Delaware Supreme Court Gives Additional Guidance on Scope and Mechanics for Applying MFW Framework to Conflict Transactions

Recently, the Delaware Supreme Court issued its much-anticipated decision in In re Match Group, Inc. Derivative Litigation, No. 368, 2022 (April 4, 2024), in which the Court reaffirmed certain venerable teachings on the standards of review that the Delaware courts will employ to review challenged transactions involving a controlling stockholder—including when and how controlling stockholders can deploy the “MFW framework” (from Kahn v. M&F Worldwide Corp, 88 A.3d 635 (Del. 2014) (“MFW”)) to shift the standard of review from “entire fairness” to “business judgement.”  In general, the MFW framework reflects the Supreme Court’s ruling in that case that where a controlling stockholder conditions a going-private transaction (which would normally be reviewed under the exacting entire fairness standard), from the beginning, on (1) approval by a fully-functioning independent committee of directors and (2) a fully-informed vote of the unaffiliated minority stockholders, the Delaware courts will look to see if that transaction was within the business judgment of the fiduciaries presenting and approving it.

Since the ruling in MFW in 2014, transactional planners, stockholder plaintiffs, and corporate defendants have all probed the contours of the ruling in various ways.  For instance, can the MFW framework be deployed outside a squeeze-out merger context or does the entirety of the special committee need to be independent and disinterested or can just a majority of the members of the committee be satisfactory?

In the Match opinion, the Supreme Court discusses in detail (1) the historical framework of the various standards of review that the Delaware courts will use to review challenged corporate transactions and conduct, (2) the history behind, and the nature of, the Court’s ruling in MFW, and (3) additional guidance for corporate constituencies (including controlling stockholders, boards of directors, and their advisors) on the scope of and mechanics for properly deploying the MFW framework to shift the standard of review from entire fairness to business judgment.  Specifically, the Supreme Court held:

  • Long-standing precedent holds that “in a suit claiming a controlling stockholder stood on both sides of a transaction with the controlled corporation and received a non-ratable benefit, entire fairness is the presumptive standard of review”—this is not limited to going-private mergers, but rather applies to all transactions with a controlling stockholder that would historically have been reviewed for entire fairness.
  • A “controlling stockholder can shift the burden of proof [to prove the transaction was not entirely fair] to the plaintiff by properly employing a special committee or an unaffiliated stockholder vote” (emphasis added).  However, “the use of just one of these procedural devices does not change the standard of review” from entire fairness to business judgment.
  • If “the controlling stockholder wants to secure the benefits of business judgment review, it must follow all [of] MFW’s requirements.”  That is, the transaction must be conditioned on both the approval by an effective and independent special committee, and the informed vote of approval by the unaffiliated stockholders.
  • For the special committee to be effective in “replicat[ing] arm’s length bargaining, all [special] committee members must be independent of the controlling stockholder.”



And . . . Yet Another Minute About Minutes

Over the years we have used this blog to highlight Delaware case law where the topic of corporate minutes has played a material role in the way the court has reviewed the actions of a board of directors.  Those posts can be found here under the tag “minutes.”

Recently, The Honorable Leo E. Strine, Jr. (Ret.), the former Chief Justice and Chancellor of Delaware, posted a short summary on the Harvard Law School Forum on Corporate Governance of a more comprehensive paper he has written on this topic titled: “Minutes are Worth the Minutes: Good Documentation Practices Improve Board Deliberations and Reduce Regulatory and Litigation Risk”  forthcoming in the Fordham Journal of Corporate and Financial Law.  

Spending some time reading Chief Justice Strine’s article is well-“Worth the Minutes” invested, as he has done a great job of surveying the case law and highlighting the methods and means for generating corporate minutes that will most likely withstand scrutiny and give confidence to the court in the governance actions taken at such meetings.

Duty of Oversight of Officers–Post-McDonald’s Action in Court of Chancery

Nearly one year ago we reported in this blog on the Court of Chancery’s decision in In re McDonald’s Corp. S’holder Litigation, 289 A.3d 343 (Del. Ch. 2023), in which the court affirmatively held that officers of Delaware corporations owe duties of oversight (often called, Caremark duties), and specifically for matters that would fall within their managerial purview.  In a recent decision granting a motion to dismiss in Segway Inc. v. Hong Cai a/k/a Judy Cai, C.A. No. 2022-1110-LWW (Del. Ch. Dec. 14, 2023), Vice Chancellor Will has provided practitioners counselling corporate officers with additional guidance on how the Court of Chancery will apply the duty of oversight to officers (as opposed to directors)—particularly when reviewing the sufficiency of claims pled against such officers.

