The Management Friendly Nature of Delaware Decisions: In re MFW Shareholders Litigation (Director Independence and the Public Company Exception)(Part 2A)
We are discussion In re MFW Shareholders Litigation.
Before the court could decide to abandon the fairness analysis in the context of a transaction between a controlling shareholder and the company, it first had to consider the benefits of the process employed by MFW in considering the offer from M&F.
As is typical in these types of transactions, the board of MFW formed a special committee of independent directors to consider the proposal. Empowered to hire independent advisors, the committee retained a law firm and financial advisor. The committee also had the authority to negotiate the terms of the offer and could, according to the court, elect not "to pursue the Proposal". The committee, however, "did not have the practical authority to market MFW to other buyers" although it could and did consider "whether there were other strategic options . . . that might generate more value for minority stockholders".
Shareholders challenged the process by asserting, among other things, that there was reasonable doubt as to the independence of the directors on the special committee. The Chancery Court had little interest in the argument. Rather than simply consider the contentions, it began by essentially alerting shareholders to the futility of their argument.
First, there was inadequate evidence of "subjective" materiality. As the court stated:
- Despite receiving the chance for extensive discovery, the plaintiffs have done nothing, as shall be seen, to compare the actual economic circumstances of the directors they challenge to the ties the plaintiffs contend affect their impartiality. In other words, the plaintiffs have ignored a key teaching of our Supreme Court, requiring a showing that a specific director's independence is compromised by factors material to her. As to each of the specific directors the plaintiffs challenge, the plaintiffs fail to proffer any real evidence of their economic circumstances.
Under this approach, it is not enough to show that a director obtained a sizeable payment from the company. Instead, shareholders had to show that the payments were material to that particular director. In effect, wealthy directors receiving significant amounts from the company were nonetheless treated as independent. Moreover, this standard applied without consideration of the the the availability of the "economic circumstances" of each director.
Second, the court essentially applied a presumption that rendered directors independent to the extent they met the applicable definition used by the NYSE.
- MFW was a New York Stock Exchange-listed company. Although the fact that directors qualify as independent under the NYSE rules does not mean that they are necessarily independent under our law in particular circumstances, the NYSE rules governing director independence were influenced by experience in Delaware and other states and were the subject of intensive study by expert parties. They cover many of the key factors that tend to bear on independence, including whether things like consulting fees rise to a level where they compromise a director's independence, and they are a useful source for this court to consider when assessing an argument that a director lacks independence. Here, as will be seen, the plaintiffs fail to argue that any of the members of the special committee did not meet the specific, detailed independence requirements of the NYSE.
The NYSE (and Nasdaq) contain some categorical exclusions from the definition of independence. But for the most part, the rules arising from "extensive study" do little more than require a board to determine whether directors have a "material relationship" with the company. See NYSE 303A.02 ("No director qualifies as 'independent' unless the board of directors affirmatively determines that the director has no material relationship with the listed company").
In other words, the analysis was circular. Review of a board's determination of director independence would receive a greater presumption of validity where, under the rule of the NYSE, the board determined independence. This is significant since exchange traded companies generally must have a majority of independent directors. The language of the opinion, therefore, suggested that shareholders would rarely if ever be able to challenge the independence of directors of public companies that were appointed to special committees.
This was the case despite facts in the case that suggested the limitations of the rules of the NYSE. One of the directors determined to be "independent" under the NYSE rules and initially appointed to the special committee decided not to participate on the special committee as a result of "some current relationships that could raise questions about his independence for purposes of serving on the special committee." As the opinion stated:
- The special committee consisted of Byorum, Dinh, Meister (the chair), Slovin, and Webb. The following day, Slovin recused himself because, although the board had determined that he qualified as an independent director under the rules of the New York Stock Exchange, he had "some current relationships that could raise questions about his independence for purposes of serving on the special committee."
The opinion did not explain the "current relationships" that could raise the questions. Plaintiffs, however, alleged in their brief that Perelman had described the director as having a relationship akin "to that as a brother." See REDACTED version of Plaintiffs' Brief in Opposition to Defendants' Motions for Summary Judgment, at 5).
Primary materials in this case can be found at the DU Corporate Governance web site.