The MFW framework rewards controllers who bind themselves first

The record

On March 14, 2014, the Delaware Supreme Court decided Kahn v. M&F Worldwide Corp., affirming a Court of Chancery grant of summary judgment for the defendants in a challenge to MacAndrews & Forbes Holdings' 2011 buyout of the minority shares of M&F Worldwide Corp. (MFW), a company in which MacAndrews & Forbes already held a 43 percent stake. The court held that the deferential business-judgment standard, rather than Delaware's more exacting entire fairness standard, applies to a controlling-stockholder freeze-out merger if, and only if, the controller conditions the transaction “ab initio” — from the outset — on approval by both an independent, empowered special committee and an informed, uncoerced vote of a majority of the disinterested minority stockholders.

What the documents establish

The opinion states the test as six conjunctive conditions, all of which the Court of Chancery found satisfied on the summary-judgment record: the controller conditions the deal on approval of both a special committee and a majority-of-the-minority vote; the special committee is independent; the committee is empowered to freely select its own advisors and to say no definitively; the committee acts with care; the minority vote is informed; and there is no coercion of the minority. A separate 2018 Delaware Supreme Court decision, Flood v. Synutra International, Inc., clarified what “ab initio” requires in practice: the controller need not include both conditions in its very first offer letter, only impose them before any substantive economic negotiations take place between the special committee and the controller. Because MFW's committee screened the controller out of its process, held eight meetings, and obtained updated projections free of the controller's influence, the court treated those facts as evidence the committee exercised the independence and care the framework requires, not merely recited it.

The operating read

Editorially, the framework's value to a controller depends on sequencing, not on paperwork drafted after the fact: both procedural protections must be in place before substantive economic negotiations begin, as Synutra confirms, not layered on afterward to defend a deal already shaped by the controller. A special committee formed after terms are largely set, given a mandate to negotiate but not to say no, or denied its own financial and legal advisors, does not satisfy the test merely because it existed and a vote later occurred.

What to check before you decide

Before assuming a controller transaction qualifies for business-judgment review under this framework, check the following against the transaction's own record:

• Were both the special-committee and majority-of-the-minority conditions imposed by the controller before substantive economic negotiations began, not after?
• Did the committee have an actual, exercised power to reject the deal and to retain independent advisors, evidenced by its conduct rather than only its charter?
• Was the disclosure supporting the minority vote sufficient to make that vote fully informed?

This describes the six conditions the Delaware Supreme Court's opinions set out; it is not a determination that any particular company's governance arrangement satisfies them.