This decision makes clear that “[d]espite a proliferation of modern jurisprudence, bad faith remains a necessary predicate to any Caremark claim.”  This is so no matter whether the fiduciary whose conduct is challenged is an officer or a director.  While the McDonald’s decision “emphasized that—barring extreme facts—an officer’s duty of oversight would only extend to matters within the officer’s remit,” that decision did not “craft a lower standard for oversight claims brought against officers.”  Because the complaint in this case did not sufficiently plead  “potential wrongdoing (much less within [the officer’s] purview),” the Vice Chancellor dismissed the claims.

In closing the Memorandum Opinion, Vice Chancellor Will summarized the current state of the law as it pertains to the Caremark duties owed by officers of Delaware corporations as follows:

The Caremark doctrine is not a tool to hold fiduciaries liable for everyday business problems.  Rather, it is intended to address the extraordinary case where fiduciaries’ “utter failure” to implement an effective compliance system or “conscious disregard” of the law gives rise to a corporate trauma.  These tenets of our law persist regardless of whether a Caremark claim is brought against a director or an officer.  Officers’ management of day-to-day matters does not make them guarantors of negative outcomes from imperfect business decisions.

* * *

At a minimum, a plaintiff pursuing an oversight claim against an officer would need to demonstrate that the officer failed to make a good faith effort to monitor central compliance risks within her remit that pose potential harm to the company or others.

To the extent officers of Delaware corporations or their advisors might have read the earlier McDonald’s decision as creating an easier path to liability for duty of oversight claims for officers as opposed to directors, this recent decision should quiet those concerns.

Do New Delaware General Corporation Law Exculpation Amendments Trigger a Mandatory Class Vote for Changes to Charters?

In August 2022, a number of amendments to the provisions of the Delaware General Corporation Law (DGCL) went into effect. One amendment of note is the extension of Section 102(b)(7)’s exculpation provisions, which now permit corporations to eliminate or limit the personal liability of specified officers for direct claims of breach of the fiduciary duty of care. As a result, several Delaware corporations have amended their charters to extend the Section 102(b)(7) clauses to those senior corporate officers specified under the newly amended statute. Naturally, these actions bring a new issue for the courts to determine: What is the requisite stockholder approval to implement these charter amendments?


To read the full Alertvisit the firm website

Demand Futility Saves McDonald’s Former Executive from Potential Caremark Liability

We discussed in a prior Alert Vice Chancellor J. Travis Laster’s extension of oversight duties and liability therefrom upon corporate officers. While this decision provided answers to long-standing questions relating to the extension of oversight duties, it also brought about concerns regarding the potential increase of exposure to liability. Luckily for those who shared in this concern, Vice Chancellor Laster reminded us all that the requirement to plead demand futility under Court of Chancery Rule 23.1 will continue to serve as an important hurdle to a plaintiff’s success in the courtroom. In a short order released this month, Vice Chancellor Laster dismissed the same breach of oversight claims that previously withstood Court of Chancery Rule 12(b)(6) muster.

To read the full Alertvisit the firm website.

Consent to Jurisdiction Clauses–The Sequel

We recently wrote a post on this page discussing a new decision of the Court of Chancery holding that a consent to jurisdiction clause in a corporate acquisition agreement was not drafted such that its scope covered claims for breach of fiduciary duty–the lesson for drafters of agreements being to carefully consider how the provision being drafted actually covers the intended scope and types of claims.

In a decision issued on February 28, 2023, the Court of Chancery issued its decision in Golden v. Shootproof Holdings, LP, et al., C.A. No. 2022-0434-MTZ, in which the court considered whether the consent to jurisdiction clause in a merger agreement covered individuals (officers of the buying entities) who were not signatories to, or parties to, the merger agreement at issue.  The court found that it did not have personal jurisdiction over the two individual defendants, both residents of Georgia, because it found–as non-parties to the merger agreement–they had not consented to jurisdiction in Delaware.  The court, therefore, granted the individual defendants’ motion to dismiss.

In arriving at this result, the court noted that it may enforce a forum selection clause against those “who are not otherwise individually bound by the agreement” where it finds all three of the following present: “(i) the agreement contains a valid forum selection provision; (ii) the non-signatory has a sufficiently close relationship to the agreement  . . .; and (iii) the claim potentially subject to the forum selection provision arises from the non-signatory’s standing related to the agreement.”  In the litigation, only factor (ii) was contested.

