IN THE SUPREME COURT OF THE STATE OF DELAWARE
ARTHUR FLOOD, Individually and
§
on behalf of all others similarly
§
situated, § No. 101, 2018
§
Plaintiff Below, § Court Below: Court of Chancery
Appellant, § of the State of Delaware
§
v. § C.A. No. 2017-0032-JTL
§
SYNUTRA INTERNATIONAL, INC., §
LIANG ZHANG, JINRONG CHEN, §
LEI LIN, YALIN WU, XIUQING §
MENG, BEAMS POWER MERGER §
SUB LIMITED, and HOULIHAN §
LOKEY CAPITAL, INC., §
§
Defendants Below, §
Appellee. §
Submitted: September 12, 2018
Decided: October 9, 2018
Before STRINE, Chief Justice; VALIHURA, VAUGHN, SEITZ, and
TRAYNOR, Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery. AFFIRMED.
Ryan M. Ernst, Esquire, Daniel P. Murray, Esquire, O’Kelly Ernst & Joyce, LLC,
Wilmington, Delaware; Donald J. Enright, Esquire (Argued), Elizabeth K. Tripodi,
Esquire, Levi & Korsinsky, LLP, Washington, D.C., for Appellant, Arthur Flood.
Matthew E. Fischer, Esquire, Matthew R. Dreyfuss, Esquire, Potter Anderson &
Corroon LLP, Wilmington, Delaware; Roger A. Cooper, Esquire, Rishi N. Zutshi,
Esquire (Argued), Vanessa C. Richardson, Esquire, Hana Choi, Esquire, Cleary
Gottlieb Steen & Hamilton LLP, New York, New York, for Appellees, Synutra
International, Inc, Jinrong Chen, Lei Lin, and Yalin Wu.
William M. Lafferty, Esquire, John P. DiTomo, Esquire, Morris, Nichols, Arsht &
Tunnell LLP, Wilmington, Delaware; Lawrence Portnoy, Esquire, Rebecca L.
Martin, Esquire, Davis Polk & Wardwell LLP, New York, New York, for Appellees,
Liang Zhang, Xiuqing Meng, and Beams Power Investment Ltd.
STRINE, Chief Justice, for the Majority:
In Kahn v. M&F Worldwide Corp. (“MFW”),1 we held that business judgment
review applied to a merger proposed by a controlling stockholder conditioned before
the start of negotiations on “both the approval of an independent, adequately-
empowered Special Committee that fulfills its duty of care; and the uncoerced,
informed vote of a majority of the minority stockholders.”2 In this appeal, the
question is whether the Court of Chancery properly applied MFW by reading it as:
i) allowing for the application of the business judgment rule if the controlling
stockholder conditions its bid on both of the key procedural protections at the
beginning stages of the process of considering a going private proposal and before
any economic negotiations commence, and ii) requiring the Court of Chancery to
apply traditional principles of due care and to hold that no litigable question of due
care exists if the complaint fails to allege that an independent special committee
acted with gross negligence. In our previous affirmance of the Court of Chancery
in Swomley v. Schlecht,3 we held that an interpretation of MFW based on these
principles was correct.
As to the first point, what is critical for the application of the business
judgment rule is that the controller accept that no transaction goes forward without
special committee and disinterested stockholder approval early in the process and
1
88 A.3d 635 (Del. 2014).
2
Id. at 644
3
128 A.3d 992 (Del. 2015) (TABLE).
before there has been any economic horse trading. Stressing that in the controller’s
first expression of interest it failed to condition its proposal on the satisfaction of
those two key conditions, the plaintiff ignores that the controller quickly conditioned
its offer on both of MFW’s dual requirements — approval by an independent Special
Committee and an affirmative vote by a majority of the minority stockholders —
before the Special Committee had even hired counsel. MFW’s required
preconditions were therefore in place before any economic negotiation between the
Special Committee and the controller occurred. Thus, before the Special Committee
began substantive deliberations, it knew that any merger was conditioned on both its
approval and the approval of a majority of the disinterested stockholders. So,
consistent with our prior decision to identical effect in Swomley,4 we therefore agree
with the Court of Chancery that MFW applies “when the controller announces the
conditions ‘before any negotiations took place.’”5
As to the second point, the central objective of the MFW standard is to provide
an incentive for controllers to embrace the procedural approach most favorable to
minority investors, with the incentive of obtaining the protection of the business
4
Swomley, 2014 WL 4470947, at *21, aff’d 128 A.3d 992 (Del. 2015) (TABLE) (holding that
MFW applied despite the fact that “the controller’s initial proposal hedged on whether the
majority-of-the-minority condition would be waivable or not, but from the first meeting, the board
resolved that any deal would require both the approval of a special committee and a majority-of-
the-minority vote”).
5
In re Synutra Int’l, Inc., No. 2017-0032-JTL, 2018 WL 705702, at *2 (Del. Ch. Feb. 2, 2017)
(quoting Swomley, 2014 WL 4470947, at *17–18).
2
judgment rule standard of review. To lard on to the due care review a substantive
review of the economic fairness of the deal approved by a Special Committee, as the
plaintiff advocates, is to import improperly into a due care analysis the type of
scrutiny used in entire fairness review and in appraisal cases. Thus, in Swomley and
in this case, the Court of Chancery properly held that the business judgment rule
applied when the other conditions of MFW applied and the Special Committee
employed qualified legal and financial advisors and indisputably engaged in a
deliberative process that cannot rationally be characterized as grossly negligent.6
Accordingly, we affirm.
I.
This case comes before us from a dismissal of the plaintiff’s complaint by the
Court of Chancery.7 The relevant pled facts can be summarized briefly. Liang
Zhang and entities related to him controlled 63.5% of Synutra International Inc.’s
stock.8 In January 2016, Zhang proposed to take Synutra private by acquiring the
rest of the stock he did not control.9 In an initial letter, Zhang proposed purchasing
6
See Swomley, 2014 WL 4470947, at *21, aff’d 128 A.3d 992 (Del. 2015) (TABLE) (holding that
the “gross negligence standard,” a standard that “is only satisfied by conduct that really requires
recklessness,” applies to whether the Special Committee “met its duty of care in negotiating a fair
price” and that merely alleging that “[s]omebody could have negotiated that differently” does not
establish a duty of care violation to overcome a motion to dismiss).
7
Accordingly, we review whether the Court of Chancery’s decision was correct de novo. Dunlap
v. State Farm Fire & Cas. Co., 878 A.2d 434, 438–39 (Del. 2005).
8
Opening Br. at 1.
9
Id. at 5.
3
the remaining shares at $5.91, but he did not include a requirement that the sale be
conditioned on the approval of a special committee and an affirmative vote of a
majority of the minority stockholders.10 To assist him in the proposed merger, Zhang
retained Davis Polk & Wardwell LLP.11 Although Davis Polk was traditionally
Synutra’s corporate counsel, Synutra’s CFO agreed to waive Davis Polk’s conflicts
of interest before the Board met to discuss Zhang’s proposed merger.12
One week after Zhang issued his proposal, the Board met and formed a Special
Committee.13 Before the meeting, the Board “agreed that it would not substantively
evaluate” Zhang’s proposal.14 Although Davis Polk now represented Zhang, it
advised the Board at this meeting on its fiduciary duties.15 The Board understood
that Davis Polk represented Zhang, but nevertheless “requested the attendance . . .
of representatives of Davis Polk who frequently advised [the Board] because those
representatives were not involved in Davis Polk’s representation of [Zhang].”16 The
10
Id.; App. to Opening Br. at A22 (Verified Amended Class Action Complaint (Feb. 10, 2017))
(“As clearly evidenced by the Initial Proposal quoted in full above, Zhang did not condition the
Proposed Buyout ab initio on approval by a special committee nor on approval by the majority of
the minority unaffiliated stockholders.”).
11
Opening Br. at 5 (“By the time of [the first] meeting, [Zhang] had already retained Davis Polk
as legal counsel in connection with the Buyout.”).
12
Id.
13
Id. at 5–6.
14
App. to Opening Br. at A152 (Schedule 14A, Definitive Proxy Statement, Synutra International,
Inc. (Mar. 9, 2017)).
15
Opening Br. at 5–6.
16
App. to Opening Br. at A152 (Schedule 14A, Definitive Proxy Statement, Synutra International,
Inc. (Mar. 9, 2017)).
4
plaintiff does not allege that any negotiations occurred at this meeting.17 Rather, the
only substantive action the plaintiff alleges was taken at the meeting was the decision
to establish the Special Committee.18 Indeed, the proxy, which plaintiff incorporated
into his complaint by reference, says that the Board did not discuss the substance of
Zhang’s proposal at the meeting.19 Specifically, the proxy states that, at the January
21, 2016 board meeting, the “board of directors agreed that it would not
substantively evaluate the January 14 Proposal at this meeting and that Davis Polk’s
advice to [the] board of directors would be limited to reminding the directors of their
fiduciary duties under Delaware law and advising [the] board of directors on
establishing a special committee to evaluate and, if appropriate, negotiate the
January 14 Proposal.”20 The plaintiff pleads no facts to the contrary.
Two weeks after the initial offer, and only one week after the Special
Committee was formed, Zhang sent a second letter to the Special Committee
stipulating that he would not proceed with the transaction unless it was approved by
the Special Committee and approved by the holders of a majority of the voting stock
not controlled by Zhang.21 No negotiations had commenced as of that time; the
17
Id. at A63–65 (Verified Amended Class Action Complaint (Feb. 10, 2017)) (noting that the
Board met, formed a Special Committee, and then, two weeks later, Zhang made his second
proposal without alleging any discussions or interactions during that two-week period).
