Page 12 - Delaware Lawyer - Winter 2020

FEATURE
overseer and the business judgment rule will be whisked away.
As a result, the “from the outset” con- dition — when did the party begin — has become a highly litigated issue. Books on childhood development tell us that most six-year-olds are very rule-oriented and prefer bright-line rules that make com- pliance clear. A majority of the Delaware Supreme Court, however, has rejected the bright-line rule approach to the “from the outset” condition. In Flood v. Synutra International,4 the Supreme Court held that the controlling stockholder satisfied MFW ’s “from the outset” requirement and was entitled to the business judgment rule so long as the MFW conditions were in place “before any substantive economic negotiations” took place. The Court was satisfied that the controller self-disabled before substantive economic conditions were discussed and that the controller “could not use the conditions as bargain- ing chips during economic negotiations.” The Court also rejected the bright-line test argued for by the dissent, under which “from the outset” would mean at the very beginning. The Supreme Court’s decision to not adopt a strict and unbend- ing rule and thus loosen the apron strings reflects its faith in the ability of the Dela- ware courts to provide case-by-case tute- lage of MFW.
Beware False Friendship: ‘Cool Par- ents’ and Sneaky Controllers
Another perennial issue that parents face is the well-meaning menace of the “cool” parent. On the surface, the cool parent appears to be providing adult su- pervision. But because the cool parent wants to befriend the children it is sup- posed to be watching, the cool parent lets the children get away with murder. The effectiveness of MFW depends in large part on the effectiveness of the chaper- ones. And a transaction planner hoping to host MFW should pay close attention to the independence of directors on the special committee. Recent decisions not involving the MFW doctrine show that Delaware courts are analyzing indepen- dence issues with vigor. As a recent exam- ple, in In re BCG Partners, Inc. Derivative Litigation,5 pre-suit demand was excused because the complaint sufficiently alleged
Delaware courts have had to keep an eye out for controlling stockholders coming to the transactional party in disguise and evading the watchful eye of both entire fairness and the MFW chaperones.
particularized facts that, when considered in totality and not in isolation from each other, spun a web of professional and per- sonal relationships among three directors and the controller that created a reason- able doubt about those directors’ ability to impartially consider a demand. The Court stressed the importance of adopting a ho- listic approach to director independence in the demand futility context and of af- fording a plaintiff all reasonable infer- ences. If the Court is not convinced that the independent directors can say “no” to the controller, it will not credit their abil- ity to serve as an MFW chaperone.
Wise parents know who is coming to a party at their house. In the same vein, Delaware courts have had to keep an eye out for controlling stockholders coming to the transactional party in disguise and evading the watchful eye of both entire fairness and the MFW chaperones. The Court of Chancery has frequently been pressed into the role of bouncer, looking behind surface appearances and seeing if there is a controlling stockholder wear- ing false whiskers. A stockholder could be found a controller under Delaware law where the stockholder (1) owns more than 50% of the voting power of a corpo- ration’s stock, or (2) owns less than 50% of the voting power but exercises control
over the business affairs of the corpora- tion. If the stockholder owns 50% or more of the corporation’s stock, no disguise will work. But exercise of control with less than 50% ownership is much harder to detect. A plaintiff may establish exercise of control by showing that either (1) the stockholder dominated and controlled the majority of the board generally, or (2) the stockholder actually dominated and controlled the corporation, its board, or the deciding committee with respect to the challenged transaction.
In In re Tesla Motors, Inc. Stockholder Litigation,6 the Court of Chancery found it was reasonably conceivable that Elon Musk, the founder of Tesla and the owner of 22.1% of its stock, was the company’s controlling stockholder and controlled Tesla’s board of directors in connection with its decision to acquire SolarCity Cor- poration, another company founded by Musk and his cousins and of whose stock Musk owned 21.9%. Key factors in find- ing control were (1) Musk’s past willing- ness to remove senior management when displeased; (2) Musk’s blocking power due to supermajority voting provisions relating to fundamental transactions; (3) Musk’s outsized influence on the stock- holder base as a visionary founder and driving force at Tesla; (4) Musk’s exertion of active influence over the Tesla board when deliberating on a transaction; and (5) the majority of the Tesla directors’ lack of independence from Musk.
Similarly, in FrontFour Capital Group v. Taube,7 the court found the entire fair- ness standard applied because, although the Taube brothers owned less than 15% of Medley Capital’s common stock, at least half of the special committee was be- holden to them, and the special commit- tee “sat supine in negotiations concerning the Proposed Transactions, allowing the Taube brothers to dominate the process.” Control is highly fact-determinative, but Tesla Motors and FrontFour Capital illus- trate common themes courts encounter in conducting such analyses.
Teach Your Children Well
The absence of a bright-line test for “exercise of control” absent majority own- ership creates a dilemma for the transac- tional planner advising a corporation that
10 DELAWARE LAWYER WINTER 2020