Page 11 - Delaware Lawyer - Winter 2020

stockholder. When the controlling stock- holder came to the transactional party, it was always seated with entire fairness and, under entire fairness’s watchful and unblinking eye, would have to answer entire fairness’s probing questions about fair price and fair process. In addition, transactions involving the controlling stockholder were always kept apart from the business judgment rule. The business judgment rule’s relaxed outlook and the controlling stockholder’s strong-willed tendencies were considered an unhealthy mix that could too easily lead to mis- chief.
For over a decade, transaction planners wondered if, with the proper chaperones and safeguards, controlling stockholder transactions might be permitted to enjoy the company of a relaxed standard more like the business judgment rule and be spared, at least on some occasions, the de- manding attentions of the entire fairness standard. These hopes were realized in 2014, when the Delaware Supreme Court blessed the union of the business judg- ment rule and the entire fairness doctrine, allowing them to give birth to MFW. MFW Heir to Substantial Legacies from Both Parents
MFW has inherited traits from both its parents: MFW provides that a transfor- mational transaction (e.g., a squeeze-out merger) involving a controlling stock- holder may be subject to the deferential business judgment standard of review where the transaction is conditioned from the outset — ab initio — upon the “dual protections” of (1) being negotiated by an independent special committee, and (2) subsequent approval by a fully informed vote of the “majority of the minority” of disinterested stockholders. If escorted by MFW, a controlling stockholder transac- tion can enjoy the company of the busi- ness judgment rule, but only if it remains under the careful and disinterested su- pervision of the independent directors and unaffiliated stockholders, and only if these chaperones are present from start to finish. If the chaperones fall down on their job, MFW will remit the controller to the supervision of its other, more demand- ing parent, the entire fairness standard. A sojourn with the entire fairness standard
Like many a child prodigy, MFW enjoyed instant popularity, especially with transaction planners seeking to take controlled companies private.
can be a lengthy and expensive one, usu- ally involving a long drive down discovery road and an extended stay at trial town, where the controlling stockholder must prove that it has done nothing untoward.
Like many a child prodigy, MFW en- joyed instant popularity, especially with transaction planners seeking to take con- trolled companies private. But even the most precocious youth is not immune from the predicaments and trials of grow- ing up. Luckily, Delaware courts have been diligent guardians of MFW, over- seeing their ward’s development and up- bringing.
How Much Freedom to Give the Precocious Child?
Just as parents must worry about what company their offspring should keep and how far from home they should be al- lowed to go, Delaware courts, as MFW’s guardian, have had to consider what types of controller transactions MFW should be permitted to associate with. Does MFW have any place in controlling stockholder transactions other than a squeeze-out merger? The Court of Chancery has in- dicated that it believes MFW has a place in executive compensation decisions and other controller transactions. In In re EZCORP Inc. Consulting Agreement De- rivative Litigation,2 a decision challeng- ing the executive compensation received by a controller, the court held that “the
entire fairness framework governs any transaction between a controller and the controlled corporation in which the con- troller receives a non-ratable benefit.” It then suggested, in dicta, that if the MFW protections are employed, the business judgment rule could apply to executive compensation decisions for controlling stockholders.
More recently, in Tornetta v. Musk,3 another executive compensation decision concerning a controller’s incentive com- pensation, the defendants claimed that MFW applied, and because there had been an independent committee of directors negotiating the controller’s compensa- tion and a subsequent stockholder vote in which a majority of the minority had approved the compensation package, the business judgment rule governed and the lawsuit should be dismissed. The court held MFW did not apply because a vote of the majority of minority unaffiliated stock- holders was not a condition at the outset.
The Delaware Supreme Court has yet to address the application of MFW be- yond the controller squeeze-out transac- tion. Although it is unclear how far from its original home MFW may venture, one suspects that Delaware courts do not in- tend it to live the crabbed life of a tightly cabined homebody.
Avoiding Bad Friends with Bad Habits
This is not to say that Delaware courts are unaware of the daily perils MFW might face. As most parents know, even a well-chaperoned get-together is not a foolproof safeguard against trouble. The practice of “pre-gaming,” in effect, having an unchaperoned party before the chap- eroned party begins, is a constant worry. Wayward youth don’t need to run the risk of getting caught spiking the punch bowl if they drink their stash before the party starts. As reflected by MFW’s “from the outset” condition, Delaware courts have always been concerned about control- ling stockholders’ “pre-gaming” before coming to an MFW party. The “from the outset” condition makes it clear that if the controlling stockholder pre-games a transaction before the chaperones show up, entire fairness will be the controller’s
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