18
Id. (Verified Amended Class Action Complaint (Feb. 10, 2017)).
19
Id. at A152 (Schedule 14A, Definitive Proxy Statement, Synutra International, Inc. (Mar. 9,
2017)).
20
Id. (Schedule 14A, Definitive Proxy Statement, Synutra International, Inc. (Mar. 9, 2017)).
21
Opening Br. at 7.
5
Special Committee had not met and the complaint is devoid of any facts suggesting
that the Special Committee and Zhang had engaged in any economic negotiations.22
In fact, the plaintiff’s complaint makes clear that:
the Special Committee did not engage its own investment bank
or counsel until after this point;23
the Special Committee declined to engage in price negotiations
until its banker could do due diligence and obtain projections;24
and
the price negotiations did not begin until seven months after
Zhang’s second offer conditioning any merger on both Special
Committee and majority-of-the-minority approval.25
Thus, the plaintiff does not allege any negotiations or other meetings occurred
before Zhang’s second offer, which conditioned the take-private offer on MFW’s
dual requirements.
To highlight this reality, it is useful to underscore the chronology of the facts
the complaint outlines. After receiving Zhang’s second offer — proposing the same
price as the first offer — on January 30, 2016, the Special Committee hired Houlihan
Lokey and Cleary Gottlieb as its independent financial and legal advisors.26
Houlihan began discussions with management regarding the company’s financial
22
See App. to Opening Br. at A46–90 (Verified Amended Class Action Complaint (Feb. 10,
2017)).
23
Id. at A152–53 (Schedule 14A, Definitive Proxy Statement, Synutra International, Inc. (Mar. 9,
2017)).
24
Id. at A64–80 (Verified Amended Class Action Complaint (Feb. 10, 2017)).
25
Id. at A60–67.
26
Id. at A64–67.
6
projections. On March 22, 2016, Houlihan met with the company’s CFO to discuss
what was needed for Houlihan to advise the Special Committee.27 The next day, the
Special Committee met, received an update from Houlihan, and discussed Davis
Polk’s preparations of an initial draft of the merger agreement.28 Houlihan received
the company’s financial projections on April 22, 2016, met with the company’s
management on April 28, 2016 to discuss the projections, and provided the Special
Committee with “preliminary financial discussion materials” on June 3, 2016.29
The Special Committee met again on July 20, 2016 and decided to have
Houlihan initiate a market check.30 None of the 25 potential bidders Houlihan
contacted were interested, which is not surprising given Zhang’s 63.5% voting
control and the lack of any promise that he was a willing seller.31
In August 2016, management provided Houlhian with updated, lower
projections.32 Houlihan provided an updated financial analysis to the Special
Committee on September 8, 2016.33 At that meeting, after seven months of analysis
and consultation with its advisors, the Special Committee authorized Houlihan to
negotiate a higher price with Zhang.34 The next day, Houlihan met with Zhang, and
27
Id. at A66.
28
Id. at A66–67.
29
Id. at A68–69.
30
Id. at A70–71.
31
Id. at A71.
32
Id. at A71–72.
33
Id. at A73–74.
34
Id..
7
Zhang agreed to increase his offer to $6.05 per share.35 The Special Committee met
again on September 22, 2016 and ultimately agreed to accept the $6.05 price, a 2.4%
bump from Zhang’s original offer, a 58% premium to the trading price of Synutra’s
stock when the offer was first made public, a 31% and 20% premium to the 30- and
60-day volume-weighted trading averages, respectively, and a price that Houlihan
viewed as fair.36
The plaintiff argues that this price was not fair. But, the plaintiff fails to allege
any lack of independence on the part of the Special Committee,37 and admits that the
Special Committee met 15 times over a nine-month period and was advised by
independent financial, legal, and economic advisors.38 At bottom, the plaintiff just
takes issue with the economic outcome of the negotiation and questions how skillful
the Special Committee and its advisors were.39 The plaintiff does not allege that the
35
Id. at A74–75.
36
Id. at A167 (Schedule 14A, Definitive Proxy Statement, Synutra International, Inc. (Mar. 9,
2017)).
37
Although the plaintiff makes some noise about Yalin Wu — a member of the Special Committee
who was appointed to the Board at the Board meeting in which the Board formed the Special
Committee — the Court of Chancery correctly found that a “charge that a director was nominated
by or elected at the behest of those controlling the outcome of a corporate election” does not rebut
the presumption of director independence. Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984).
38
App. to Opening Br. at A64–79 (Verified Amended Class Action Complaint (Feb. 10, 2017));
id. at A151–167 (Schedule 14A, Definitive Proxy Statement, Synutra International, Inc. (Mar. 9,
2017)).
39
Opening Br. at 25 (“The Complaint alleged strikingly similar facts, demonstrating not only that
the price was insufficient, but therefore, that the Special Committee was grossly negligent.”).
8
majority-of-the-minority vote secured to approve the merger was coerced or not
fully informed.40
II.
In this appeal, the plaintiff does not quibble with the MFW standard itself, but
argues that the Court of Chancery misapplied it in two respects. Despite the fact that
the controlling stockholder here conditioned his second offer on approval by the
Special Committee and an affirmative majority-of-the-minority vote before any
substantive economic negotiations occurred between himself and the Special
Committee, the plaintiff argues that, because Zhang’s initial offer letter did not
contain the Special Committee approval and majority-of-the-minority vote
conditions, the business judgment rule does not apply.41 In the plaintiff’s view, if a
controller’s first approach does not contain the required conditions, then it is stuck
with entire fairness review, even if the controller still commits itself to MFW’s
requirements early on before any economic negotiations.42
The plaintiff grounds its argument in the language of our opinion in MFW that
says both procedural protections must be in place “ab initio”43 (Latin for “from the
40
See App. to Opening Br. at A46–90 (Verified Amended Class Action Complaint (Feb. 10,
2017)).
41
Opening Br. at 19 ([I]n a controlling stockholder squeeze-out merger, negotiations begin at the
initial offer, and a control must self-disable at that point if it is to receive the benefits of the business
judgment rule.”).
42
Id.
43
MFW, 88 A.3d at 646.
9
beginning”44), and in language from the Court of Chancery’s decision in MFW that
uses the phrase “[f]rom inception.”45 The plaintiff argues for a quite specific and
exacting reading of that language. Rather than meaning that the conditions be in
place at the beginning of the Special Committee’s process and before economic
bargaining occurs, the plaintiff argues that it means that the controller must include
the conditions in its “first offer” or else lose out on the business judgment rule.46
The plaintiff argues for the brightest of lines.47
The defendants read the requirement that the conditions be in place “ab initio”
or “from inception” less rigidly. They argue that what MFW requires is that these
conditions be in place at the early stages of negotiations, and that they be in place
before any substantive economic negotiations take place, so that the proffer of the
conditions cannot be substituted for price concessions.48
Below, the Court of Chancery sided with the defendants’ view, stating “[a]
process meets the ab initio requirement when the controller announces the
44
AB INITIO, Black’s Law Dictionary (10th ed. 2014).
45
In re MFW, 67 A.3d at 529.
46
Opening Br. at 18 (“Thus, the outset — the initio — of negotiations must tautologically be the
first offer. Any other interpretation simply does not comport with the underlying concepts.”).
47
Id. (suggesting that “negotiations commence with the initial proposal”) (emphasis omitted).
48
Answering Br. at 19–20 (Moreover, despite Plaintiff’s contention that the ‘clear implication’ or
[MFW’s] ab initio requirement is that ‘negotiations begin at the initial offer,’ neither this Court
nor any other has adopted such a rule.”) (citation omitted).
10
conditions ‘before any negotiations took place.’”49 As we did in our previous
decision in Swomley, we read MFW as the Court of Chancery did here.
Admittedly, our opinion and the Court of Chancery’s opinion in MFW uses
what can be read as ambiguous language to express the requirement that the key dual
procedural protections must be in place before economic negotiations so the
protections are not used as a bargaining tool in substitution for economic concessions
by the controller. In describing this prerequisite to the invocation of the business
judgment rule standard of review, we and the Court of Chancery have said the
conditions must be in place “ab initio,”50 before the “procession of the transaction,”51
“from inception,”52 “from the time of the controller’s first overture,”53 and
“upfront.”54 From these uses, the plaintiff argues that MFW strictly hinges the
49
In re Synutra, 2018 WL 705702, at *2 (quoting Swomley, 2014 WL 4470947, at *17–18).
50
MFW, 88 A.3d at 646 (“We hold that business judgment is the standard of review that should
govern mergers between a controlling stockholder and its corporate subsidiary, where the merger
is conditioned ab initio upon both the approval of an independent, adequately-empowered Special
Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the
minority stockholders.”).
51
Id. at 645 (“To summarize our holding, in controller buyouts, the business judgment standard of
review will be applied if and only if: (i) the controller conditions the procession of the transaction
on the approval of both a Special Committee and a majority of the minority shareholders . . .”);
see also In re MFW, 67 A.3d at 535 (“The business judgment rule is only invoked if: (i) the
controller conditions the procession of the transaction on the approval of both a special committee
and a majority of the minority stockholders . . .”).
52
In re MFW, 67 A.3d at 528 (“From inception, the controlling stockholder knows that it cannot
bypass the special committee's ability to say no.”).
53
Id. at 503 (“[T]he court concludes that when a controlling stockholder merger has, from the time
of the controller’s first overture, been subject to . . .”).