The court ultimately found that the individual defendants were not intended third-party beneficiaries of the merger agreement and would not be bound by the principles of estoppel, and thus, they had not consented to the jurisdiction of Delaware’s courts.

As with last week’s post, this new decision highlights how the Delaware courts are content to apply consent to jurisdiction clauses–but will only do so where the clause clearly articulates that it covers both the intended parties and the intended conduct.

Delaware Choice of Law Clauses for Restrictive Covenants in Agreements

The Delaware Business Court Insider recently published my analysis of a decision of the Court of Chancery where the court declined to apply a Delaware choice of law provision in a dispute related to restrictive covenants where the application of Delaware law would thwart an express policy of the state (here, Alabama) with the greater interest in the dispute.  That article may be read here.

Contract Drafters: Consider the Scope of Your Consent to Jurisdiction Clauses!

A new decision from Delaware’s Court of Chancery highlights how transactional lawyers are granted wide latitude to seek, by contract, to invoke the jurisdiction of Delaware’s renowned business and commercial courts, where jurisdiction might not otherwise lie, through the use of a consent to jurisdiction clause in a contract or agreement.  But in doing so, practitioners should consider carefully how the parties will ultimately define the scope and reach of such consent.  In ActiGraph Holdings, LLC, et al. v. Cyntech, Inc. et al., C.A. No. 2021-0507-KSJM (February 14, 2023), the Chancellor found that a consent to jurisdiction clause in a purchase agreement for the sale of a business (a Florida LLC) did not subject the former CEO of the sold business to the jurisdiction of the Delaware courts for purposes of claims of breach of fiduciary duty in the management and affairs of the Florida LLC.

The pertinent language in the consent to jurisdiction clause stated: “Each party hereby irrevocably submits to the jurisdiction of the Court of Chancery of the state of Delaware or any federal court of competent jurisdiction in the state of Delaware, solely in respect of the interpretation and enforcement of the provisions of this agreement and of the documents referred to in this agreement . . . .” (emphasis added by Court)  The Court held that the the emphasized language in the consent to jurisdiction clause did not cover claims for breach of fiduciary duty, and therefore found that the Court did not have personal jurisdiction over the former CEO (a Florida resident) for such claims.

Clarity at Last? Court of Chancery Confirms Corporate Officers Owe Oversight Duties

Since Chancellor William T. Allen’s seminal ruling in In re Caremark International Inc. Derivative Litigation, the question of the duties owed by corporate officers, not directors, has remained unclear. For years, practitioners, academics and the courts have grappled with this question and others. Recently, Vice Chancellor J. Travis Laster answered some of these questions and provided long-needed clarity, holding that corporate officers “owe a fiduciary duty of oversight as to matters within their areas of responsibility.”  While this opinion provides answers to the questions many have been asking, it also raises concerns.

To read the full Alert, visit the firm website.

Seek (In Delaware), and Ye Shall Find Corporate Books and Records

The right of a stockholder of a Delaware corporation to inspect the books and records of the company is codified in Section 220 of the Delaware General Corporation Law.  In recent years, and for a number of reasons, stockholders have been exercising this inspection right in ever increasing numbers (I have four clients addressing demands to inspect books and records as I write).  A recent decision of the Court of Chancery (Juul Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL) is worth highlighting–less for the substantive law related to Section 220 inspections of books and records and more its discussion of certain “gatekeeping” matters related to litigation to enforce these stockholder inspection rights.

The noteworthy holdings and outcomes in the Juul Labs decision are the following:

  • Because Juul Labs is a Delaware corporation, and a demand by a stockholder to inspect the books and records of a corporation are a matter of internal affairs for that entity, the stockholder could not use a similar California statute (even though Juul’s principal place of business is in California) as a basis upon which to demand the inspection of books and records;
  • A stockholder of a Delaware corporation must look solely to 8 Del. C. Sec. 220 for its statutory rights to inspect the books and records of a Delaware corporation in which they own shares; and
  • The court left open the question whether a stockholder of a Delaware corporation can contractually waive the statutory rights to inspection of books and records granted by Section 220.

Thus, while it is clear that Delaware corporations and their legal advisors can take greater comfort that disputes over stockholder access to corporate books and records can and will be heard in Delaware, the broader question of whether Delaware corporations can affirmatively contract with their stockholders to limit or obviate such inspection rights remains to be answered.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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