The Management Friendly Nature of Delaware Decisions: In re MFW Shareholders Litigation (The Future) (Part 9)
What predictions can we make about this case?
First, it needs to be approved by the Delaware Supreme Court. Although described as pro-shareholder, it is a management friendly decision that reduces the risk of liability on directors. As a result, the Supreme Court, which is probably more management friendly than the Chancery Court (look at the decisions in the Air Products case), is likely to view the reasoning with considerable sympathy. The Supreme Court may, however, want to limit or reverse the Chancery Court's view of dicta but will otherwise be likely to leave the reasoning in place.
Second, the law can be expected to develop in a manner that will make the process less and less rigorous. The most obvious mechanism for doing so is for the courts to adopt a broad definition of minority shareholders. To the extent that the minority includes shareholders predisposed towards the controlling shareholder, a majority will be easier to attain. Thus, for example, the minority shareholders will likely include not only arbs and other short term investors but also management and the shares owned by entities or persons with considerable contact with the controlling shareholders.
Third, the offer in this case was conditioned upon approval of the unaffiliated shares. This was important to the court's analysis.
- From inception, the controlling stockholder knows that it cannot bypass the special committee's ability to say no. And, the controlling stockholder knows it cannot dangle a majority-of-the-minority vote before the special committee late in the process as a deal-closer rather than having to make a price move. From inception, the controller has had to accept that any deal agreed to by the special committee will also have to be supported by a majority of the minority stockholders.
Yet future decisions will likely eliminate this requirement. Controlling shareholders may seek approval of minority shareholders to obtain the shift in the burden but not condition the transaction on a successful vote. In those circumstances, the Delaware courts will likely still give them the advantages associated with the use of a special committee. Thus, entire fairness will be the applicable standard but the burden will shift to shareholders.
This approach means that controlling shareholders will ultimately obtain all of the advantages that can arise from seeking a majority of the minority but none of the disadvantages. Shareholders will receive something like an advisory vote, able to register opposition to the transaction but having no actual authority to stop it from going forward.
Primary materials in this case can be found at the DU Corporate Governance web site.