Expanding MFW: Delaware Law Should Offer a Business Judgment Rule Safe Harbor for All Conflicted Controller Transactions

Authors

Alex Lindsey, Fordham University School of Law

Keywords

Business judgement rule, squeeze-out mergers, freeze out mergers, controlling shareholder, entire fairness, corporate governance, compensation packages, duty of loyalty, fiduciary, fiduciary duties, MFW, minority stockholder, Delaware law, MFW factors, deal structure, business, finance, Delaware Chancery Court, shareholder protection, business decisions

Abstract

While courts usually defer to a board’s business decisions under the business judgment rule, courts will apply a much less deferential standard of review due to loyalty concerns if a conflicted controller is involved in a business decision such as a merger. However, in Kahn v. M & F Worldwide (“MFW”) when a squeeze out merger was challenged by a minority stockholder, the Delaware Supreme Court reviewed the transaction under the deferential business judgment rule standard because the Court found that the structure of the transaction neutralized the controller loyalty concerns. Building on this reasoning, the Court developed a checklist of procedural protections (the “MFW factors”) that, if followed, can allow a controller to earn business judgment rule deference in a squeeze out merger transaction.

The Delaware Chancery Court has since applied the MFW factors and granted business judgment rule deference in other types of conflicted controller transactions such as controller compensation packages. However, the legitimacy of this expansion of MFW remains uncertain. This Note discusses the background leading up to the development of the MFW factors, analyzes the effectiveness of the MFW factors in squeeze out mergers specifically, and considers the expansion of the MFW factors beyond squeeze out mergers. Ultimately, this Note proposes that, even though the MFW factors were developed in the context of squeeze out mergers specifically, the MFW factors should be expanded to apply to all conflicted controller transactions because the factors target the loyalty concerns present in all conflicted controller transactions.

Recommended Citation

Alex Lindsey, Note, Expanding MFW: Delaware Law Should Offer a Business Judgment Rule Safe Harbor for All Conflicted Controller Transactions, 29 Fordham J. Corp. & Fin. L. 339 (2023).