company nearing the end of the development process for a potentially profitable pharmaceutical product, and as such had acceptable alternatives to a deal with Bridgebio.

The decision is a full-throated reaffirmation of the importance of procedure when a controlling stockholder negotiates a merger in which it will acquire all the outstanding shares of a company. The Delaware Supreme Court has previously observed that procedure is central to the practical goal of the MFW regime, which is to use business judgment review as an incentive for controlling stockholders to embrace the procedural approach most favorable to minority investors when engaging in transactions where the controller is on both sides. Flood v. Synutra Int’l, Inc., 195 A.3d 754, 756 (Del. 2018). SMART Local Unions is an illustration of this emphasis on procedure, even where a competitor offers minority shareholders a substantial premium.

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