54
Id. at 505 (“After addressing that issue, the court then considers whether our Supreme Court has
answered the question of what judicial standard of review applies to a merger with a controlling
stockholder conditioned upfront on a promise that no transaction will proceed without (i) special
committee approval, and (ii) the affirmative vote of a majority of the minority stockholders.
11
application of the business judgment rule on the controller including the two key
procedural protections in the first offer. A controller gets one chance, as the master
of its offer, to take advantage of MFW, and if it fails to do so, that is it. But in an
earlier case, the Court of Chancery and we did not embrace this rigid reading of
MFW. In the case of Swomley v. Schlecht, the Court of Chancery held that MFW’s
“ab initio” requirement was satisfied even though “the controller’s initial proposal
hedged on whether the majority-of-the-minority condition would be waivable or
not” because the controller conditioned the merger on both of MFW’s dual
requirements “before any negotiations took place.”55 We affirmed that well-
reasoned conclusion, and adhere to that approach for reasons we now explain.
For starters, the plaintiff’s cramped reading contradicts the use of “beginning”
in everyday speech, when that term is applied to a multi-stage process of human
events with periods of time leading to an ultimate conclusion.56 A goal scored in the
fifth minute of a 90-minute game would be referred to as a goal at the beginning of
the match. Enjoying the beginning of fall refers to those few weeks in late
September and early October when the weather gets chilly and the leaves start to
change color, not just the autumnal equinox. The beginning of a novel is not the
Finally, having concluded that the question has not been answered by our Supreme Court, this
court answers the question itself.”).
55
Swomley, 2014 WL 4470947, at *17–18.
56
For instance, Merriam-Webster defines beginning as “the first part” or “a rudimentary stage or
early period.” Beginning, Merriam-Webster, https://www.merriam-
webster.com/dictionary/beginning.
12
first word, but the first few chapters that introduce the reader to the characters,
setting, and plot. Indeed, three years after Britain entered World War II,57 Winston
Churchill famously declared that the War had reached “the end of the beginning.”58
Thus, as a matter of language, “from the beginning” can encompass more than
the narrow sense in which the plaintiff reads those words. An ordinary person would
conclude that Zhang had conditioned the merger on MFW’s dual requirements in the
beginning stages of the process that led to the merger. More important, even if the
plaintiff’s linguistic argument is one plausible reading of the literal words of MFW,
that reading is at odds with the origins of why that decision requires that the
controller condition its offer early in the process — i.e., before any substantive
economic negotiations begin — on the two key procedural protections.
The MFW standard emerged out of concerns created by Kahn v. Lynch
Communication Systems, Inc., which held that approval of a controlling shareholder
transaction by either “an independent committee of directors or an informed majority
of minority shareholders shifts the burden of proof on the issue of [entire] fairness
from the controlling or dominating shareholder to the challenging shareholder-
plaintiff.”59 Lynch incentivized “the use of special negotiating committees in
57
Britain declared war on Germany on September 3, 1939.
58
Winston Churchill, The End of the Beginning (Churchill Society, Nov. 10, 1942),
http://www.churchill-society-london.org.uk/EndoBegn.html.
59
638 A.2d 1110, 1117 (Del. 1994).
13
addressing mergers with controlling stockholders,” but its practical effect “in the real
world of transactions was to generate the use of special committees alone.”60
Controllers were reluctant to condition mergers on a majority-of-the-minority vote
upfront because it “added an element of transactional risk without much liability-
insulating compensation in exchange.”61 As a result, controllers were likely to, “at
most, agree to such a [c]ondition at the insistence of a special committee and/or as a
way to settle with the plaintiffs.”62 In essence, those subject to the economic
consequences of the process — the minority stockholders — were left either without
a say or with a say at the potential expense of additional consideration that might
have been extracted by tougher economic bargaining.
Enter MFW. To avoid one of Lynch’s adverse consequences — using a
majority-of-the-minority vote as a chit in economic negotiations with a Special
Committee — MFW reviews transactions under the favorable business judgment
rule if “these two protections are established up-front.”63 MFW’s dual conditions
create “a potent tool to extract good value for the minority” because from the start
of negotiations “the controlling stockholder knows that it cannot bypass the special
committee’s ability to say no.”64 The key concern of MFW was ensuring that
60
In re Cox, 879 A.2d at 618.
61
Id.
62
Id.
63
MFW, 88 A.3d at 644 (quoting In re MFW, 67 A.3d at 528).
64
Id. (quoting In re MFW, 67 A.3d at 528).
14
controllers could not use the conditions as bargaining chips during economic
negotiations:
[T]he dual procedural protection merger structure optimally protects
the minority stockholders in controller buyouts . . . . [W]hen these two
protections are established up-front, a potent tool to extract good value
for the minority is established. 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.65
This requirement — having MFW’s dual requirements in place at the start of
economic negotiations — helps replicate a third-party process and, simultaneously,
incentivizes controllers to precommit to MFW’s conditions early to take advantage
of business judgment review.66 The essential element of MFW, then, is that these
requirements cannot be dangled in front of the Special Committee, when
negotiations to obtain a better price from the controller have commenced, as a
substitution for a bare-knuckled contest over price.67
That is, the purpose of the words “ab initio,” and other formulations like it in
the MFW decisions, require the controller to self-disable before the start of
65
Id. (quoting In re MFW, 67 A.3d at 528) (emphasis added).
66
Id. (“The simultaneous deployment of the procedural protections employed here create a
countervailing, offsetting influence of equal — if not greater — force. That is, where the controller
irrevocably and publicly disables itself from using its control to dictate the outcome of the
negotiations and the shareholder vote, the controlled merger then acquires the shareholder-
protective characteristics of third-party, arm’s-length mergers, which are reviewed under the
business judgment standard.”).
67
Id.
15
substantive economic negotiations, and to have both the controller and Special
Committee bargain under the pressures exerted on both of them by these protections.
Thus, so long as the controller conditions its offer on the key protections at the
germination stage of the Special Committee process, when it is selecting its advisors,
establishing its method of proceeding, beginning its due diligence, and has not
commenced substantive economic negotiations with the controller, the purpose of
the pre-condition requirement of MFW is satisfied. In that situation, the Special
Committee and the controller know, at all times during economic bargaining, that a
transaction cannot proceed if the Special Committee says no, and the Special
Committee knows that if they agree to a price, their judgment will be subject to
stockholder scrutiny and approval.
And any ambiguity left by MFW’s various semantic phrases was clarified by
Swomley where we affirmed the Court of Chancery in holding that MFW’s “ab
initio” requirement is satisfied if the controller disables “before any negotiations
t[ake] place.”68 In Swomley, the controller’s first proposal was not conditioned on
both of MFW’s dual requirements, yet we affirmed the Court of Chancery’s holding
that MFW applied, and the controller was thus entitled to business judgment rule
review, because the controller conditioned the buyout on MFW’s dual requirements
68
Swomley, 2014 WL 4470947, at *17–18.
16
“before any negotiations took place.”69 We adhere to our prior decision in Swomley,
which affirmed the Court of Chancery’s decision that to satisfy MFW’s “ab initio,”
or from inception, prong, a controller is required to condition the buyout on both the
approval of an independent, fully empowered Special Committee and the approval
of a majority of minority stockholders at the beginning stages of the process of
considering a going private proposal and before any negotiations commence
between the Special Committee and the controller over the economic terms of the
offer.
Of course, adopting any rule, including this one, may give rise to close cases.
But our Court of Chancery is expert in the adjudication of corporate law cases. And
when a plaintiff has pled facts that support a reasonable inference that the two
procedural protections were not put in place early and before substantive economic
negotiation took place, the Court of Chancery can be trusted to apply appropriate
pleading stage principles and refuse to dismiss the case
But that situation does not exist here. The plaintiff has pled no facts
supporting a reasonable inference that Zhang did not condition the merger on MFW’s
dual procedural protections before any economic negotiations took place. Although
plaintiff is entitled to reasonable inferences from the facts pled,70 we agree with the
69
Id.
70
See Dunlap, 878 A.2d at 438–39.
17
Court of Chancery that “[t]he plaintiff has not pled facts sufficient to call into
question compliance with the ab initio requirement.”71
The Court of Chancery found that Zhang “sent the Follow-up Letter just over
two weeks after [he] first proposed the Merger, before the Special Committee ever
convened and before any negotiations ever took place. The prompt sending of the
Follow-up Letter prevented [Zhang] from using the [MFW] conditions as bargaining
chips.”72 And the plaintiff pled no facts suggesting that the Special Committee or
any member of the committee communicated with Zhang about the substance of the
transaction before he sent the second letter.73 Indeed, Zhang disabled before the
Special Committee had hired its advisors. And the Special Committee spent months
working with its advisors before asking Zhang for additional consideration. All of
the Special Committee’s work was done after Zhang had agreed to condition his
buyout on MFW’s dual requirement. Zhang thus conditioned the buyout at the
beginning of the process and is therefore entitled review under the business judgment
rule standard.
In its briefs before us and below, the plaintiff spent most of his time on its
bright line, one shot argument.74 That was logical because the early second offer
71
In re Synutra, 2018 WL 705702, at *3.
72
Id.
73
Id.
74
See Opening Br. at 16–23.
