In Flood v. Synutra Int’l, Inc., No. 101, 2018, (Del. Oct. 9, 2018), the Delaware Supreme Court held that a controlling stockholder who pursues a merger with the company under its control will have the benefit of the business judgment review standard pursuant to Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), so long as the requisite protections under MFW are put in place prior to the start of negotiations between the purchaser and seller.
In MFW, the Supreme Court held that, in a landmark decision, freezeout mergers structured with various inherent protections should be reviewed under the highly deferential business judgment standard. In order to benefit from the business judgment rule, the transaction must be conditioned, at the start, upon the following: (1) the approval of an independent, adequately-empowered special committee of the board of directors that fulfills its duty of care, and (2) the uncoerced, informed vote of a majority of the minority stockholders (the “MFW protections”).
The dispute in Synutra arose over when the MFW protections will be deemed to have been in place “ab initio.” Appellants argued the Court of Chancery misapplied the MFW standard, claiming the business judgment rule should not apply because the initial proposal did not contain the MFW protections and therefore could not be considered to have been in place from the beginning. The High Court majority disagreed, explaining the MFW ab initio requirement is satisfied if the controller conditions the buyout on the MFW protections at the beginning of the deal process and before economic negotiations commence.
The Supreme Court therefore concluded that the interpretation of MFW standard based on the foregoing principles was correct, citing its previous affirmance in Swomley v. Schlecht, 128 A.3d 992 (Del. 2015).