Delaware Court Of Chancery Holds That Addition Of MFW Protections Following Initial Controller Proposal But Before Negotiations Meets MFW Conditions
On February 2, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery dismissed a stockholder challenge to the buyout of Synutra International Inc. (“Synutra”) in a squeeze-out merger by a controlling stockholder group. In re Synutra International Inc. Stockholder Litigation, C.A. No. 2017-0032 (Del. Ch. Feb. 2, 2018). Plaintiffs asserted breach of fiduciary duty claims against the controller group and the special committee of the Synutra board. They alleged that the transaction did not satisfy the ab initio requirement under Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”), because the controller group did not initially condition the proposed transaction on recommendation by a special committee and approval by a majority of the disinterested stockholders, features added weeks after the controller’s initial proposal letter and after the Synutra board had already met and formed a special committee. Finding that “the controller announce[d] the conditions before any negotiations took place,” the Court held the ab initio requirement was satisfied and dismissed the complaint under MFW.
To qualify for review under the deferential business judgment rule, MFW requires that a controller take-private transaction be “conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.” Plaintiffs alleged that the Synutra controller group, which held at least 63.5% of the company and included the company’s CEO and chairman, submitted a “preliminary non-binding proposal,” offering to acquire the company at $5.91 per share on January 14, 2016. Thereafter, the Synutra board met on January 21, 2016 and formed the special committee. It was not until January 30, 2016, that the controller group submitted a follow-up letter reaffirming its initial offer and—for the first time—expressly conditioning the transaction on the approval of the special committee and a majority of the minority stockholders. After negotiation and obtaining such approvals, the deal closed in May 2017 at a price of $6.05 per share.
The Court determined that the ab initio requirement is satisfied so long as the conditions are announced prior to the initiation of negotiations. The Court explained that “[u]sing this point in time fulfills the goals of disabling the controller for purposes of the negotiations and ensuring that the controller cannot dangle a majority-of-the-minority vote before the special committee late in the process as a deal-closer rather than having to make a price move.” Finding that the follow-up letter was sent promptly, before the special committee ever convened, and before any negotiations took place, the Court concluded that the ab initio requirement was met.
The Court also found that plaintiffs’ other contentions lacked merit. In particular, the Court explained that the controller group’s ability to decrease the price and refusal to support a competing bid were merely facts inherent in such transactions for which the MFW framework developed in the first place. The Court also found that the controller’s involvement in selecting directors did not impugn the directors’ independence and that the appointment of a new director to a long-vacant seat when the special committee was formed did not support a reasonable inference that director was conflicted. Finally, the Court emphasized that the special committee’s duty of care in negotiating a fair price was one of process and found that plaintiffs’ various other allegations did not support an inference of gross negligence, where the committee was advised by counsel and financial advisors, conducted a market check, and negotiated an increase (albeit modest) in price.