18
was followed by several months of due diligence that occurred before any bargaining
took place between the Special Committee and Zhang over the economic terms of
the proposed transaction. But in a cursory part of his brief in opposition to the
motion to dismiss and his brief in this Court, the plaintiff did argue that the decision
of Synutra’s CFO to grant Davis Polk a waiver constituted negotiations that, under
Swomley, should prevent Zhang’s second offer from satisfying the “from inception”
requirement of MFW.75 The plaintiff did so despite other pled facts demonstrating
that the Special Committee was not even in existence at the time of the waiver much
less involved in granting it.76 As we have noted, after Zhang sent his initial offer,
Synutra’s CFO granted the company’s law firm, Davis Polk, a waiver that allowed
it to represent Zhang. And although the proxy does state that “[t]he waiver of Davis
Polk’s conflicts was negotiated and agreed by [Synutra’s CFO] on behalf of the
Company before the Company’s board meeting,” in context — and from the facts
75
See App. to Opening Br. at A369–70 (Plaintiff’s Combined Brief in Opposition to Defendants’
Motions to Dismiss the Verified Amended Class Action Complaint (Nov. 30, 2017)) (“Finally, the
Proxy states that Cai [the CFO] ‘negotiated and agreed’ to a waiver of Davis Polk’s conflict of
interest before the January 21 board meeting, clearly admitting that some negotiation with the
Buyer Group had already taken place before the Board formed the Special Committee.”); Opening
Br. at 21 (“Plaintiff clearly alleged that in the interim, Cai ‘negotiated and agreed’ to a waiver of
Davis Polk’s conflict of interest before the January 21 board meeting, clearly admitting that some
negotiation with the Buyer Group had already taken place before the Board formed the Special
Committee.”).
76
Id. at A64–80 (Verified Amended Class Action Complaint (Feb. 10, 2017)).
19
pled — it is clear that the negotiation occurred around the terms of the waiver and
not substantive terms of the proposed transaction.77
Consistent with its close and diligent consideration of the record, the Court of
Chancery examined the waiver issue and whether it disqualified Zhang’s second
letter from satisfying MFW’s requirement that the two key procedural protections be
in place at the beginning of the deal process and before economic negotiations
commenced. In coming to the conclusion that the waiver did not preclude invocation
of the business judgment rule, the Court of Chancery reasoned:
The only arguably substantive event that happened before the Follow-
up Letter was that the Company authorized Davis Polk to represent the
Buyer Group by waiving any conflict that Davis Polk might have.
Davis Polk was the Company’s long-time counsel. It would have been
preferable, both optically and substantively, for the Buyer Group to
retain its own counsel. That scenario would have given the Special
Committee the choice of hiring its own independent counsel or using
Davis Polk, if it preferred to take advantage of Davis Polk’s knowledge
and expertise after considering the firm’s potential ties to the Buyer
Group. The Special Committee retained Cleary Gottlieb Steen &
Hamilton LLP (“Cleary Gottlieb”), a firm fully capable of going head-
to-head with Davis Polk. The complaint does not plead facts that would
support a reasonable inference that the conflict waiver undercut the
Special Committee’s effectiveness.78
We find no basis to quibble with the Court of Chancery’s analysis on this
point. The Special Committee did not engage in any substantive negotiation of
77
Id. at A152 ((Schedule 14A, Definitive Proxy Statement, Synutra International, Inc. (Mar. 9,
2017)).
78
In re Synutra, 2018 WL 705702, at *2.
20
Zhang’s offer until well after it had engaged in a lengthy due diligence process led
by its independent financial and legal advisors.79 And the complaint pled no facts
suggesting — or from which we can rationally infer — that the waiver was
exchanged for the two procedural protections or anything else.
At oral argument, the plaintiff seized on this issue in a way that it did not
emphasize below or in its briefs to us. As the defendants argue to us, it is likely that
had the waiver not been granted, this would not have meant that Davis Polk could
have represented the Special Committee. Had it done so, the plaintiffs would likely
have argued that its role as counsel for the company controlled by Zhang rendered it
incapable of bargaining adversely to him on behalf of the Special Committee.
At best, therefore, Davis Polk would have been put in a neutral position,
representing neither Zhang nor the Special Committee. This would have been
perhaps the ideal, optimal situation to create a level playing field. But, on the pled
facts, we agree with the Court of Chancery that the waiver did not obviate the
application of the business judgment rule because no pled facts suggest any
connection between the Davis Polk waiver and substantive consideration and
negotiation of the economics of Zhang’s offer.80 Thus, as to the only question posed
79
See id. at A46–90 (Verified Amended Class Action Complaint (Feb. 10, 2017)).
80
Neither below nor in its briefs before us did the plaintiff argue that the waiver granted to Davis
Polk prevented the satisfaction of another requirement of MFW, which is that the Special
Committee be “empowered to freely select its own advisors and to say no definitively.” MFW, 88
A.3d at 645. As the Court of Chancery found, the Special Committee selected a major law firm
with substantial mergers and acquisitions experience to represent it. In re Synutra, 2018 WL
21
to us, which is whether Zhang conditioned his offer sufficiently early to satisfy the
“from inception” requirement of MFW, the Court of Chancery correctly answered
yes.
III.
The plaintiff’s other contention is that the Court of Chancery erred in finding
that no due care violation was pled. The plaintiff reads dicta in footnote 14 of our
MFW decision — dicta that conflict with the actual due care holding in MFW — as
indicating that somehow a plaintiff may avoid the business judgment rule by raising
questions about whether the Special Committee, despite concededly being
independent, being advised by independent advisors, and conducting a lengthy
procedural process, was adroit in bargaining. The plaintiff argues that this dicta
allows him to plead a duty of care violation based on an insufficient price.81
But the entire point of the MFW standard is to recognize the utility to
stockholders of replicating the two key protections that exist in a third-party merger:
705702, at *2 (“The Special Committee retained Cleary Gottlieb Steen & Hamilton LLP (‘Cleary
Gottlieb’), a firm fully capable of going head-to-head with Davis Polk.”). The complaint is devoid
of any pled fact supporting an inference that the Special Committee’s counsel was not equipped to
represent the Special Committee skillfully and vigorously, nor that it failed to do so. And of
course, the waiver granted to Davis Polk had no bearing on which financial advisor the Special
Committee selected. Although we have no doubt that the selection of qualified advisors is
important to the effectiveness of a special committee, the plaintiff did not argue, and has pled no
facts supporting any inference, that the Special Committee here was not empowered to select a
highly qualified legal counsel of its choice.
81
Footnote 14 in MFW is dicta musing on whether the complaint in MFW could have survived a
motion to dismiss. 88 A.3d at 645 n.14. But, one was never brought, and the skilled lawyers who
ultimately won the case likely would have had much to say about whether that was so. Our system
of justice depends on the courts hearing out both sides, and a footnote speculating about the
22
an independent negotiating agent whose work is subject to stockholder approval.82
If that standard injects the reviewing court into an examination of whether the
Special Committee’s good faith efforts were not up to the court’s own sense of
business effectiveness, the standard is without the very utility it was designed to
accomplish, motions to dismiss will not be able to be granted, and controllers will
therefore have no incentive to use the approach most favorable to minority
stockholders.83
For that reason, the key paragraph of MFW itself addressing whether there
was any disagreement of fact about whether the Special Committee had acted with
gross negligence reads as follows:
The Special Committee Exercised Due Care. The Special Committee
insisted from the outset that MacAndrews (including any “dual”
employees who worked for both MFW and MacAndrews) be screened
off from the Special Committee’s process, to ensure that the process
replicated arm’s-length negotiations with a third party. In order to
outcome of a motion that was never brought is a clear example of dicta. More important, to the
extent that note 14 is inconsistent with this decision, Swomley, or the Court of Chancery’s opinion
in MFW, it is hereby overruled. The whole point of MFW is to give a pathway whereby judicial
review of the economics of a transaction can be avoided if the correct parties (impartial directors
and the minority stockholders themselves) are given the appropriate authority. Footnote 14
confusingly suggests that a due care violation can be premised, not on a court’s view that a special
committee did not lean in and do its work with diligence, but on a court’s after the fact sense that
the committee should have extracted more price concessions. That, of course, is not what due care
review is about, and even more, the point of requiring the majority-of-the-minority condition is to
allow the real parties in interest the say on economics and the chance to say no for themselves.
82
MFW, 88 A.3d at 644 (“[W]here the controller irrevocably and publicly disables itself from
using its control to dictate the outcome . . . the controlled merger then acquires the shareholder-
protective characteristics of third-party, arm’s-length mergers . . . .”).
83
Id. at 645 (“[T]he adoption of this rule will be of benefit to minority stockholders because it will
provide a strong incentive for controlling stockholders to accord minority investors the
transactional structure that . . . will provide them the best protection . . . .”) (emphasis omitted).
23
carefully evaluate M & F’s offer, the Special Committee held a total of
eight meetings during the summer of 2011 . . . . In scrutinizing the
Special Committee’s execution of its broad mandate, the Court of
Chancery determined there was no “evidence indicating that the
independent members of the special committee did not meet their duty
of care . . . .” To the contrary, the Court of Chancery found, the Special
Committee “met frequently and was presented with a rich body of
financial information relevant to whether and at what price a going
private transaction was advisable.” The Court of Chancery ruled that
“the plaintiffs d[id] not make any attempt to show that the MFW
Special Committee failed to meet its duty of care . . . .” Based on the
undisputed record, the Court of Chancery held that, “there is no triable
issue of fact regarding whether the [S]pecial [C]ommittee fulfilled its
duty of care.”84
As can be seen, that paragraph, which is a holding, focuses as it should on due
care and not whether someone might question whether the Special Committee’s
sufficiently diligent efforts resulted in a negotiated price that was fair. The price
question is not one for a court applying the business judgment rule standard, and was
for MFW’s stockholders to vote on themselves.
Any ambiguity arguably created by the confusing dicta in MFW — suggesting
that challenging price was sufficient to state a duty of care violation — was clarified
by Swomley. In Swomley, the Court of Chancery held that, in the context of a
controlling stockholder transaction that was preconditioned on MFW’s dual
requirements, a plaintiff could not get past a motion to dismiss merely by suggesting
that the Special Committee “could have negotiated [ ] differently” because that is “a
84
Id. at 651–52.
24
matter of strategy and tactics that’s debatable and isn’t a duty of care violation.” 85
And the Court of Chancery in Swomley held that the “[d]uty of care is measured by
a gross negligence standard,” and “disagree[ing] with the [special] committee’s
strategy” is not a duty of care violation.86
This Court affirmed that holding, eliminating any ambiguity created by MFW
and confirming that a plaintiff can plead a duty of care violation only by showing
that the Special Committee acted with gross negligence, not by questioning the
sufficiency of the price.
Here, the Court of Chancery appropriately read MFW as requiring it to
determine, under the high standard of gross negligence, whether the plaintiff had
stated a due care claim. Given the Special Committee’s extensive deliberations,
receipt of extensive advice and information from its financial and legal advisors, and
negotiations with Zhang, the Court of Chancery correctly found “[t]he complaint’s
allegations, considered individually and in the aggregate, do not support an inference
of gross negligence.”87
85
Swomley, 2014 WL 4470947, at *21, aff’d 128 A.3d 992 (Del. 2015) (TABLE).
86
Id.
87
In re Synutra, 2018 WL 705702, at *5–6.
25
IV.
The Court of Chancery faithfully applied our precedents in holding that the
business judgment rule applied and dismissing the plaintiff’s complaint. Its decision
is hereby affirmed.
26
VALIHURA, Justice, dissenting:
I. Overview
I differ with the views of my learned colleagues on the important question of
what the test should be for invoking business judgment protection in controller
buyout transactions. The Majority’s adoption of the “when the negotiations begin”
test invites factual inquiries that defeat the purpose of what should be more of a
bright line and narrower pathway for pleading-stage dismissals in this context.
Instead, I believe this Court did conclude in M&F Worldwide, and should reaffirm
now, that in controller squeeze-out transactions where the controller is on both sides,
the ab initio requirement is satisfied when the Dual Protections are contained in the
controller’s initial formal written proposal. This bright-line makes sense because
the controller dictates when to commence the transactional process so that the outset
is clear. Here, the outset was the January 14 Proposal.
Ordinarily, transactions involving conflicts of interest are subjected to our
most rigorous form of judicial review: entire fairness. Under such circumstances,
Defendants bear the burden of proving two elements: fair dealing and fair price. This
is a heavy lift. However, this Court has recognized that conflicted transactions may
merit a more deferential type of judicial examination when certain procedural
protections are in place: when such conditions are satisfied, the sale process may be
said to replicate arm’s-length dealing and, thus, the business judgment rule is
appropriate.
The Court of Chancery outlined these preconditions for business judgment
review of conflicted transactions in In re MFW Shareholders Litigation,1 and this
Court adopted its framework—albeit, with some refinements—in Kahn v. M&F
Worldwide.2 Adopting six prerequisites set forth by the trial court, this Court held
that in controller buyout transactions:
[T]he business judgment standard of review will be applied if and only
if: (i) the controller conditions the procession of the transaction[s] on
the approval of both a Special Committee and a majority of the minority
stockholders; (ii) the Special Committee is independent; (iii) the
Special Committee is empowered to freely select its own advisors and
to say no definitively; (iv) the Special Committee meets its duty of care
in negotiating a fair price; (v) the vote of the minority is informed; and
(vi) there is no coercion of the minority.3
We explained further that “business judgment is the standard of review that
should govern mergers between a controlling stockholder and its corporate
subsidiary, where the merger is conditioned ab initio upon both the approval of an
independent, adequately-empowered Special Committee that fulfills its duty of care;
and the uncoerced, informed vote of a majority of the minority stockholders.”4
1
67 A.3d 496, 502 (Del. Ch. 2013), aff’d sub nom. Kahn v. M&F Worldwide Corp., 88 A.3d 635
(Del. 2014).
2
88 A.3d 635 (Del. 2014).
3
Id. at 645 (emphasis in original).
4
Id. at 644.
2
Thus, for the so-called MFW standard to apply: (1) the transaction must be
conditioned ab initio on (2) approval by both (a) “an independent, adequately-
empowered Special Committee that fulfills its duty of care,” and (b) “the uncoerced,
informed vote of a majority of the minority stockholders.”5 For simplicity, I refer to
the six-factor test quoted above as the MFW Framework, and the two conditions—
(a) special committee approval, and (b) stockholder vote approval—as the Dual
Procedural Protections.
In reviewing the role of a Special Committee, we observed that “the special
committee must ‘function in a manner which indicates that the controlling
stockholder did not dictate the terms of the transaction and that the committee
exercised real bargaining power “at an arms-length.”’”6 This requirement, which
implicates the second, third, and fourth MFW factors, is a qualitative inquiry as to
how the committee actually functioned—not simply a finding that the process
checked certain boxes in the MFW formula.7
5
Id.
6
Id. at 646 (quoting Kahn v. Tremont Corp., 694 A.2d 422, 429 (Del. 1997)).
7
See Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1148 (Del. Ch. 2006) (“If a parent seeks to satisfy
the high standard of entire fairness by establishing a special committee, its burden to show fair
dealing cannot be satisfied by orchestrating a stylized mockery of arm’s-length negotiation.”
(citing Rabkin v. Olin Corp., 1990 WL 47648, at *6 (Del. Ch. Apr. 17, 1990))).
3
As such, M&F Worldwide was careful to warn that defendants would have
difficulties in invoking such protections through a motion to dismiss.8 We observed
that, “[i]f a plaintiff that can plead a reasonably conceivable set of facts showing that
any or all of those enumerated conditions did not exist, that complaint would state a
claim for relief that would entitle the plaintiff to proceed and conduct discovery.”9
In my view, the plaintiff Arthur Flood (“Plaintiff”) has pled facts making it
reasonably conceivable that at least one of the MFW preconditions was not satisfied.
Plaintiff has sufficiently pled that the controller did not establish the Dual Procedural
Protections as preconditions to a deal up front, ab initio. As to other preconditions,
I agree with the Majority that the Plaintiff presented some refined arguments on
appeal that were, at best, only weakly alluded to below. For example, Plaintiff did
not expressly allege in the Amended Complaint that the Davis Polk conflict and
conflict waiver gave rise to a challenge to the Special Committee’s empowerment to
8
M&F Worldwide, 88 A.3d at 646 (“As we have previously noted, deciding whether an
independent committee was effective in negotiating a price is a process so fact-intensive and
inextricably intertwined with the merits of an entire fairness review (fair dealing and fair price)
that a pretrial determination of burden shifting is often impossible.” (citing Ams. Mining Corp. v.
Theriault, 51 A.3d 1213 (Del. 2012))).
9
Id. at 645 (citations omitted); see also id. at 645 n.14 (noting that the complaint in MFW would
have survived a motion to dismiss under this standard and warranted discovery; the case was only
dismissed at summary judgment); In re Martha Stewart Living Omnimedia, Inc. S’holder Litig.,
2017 WL 3568089, at *17 (Del. Ch. Aug. 18, 2017) (“This strict or ‘formalistic’ approach to
pleadings-stage transactional standard of review determinations in In re MFW and M&F
Worldwide was not at all surprising. Because the court was addressing whether the minority
stockholders’ claim should be dismissed before discovery, both this court and the Supreme Court
took pains to provide a detailed road map of the points of protection the controller must visit to
earn business judgment deference on a motion to dismiss.” (citations omitted)).
4
freely select its own advisors, although he did raise the Davis Polk conflict in the
complaint and opening brief below.10 At oral argument before the trial court, the
Davis Polk conflict waiver was raised by Plaintiff—but more in the context of
arguing that “negotiations” had commenced and, therefore, the ab initio requirement
had not been satisfied.
It was only in response to a question from the trial court at oral argument on
the motion to dismiss that Plaintiff eventually argued that there was an issue with
the Special Committee’s empowerment to freely select its advisors.11 Thereafter, on
appeal, Plaintiff’s counsel argued before this Court that the empowerment issue was
“intertwined” with the ab initio argument, but he conceded that he had not framed
the issue as an “empowerment” issue before the trial court.12 Though I agree that
the “empowerment” issue was not fairly presented below, those intervening events
are intertwined with the ab initio requirement and illustrate how the “negotiations”
test can devolve into the type of fact-intensive inquiry we were trying to avoid.
Accordingly, I believe the motion to dismiss should have been denied based upon
Defendants’ failure to satisfy the ab initio test. For the reasons set forth below, I
respectfully dissent.
10
Plaintiff’s Combined Br. in Opposition to Defendants’ Motion to Dismiss, at A356, A382.
11
Oral Argument on Defendants’ Motion to Dismiss, at A510.
12
Oral Argument video at 17:45; 18:59–19:20,
https://livestream.com/DelawareSupremeCourt/events/8366324/videos/180173490 [hereinafter
Oral Argument].
5
II. Facts
I focus my examination of the facts on the three weeks relevant to Plaintiff’s
most salient allegations on appeal, from mid-January 2016 to early February 2016.
On January 14, 2016, Mr. Zhang and Beams Power sent a letter to the
Company’s directors that included a non-binding proposal to acquire all issued and
outstanding shares of Synutra’s common stock not already beneficially owned by
them for $5.91 per share in cash (the “January 14 Proposal”).13 The letter indicated,
among other things, that they arrived at the $5.91-per-share price because they
believed it represented a “fair and attractive opportunity for the minority
stockholders to exit their investment in the Company.” 14 The letter mentioned that
the prospective buyers still needed to conduct the customary due diligence and that
they had engaged Davis Polk & Wardwell LLP (“Davis Polk”) as their U.S. legal
counsel. According to the letter, Davis Polk was prepared to negotiate and finalize
the definitive transaction documents “promptly.”
But Davis Polk was also counsel to the Company. Thus, “[t]o avoid any
conflict of interest arising from the role of Davis Polk,”15 the Company’s CFO, Ms.
Ning Cai, began the process of engaging separate U.S. legal counsel for work related
13
Schedule 14A, Synutra Int’l Inc. (March 9, 2017), at 19 (A151) [hereinafter, “Proxy”]. The
facts are largely drawn from the Proxy and are not challenged on appeal.
14
Id.
15
Id. at 20 (A152).
6
to the January 14 Proposal. On January 15, 2016, Ms. Cai reached out to Wilson,
Sonsini, Goodrich & Rosati P.C. (“Wilson Sonsini”) about the possibility of
retaining that firm.
Meanwhile, Ms. Cai had been conducting diligence on Mr. Yalin Wu as a
potential candidate for independent director of the Company. Mr. Zhang had
referred him to her in early December 2015 after a “personal friend” of Mr. Zhang’s
had recommended Mr. Wu as a potential candidate for an open seat. On January 19,
2016, Ms. Cai nominated Mr. Wu as director.
Ahead of the Company’s special telephonic board meeting scheduled for
January 21, 2016, Ms. Cai also negotiated and signed a conflicts waiver with Davis
Polk and asked Davis Polk representatives to attend that meeting. According to the
Proxy, the Board requested the participation of Davis Polk despite the firm’s role as
counsel to the Buyer Group because Davis Polk had “frequently advised” the Board,
and the Company had not yet engaged separate U.S. legal counsel.16 The Davis Polk
attorneys advising the Buyer Group were not the same Davis Polk attorneys advising
the Board.
At the special telephonic meeting held on January 21, 2016, the Board
unanimously voted to appoint Mr. Wu as an independent director, and he then joined
the meeting. According to the Proxy:
16
Id.
7
Representatives of Davis Polk advised the directors as to their fiduciary
duties under Delaware law in considering and evaluating the January
14 Proposal and further stated that it would be advisable for our board
of directors to consider forming a special committee solely consisting
of independent and disinterested directors to ensure that unaffiliated
stockholders would be adequately protected during the board’s
evaluation of the January 14 Proposal and any other alternative offers
involving the Company.17
The Board followed Davis Polk’s advice as disclosed in the Proxy. Other than
Mr. Zhang, who abstained, the Board unanimously resolved to form a special
committee (the “Committee”) of three independent directors “to consider and attend
to all matters in connection with the January 14 Proposal and any other alternative
proposals, and to ensure that the unaffiliated stockholders would be adequately
protected during the Company’s consideration and evaluation of the proposed
transaction.”18 Ms. Jinrong Chen served as chair, and Mr. Lei Lin and Mr. Wu
rounded out the Committee.
According to the Proxy, the Board authorized the Committee to retain its own
legal counsel, financial advisor, or other agents related to the transaction
contemplated under the January 14 Proposal. The Board further resolved that the
Committee could pass resolutions by majority vote, and that it would direct the
17
Id. at 21 (A153).
18
Id.
8
Company’s officers, advisors, and employees to provide any information and
assistance to the Committee or its advisors.
Following the meeting, Davis Polk ceased representing the Company in
connection with the January 14 Proposal or any such transaction. However, the firm
continued to represent the Company on different matters through March 5, 2016.
Between January 21 and February 1, 2016, the members of the Committee—
alongside Synutra CFO Ms. Cai—interviewed four law firms for engagement as the
Committee’s counsel, including Cleary Gottlieb Steen & Hamilton (“Cleary”). At
their first meeting with Cleary, on January 23, a firm representative “introduced
Cleary’s qualifications and experience in mergers and acquisitions transactions.”19
At their second meeting, on January 29, Cleary “further introduced its practice and
expertise, and specifically explained the fiduciary duties of the special committee in
connection with the proposed transaction.”20 The Committee still had not finalized
its engagement of Cleary as counsel.
That day, January 29, 2016, the Company retained Wilson Sonsini as the
Company’s U.S. legal counsel.
The next day, January 30, 2016, the Committee received another letter from
Mr. Zhang and Parent (the “January 30 Letter” or “Follow-up Letter”). In it, the
19
Id.
20
Id.
9
Buyer Group reaffirmed the terms outlined in its January 14 Proposal and then
included, for the first time,21 the Dual Procedural Protections.
The Committee convened a telephonic meeting the following day, February
1, 2016. Ms. Cai and Cleary representatives also attended. At the meeting, the
Committee decided to retain Cleary as independent U.S. legal counsel, and Cleary
then advised the members on “the key issues and implications with respect to a
going-private transaction, including the special committee’s evaluation of the
fairness of the proposed transaction to the Company’s unaffiliated stockholders and
the directors’ fiduciary duties under Delaware law.”22 They also discussed the next
steps, including the hiring of an independent financial advisor, and the Committee
instructed Ms. Cai and Cleary to begin reaching out to possible candidates.
After the meeting, Ms. Cai and Cleary contacted three investment banks to
solicit their interest in serving as financial advisor, and, on February 2, the
Committee interviewed three of them. The Committee decided to continue
evaluating two of these banks, including Houlihan Lokey (“Houlihan”), and asked
Cleary to start negotiating engagement letters with them.
21
The Proxy states that the January 30 Letter “confirmed” the following conditions, see id., but
both parties agree that these conditions were first included in the January 30 Letter, so the use of
“confirm” seems somewhat misleading. Id.
22
Id. at 22 (A154).
10
On February 2, 2016, the Committee appointed Ms. Xuan Xie, a member of
management (the Secretary to the Board), as the coordinator of the Committee. Ms.
Xie was privy to the Committee’s deliberations throughout the process.23
On February 3, the full Board held a meeting, attended by attorneys from
Wilson Sonsini. Mr. Zhang abstained from voting on the Board resolution setting
forth the powers of the Committee.24 The Board resolved not to approve or
recommend the proposed transaction absent a prior, favorable recommendation from
the Committee.
On February 4, 2016, the Committee retained Houlihan as independent
financial advisor, and the sale process began in earnest.
Months later, on November 17, 2016, after the merger consideration was
raised to $6.05 per share and Houlihan provided its opinion that the transaction was
fair, from a financial point of view, to the minority stockholders, the Committee
unanimously recommended that the Board approve the transaction.25 The Board
then resolved to approve the merger agreement and to recommend the merger to
23
Id. The Proxy states that, “[t]he duties and responsibilities of the coordinator of the special
committee mainly included, among others, provision of administrative support to the special
committee (e.g., meeting scheduling, logistics, budget management), internal and external
communication in connection with the proposed transaction, and supervision of the
communications and provision of information by the directors and employees of the Company in
connection with the proposed transaction.” Id.
24
Id. at 23 (A155).
25
Id. at 34 (A166).
11
stockholders—whose approval was required for the transaction to close—and the
parties signed the agreement.26
Following briefing and oral argument, in an order dated February 2, 2018, the
Court of Chancery dismissed all claims. It found the MFW requirements satisfied,
and because Plaintiff did not allege waste, it dismissed the complaint.27
III. Analysis
I believe the ab initio requirement was not satisfied here. In M&F Worldwide,
we held that the business judgment rule applies to conflicted transactions “where the
merger is conditioned ab initio upon both the approval of an independent,
adequately-empowered Special Committee that fulfills its duty of care; and the
uncoerced, informed vote of a majority of the minority stockholders.”28 Admittedly,
the term, ab initio—meaning, literally, from the beginning—lacks some precision in
the abstract. But in the context in which that term was used, it meant from the time
of the controller’s first written proposal—as that is exactly what happened in that
case.
In MFW, the defendants argued that, where the merger is conditioned on the
two procedural protections up front—and defendants show pretrial that those
26
Id.
27
In re Synutra Int’l, Inc., 2018 WL 705702, at *6 (Del. Ch. Feb. 2, 2018) (ORDER) [hereinafter
Chancery Order].
28
M&F Worldwide, 88 A.3d at 644.
12
conditions were in fact satisfied—then the transaction process mimics an arm’s-
length, third-party merger as ordinarily consummated under 8 Del. C. § 251, and
should be reviewed as such.29 The defendants argued that “Special Committee
approval in a going private transaction is a proxy for board approval in a third-party
transaction, and that the approval of the unaffiliated, noncontrolling stockholders
replicates the approval of all the (potentially) adversely affected stockholders.”30 In
the arm’s-length, third-party context, the buyer and target seeking to consummate a
transaction under Section 251 know the requirements from the outset, given the
existence of the statute: approval by both a majority of the board of directors 31 and
a majority of stockholders of each constituent corporation.32 M&F Worldwide
advises that, in order for conflicted transactions to mimic that process, the same
should be true—the Dual Procedural Protections must be in place in the first
proposal so that they may not be used as bargaining chips in the negotiations.33
29
Id. at 639–40 (“Defendants submit that a Special Committee approval in a going private
transaction is a proxy for board approval in a third-party transaction, and that the approval of the
unaffiliated, noncontrolling stockholders replicates the approval of all the (potentially) adversely
affected stockholders.”).
30
Id. at 640; see also In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 618–19 (Del. Ch.
2005) (likening independent special committee approval and majority-of-the-minority approval to
the “independent integrity-enforcing functions” of board approval and stockholder approval in an
arm’s-length transaction, respectively).
31
8 Del. C. § 251(b).
32
Id. § 251(c).
33
M&F Worldwide, 88 A.3d at 639 (noting that, when such conditions are satisfied, “the
negotiation and approval process” are said to “replicate those that characterize a third-party
merger”).
13
The Court of Chancery explained the rationale in MFW as follows:
When these two protections are established up-front, a potent tool to
extract good value for the minority is established. 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.34
The language used by both the Court of Chancery and this Court in M&F
Worldwide is somewhat imprecise if taken out of that context. The Court of
Chancery’s opinion in MFW held that those the protections had to be in place “from
the time of the controller’s first overture.”35 However, on appeal, this Court used
slightly different language in affirming and held that the Dual Procedural Protections
had to be in place ab initio. We did quote with approval language from the trial
court requiring those protections to be “established up-front” and “from inception.”36
34
MFW, 67 A.3d at 528; see also In re Sauer-Danfoss, Inc. S’holder Litig., C.A. No. 8396-VCL
(Del. Ch. Oct. 23, 2013) (TRANSCRIPT), at 77; id. at 80 (“[T]he controller has to step back in a
matter analogous to a third-party transaction at both the board and stockholder levels, and they
have to do so at the outset.”).
35
MFW, 67 A.3d at 502 (emphasis added); see also Sauer-Danfoss, C.A. No. 8396-VCL, at 75
(“What MFW says, and which Cox Communications said before that, is that these have to be set
up at the outset. So in the words of MFW, those conditions have to apply ‘from the time of the
controller’s first overture.’”). But see id. at 78 (“[P]erhaps it’s an overstatement, to the extent from
the time of the controller’s first overture suggests, that it actually has to be in the very first letter.
Perhaps that might be a little bit of an overstatement, but they have to be out there from the
beginning.”).
36
M&F Worldwide, 88 A.3d at 644 (quoting MFW, 67 A.3d at 528).
14
Although “first overture,” “up front,” and “from inception,” as well as “ab
initio,” could also include anything on a continuum from first utterances to nascent
stage discussions, we were addressing a situation where the Dual Protections were
contained in the controller’s first written merger proposal. We quoted the relevant
portions of the controller’s written proposal that contained the Dual Protections and
then observed:
“We hold that business judgment is the standard of review that
should govern mergers between a controlling stockholder and its
corporate subsidiary, where the merger is conditioned ab initio
upon both the approval of an independent adequately empowered
Special Committee that fulfills its duty of care; and the
uncoerced, informed vote of a majority of minority
stockholders.”37
“To reiterate, in this case, the controlling stockholder
conditioned its offer upon the MFW Board agreeing ab initio, to
both procedural protections . . . .38
Thus, consistent with this rationale, “ab initio” means from the controller/buyer’s
first written proposal, because in M&F Worldwide, the buyer stated in its initial letter
proposal to the MFW board that it was conditioning its offer on satisfaction of the
Dual Procedural Protections.39
37
Id. (emphasis added).
38
Id. at 646 (emphasis added).
39
Id. at 640.
15
In the early post-M&F Worldwide case of In re Books-A-Million, Inc.
Stockholders Litigation,40 the controller group followed the M&F Worldwide
playbook and “conditioned any transaction, from the outset, on approval by both a
special committee of independent directors and a non-waivable vote of disinterested
stockholders,” by imposing those requirements in his first letter proposal.41 In
finding that the ab initio requirement was satisfied, the Court of Chancery observed
that “[t]he Complaint does not allege that the Anderson Family delayed establishing
the conditions, waivered from them, or sought to circumvent them.”42
In Swomley v. Schlecht,43 this Court confronted an attempt to push the
possibility of satisfying the ab initio requirement just slightly beyond the first offer.
We summarily affirmed the Court of Chancery’s ruling that the ab initio requirement
was satisfied even though the initial letter proposal “hedged on whether the majority-
of-the-minority condition would be waivable or not.”44 The Court of Chancery
40
2016 WL 5874974 (Del. Ch. Oct. 10, 2016), aff’d, 164 A.3d 56 (Del. 2017).
41
Id. at *8 (also noting that the letter’s “operative text” was “substantively identical to what was
held to be sufficient in M & F Worldwide”).
42
Id. In In re Cox Communications, Inc. Shareholders Litigation—a precursor case to MFW—
the Court of Chancery awarded burden-shifting even though the Dual Procedural Protections were
not in place at the first board meeting at which directors heard the controller’s plans to submit a
takeover proposal because the controller submitted its proposal by letter immediately following
that meeting—i.e., that same day—and included the requirement of special committee approval.
Cox, 879 A.2d at 607; see also In re Martha Stewart, 2017 WL 3568089, at *18 (whether the
controller is on both sides, the MFW conditions can be included in the initial offer).
43
C.A. No. 9355-VCL (Aug. 27, 2014) (TRANSCRIPT), aff’d, 128 A.3d 992, 2015 WL 7302260
(Del. 2015) (TABLE).
44
Id. at 70.
16
found that the Dual Procedural Protections were in place ab initio because, “from
the first meeting” at which the board considered the transaction—held the same day
the control group had proposed the transaction—the board resolved that any deal
would require both the approval of a special committee and a majority-of-the-
minority vote, and the controller was part of the Board that passed those
resolutions.45 In his transcript ruling, the Vice Chancellor observed that the plaintiff
had failed to call into question the defendants’ satisfaction of the ab initio
requirement because “[a]ll this went down before any negotiations took place, even
before anything really started.”46
In this case, the Court of Chancery relied on Swomley in moving the ab initio
needle from “up front” and “from inception” of the first offer to holding that “a
process meets the ab initio requirement when the controller announces the
conditions ‘before any negotiations took place.’”47 The court reasoned that “[u]sing
this point in time fulfills the goals of disabling the controller for purposes of the
negotiations and ensuring that the controller ‘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.’”48
45
Id.
46
Id. at 71.
47
Chancery Order, 2018 WL 705702, at *2 (quoting Swomley, C.A. No. 9355-VCL, at 71).
48
Id. (quoting M&F Worldwide, 88 A.3d at 644).
17
Perhaps in summarily affirming the transcript ruling in Swomley, we muddied
the waters when we approved the trial court’s language suggesting that the start of
“negotiations” (rather than the submission of the first proposal) is the test for
determining whether the ab initio requirement is satisfied. But, as in M&F
Worldwide, we held that the Dual Procedural Protections must be in place when the
controller submits a written offer so that the Dual Procedural Protections cannot be
“dangled” at a point “late in the process as a deal-closer rather than having to make
a price move.”49 This makes sense in situations where the controller is on both sides,
as the controller decides when to begin the negotiations and on what terms. In cases
like this, the outset is clear. In any event, I do not believe our summary affirmance
should be read as a deliberate intention on our part to expand the ab initio
requirement into a sliding scale factual inquiry involving an analysis of when serious
bargaining began following submission of an initial written proposal.50
In contrast to the bright-line we tried to draw in M&F Worldwide, here, the
Dual Procedural Protections were indisputably absent from the January 14 Proposal.
They were still absent a week after the Board received the proposal and held its first
meeting on January 21. More than two weeks passed before the Dual Procedural
Protections were included in the controller’s January 30 Offer.
49
MFW, 67 A.3d at 528.
50
Even Defendants conceded the factual nature of this inquiry. See Ans. Br. at 20 (“When
negotiations actually begin must be determined based on the specific facts of the case at hand.”).
18
Meanwhile, several important “things” occurred before the imposition of the
Dual Procedural Protections. These “things” have led us down a path of a messy
pleadings stage fact-intensive inquiry. Among other things, the Company’s CFO
(Ms. Cai) unilaterally waived Davis Polk’s conflict and Davis Polk represented both
the Buyer Group and the Board at the intervening January 21 Board meeting, and
Ms. Cai continued to play a role in the Committee’s selection of both legal and
financial advisors, and in other aspects of the Committee process—as did Ms. Xie
following the January 30 Offer.
As noted above, it was the trial court, during oral argument on the motion to
dismiss, that raised the Committee empowerment issue by citing the case, In re
Emerging Communications, Inc. Shareholders Litigation.51 In that case, the Court
of Chancery viewed a controller’s retention of the target company’s longtime outside
counsel and financial advisors—the same advisors whom the target had used in an
earlier, failed acquisition bid, and who had been the company’s counselors for its
“entire existence”—as negatively impacting the transaction’s overall fairness.52 The
court considered it “unfair” because those advisors “possessed material nonpublic
51
2004 WL 1305745, at *32 (Del. Ch. May 3, 2004).
52
Id.
19
information about [the company’s] values, business and prospects” and “were in the
best position to represent the interests of the [company’s] minority.” 53
Treatises and Delaware court opinions alike have long emphasized that “no
role is more critical with respect to protection of shareholder interests in these
matters than that of the expert lawyers who guide sometimes inexperienced directors
through the process . . . .”54 After all, “professional advisors have the ability to
influence directors who are anxious to make the right decision but who are often in
terra [in]cognit[a].”55 As one treatise cautions, not everyone has heeded the value
of independence, and “[e]xamples abound of situations where advisors were
‘preselected’ by someone other than the [special committee]—either management
53
Id. See also Michael D. Allen, Srinivas M. Raju & Gregory V. Varallo, Special Committees
Law & Practice, § 3.06[4] (1st ed. 2011) (available via Lexis) (“[N]otwithstanding the critical
importance of counsel being independent and free from conflict, there are also situations in which
some background with the company will make counsel more, rather than less, valuable to the
committee.”).
54
See Allen, supra note 53, at § 3.06[1] (available via Lexis) (“The retention of competent and
skilled advisors may be the decision by the committee that is most critical to the success of the
committee’s work.”); Andrew M. Johnston & S. Mark Hurd, Special Committees of Independent
Directors, 79 C.P.S. (BNA), at A-19 (“The selection by the [special committee] of competent, able
advisors is of critical importance to the proper discharge of the [special committee’s]
responsibilities.”). See also In re Fort Howard Corp. S’holders Litig., 1988 WL 83147, at
*720 (Del. Ch. Aug. 8, 1988) (“It is obvious that no role is more critical with respect to protection
of shareholder interests in these matters than that of the expert lawyers who guide sometimes
inexperienced directors through the process.”).
55
Tremont, 694 A.2d at 429; Allen, supra note 53, at § 3.06[1] (“[N]o matter how straightforward
the task of a committee may seem, [the special committee’s] assignment will soon descend into
terra incognita and having a skilled guide along the way is likely to mean the difference between
a special committee that helps the corporation (in terms of shifting burdens or otherwise) and one
that does not.”).
20
or the interested party—which, in turn, compromised the work of the [special
committee].”56
It was only on appeal that Plaintiff squarely contended that they were entitled
to a pleading-stage inference that the Buyer Group sought to influence the
Committee’s work at its nascent stages, before it had its own counsel to protect it.
And only on appeal did Plaintiff focus more specifically on Defendants’ various
departures from certain “best practices” that potentially impact the functioning of
the Committee.
For example, Plaintiff, on appeal, emphasized the fact that the Committee
allowed the Company’s CFO to continue to participate in the workings of the
Committee, including the selection of its ostensibly independent advisors. Although
back and forth bargaining on deal terms may not have commenced at that point, the
Committee’s selection of counsel can set the tone and significantly impact the
quality of the Committee’s work.57 We recognized this in Kahn v. Tremont Corp.,58
where we questioned the independence of a special committee that “promptly”
selected a legal advisor recommended by the company’s general counsel. We
56
Johnston, supra note 54, at A-19.
57
See Kahn v. Dairy Mart Convenience Stores, Inc., 1996 WL 159628, at *8 n.6 (Del. Ch. Mar.
29, 1996) (“Another critical factor in assessing the reliability and independence of the process
employed by a special committee, is the committee's financial and legal advisors and how they
were selected.”).
58
694 A.2d 422, 429 (Del. 1997).
21
observed that “the circumstances surrounding the retaining of the Special
Committee’s advisors, as well as the advice given, cast serious doubt on the
effectiveness of the Special Committee.”59 Plaintiff attempted to draw a parallel
here with Ms. Cai’s involvement in selection of the Committee’s financial advisor,
and with Ms. Xie’s role as the Committee’s coordinator with the Board.
On appeal, Plaintiff sharpened his focus on the Davis Polk conflict, and cites
it as further evidence that the Board continued to stray from best practices. Instead
of empowering a special committee with its own independent counsel, the Board, on
January 21, received advice on their fiduciary duties and on setting up a special
committee from the same law firm advising the Buyer Group, and in the presence of
a key member of the controlling Buyer Group, Mr. Zhang, who was attending that
meeting as a director and who did not recuse himself.
As to the conflict waiver, the Court of Chancery observed that “[t]he only
arguably substantive event that happened before the Follow-up Letter was that the
Company authorized Davis Polk to represent the Buyer Group by waiving any
conflict that Davis Polk might have.”60 The Court of Chancery recognized that “[i]t
59
Id.; see also Dairy Mart, 1996 WL 159628, at *2, *8 n.6 (criticizing process where special
committee chose law firm recommended by a former board member and current partner at law
firm that was recommending the company). At oral argument before this Court, Plaintiff also
criticized the Committee’s involvement of Ms. Xie in their deliberative process. Video at 20:31;
see also Proxy, at 22 (A154).
60
Chancery Order, 2018 WL 705702, at *2.
22
would have been preferable, both optically and substantively, for the Buyer Group
to retain its own counsel.”61 As it further explained, “[t]hat scenario would have
given the Special Committee the choice of hiring its own independent counsel or
using Davis Polk, if it preferred to take advantage of Davis Polk’s knowledge and
expertise after considering the firm’s potential ties to the Buyer Group.”62 But the
trial court concluded, after having denied Plaintiff’s motion for expedited discovery,
that “[t]he granting of the conflict waiver to Davis Polk did not transform the Follow-
up Letter from a pre-negotiation self-disablement into a mid-stream trade-off.”63
When these intervening events are viewed in the aggregate, Plaintiff
convincingly says, albeit in mud-splatter fashion, that they were entitled to pleading-
stage inferences that there was “too much interaction, intermingling, and
overlapping between the Buyer Group and the Board”64 to conclude, as a matter of
law, that the ab initio requirement was satisfied.65 The authorities cited above
61
Id.
62
Id.
63
Id. at *3. The trial court denied Plaintiff’s motion for expedited discovery, concluding that
“[t]he controlling stockholder transaction in this case facially followed the MFW framework,” and
that “[t]he plaintiff has not advanced meaningful challenges to that framework.” Transcript of
Teleconference re: Plaintiff’s Motion to Expedite and the Court’s Ruling at 18, 20–21 (Feb. 3,
2017) (“But this is a situation where, when I balance things out, you have the MFW structure in
place; you don’t have a meaningful challenge at this stage to the MFW structure; and given all that,
it does not seem to me to be a situation that warrants cranking up the machinery of expedited
proceedings.”).
64
Plaintiff’s Corrected Reply Br. at 9.
65
In assessing the circumstances of this case, I am reminded of Chancellor Allen’s observation in
In re Fort Howard Corp., 1988 WL 83147, at *12, that:
[O]ne’s view concerning bona fides, will, in settings such as this, almost always
rest upon inferences that can be drawn from decisions made or courses of actions
23
suggest to me that even if not part of back-and-forth bargaining on price terms, the
Davis Polk conflict, the conflict waiver, and management’s involvement in the
selection of the Committee’s advisors during those intervening weeks are
substantive events of the type that can impact the functioning and quality of the
Committee’s work. The bright-line rule we articulated in M&F Worldwide would
deem the ab initio requirement to be satisfied upon including the Dual Protections
in the controller’s first written offer (here, the January 14 Proposal) and would avoid
the factual morass we find ourselves in when intervening events begin to bleed into
Committee empowerment and other issues potentially impacting the functioning of
the Committee process.66 Thus, whether these events described in the Proxy were
the focus of laser-like attention below is not the main point. Rather, they serve to
illustrate why it is sensible to conclude that the Dual Procedural Protections should
have been included in the January 14 Proposal and why the bright-line rule set forth
in M&F Worldwide is preferable.
pursued by the board (or a Special Committee). Rarely will direct evidence of bad
faith-admissions or evidence of conspiracy-be available. Moreover, due regard for
the protective nature of the stockholders’ class action, requires the court, in these
cases, to be suspicious, to exercise such powers as it may possess to look
imaginatively beneath the surface of events, which, in most instances, will itself be
well-crafted and unobjectionable. Here, there are aspects that supply a suspicious
mind with fuel to feed its flame.
66
Of course, any test this Court could set forth could be subject to gamesmanship. For example,
parties could verbally agree, after a series of discussions, to all material terms and then submit a
written proposal embodying “the deal.” The trial court would have to retain the ability to address
well-pled allegations of deliberate circumvention of the MFW Framework.
24
In sum, adhering to a bright-line requirement that the MFW Framework be
precisely implemented is appropriate in the context of controller squeeze-out
transactions where the outset of the process is within the control of the controller.
The controller’s ability to control the outset justifies insistence on the formalistic
requirement of precisely implementing the MFW Framework. M&F Worldwide’s
strict and detailed roadmap is particularly appropriate where the courts must address
whether the minority stockholders claims should be dismissed before discovery, and
in ascertaining which standard of review should apply—as opposed to other contexts
where we have eschewed rigid “blueprints.”67 Finally, I am unsympathetic to
Defendants’ argument that sticking to a bright line rule would potentially punish
innocent failures to include the conditions in the controller’s first written proposal
and thereby disadvantage minority stockholders. The MFW Framework was
intended to be a clear roadmap in controller buyouts and corporate counsel who
routinely practice in the area are familiar with it.68
67
See, e.g., McMillan v. Intercargo Corp., 768 A.2d 492, 502 (Del. Ch. 2000) (Strine, V.C.)
(stating that the Revlon obligation is a “contextually-specific application of the directors’ duty to
act in accordance with their fiduciary obligations, and there is no single blueprint that a board must
follow” (internal quotations omitted)).
68
After all, we are not talking here about when the autumn leaves turn color, World War II, reading
novels, or soccer. See Majority Op. at 12–13.
25
Flood v. Synutra International, Inc.
Combined Opinion