Conflict and the MFW Doctrine

Your company needs to take a big step that requires shareholder approval. Maybe you’ll merge with another company, maybe you’ll need to implement an aggressive compensation package to keep your superstar CEO, or maybe you’ll go private.

Normally, getting shareholder approval would be a complicated process, but – good news – your company’s major shareholders consist of your CEO and a few others, all of whom sit on the board.

This means that decisions can be made quickly since the people sitting in the boardroom own the majority of the shares, right?

No.

This is actually a trap for the unwary, because it seems like there is a control group that has the votes to do what they want.

But if the transaction doesn’t give the minority shareholders exactly the same benefits as the people making the decisions, you have a conflicted situation. And that can lead to expensive and time-consuming lawsuits.

The remedy is to use a set of procedural safeguards that mimic arm’s-length transaction dynamics to ensure the deal is fair to all shareholders.

Recent cases in Delaware, which I will discuss in this article, demonstrate how important these procedural safeguards can be, also known as the MFW learn.

Overview and application of the MFW doctrine

The MFW The doctrine grew out of a landmark 2014 Delaware Supreme Court ruling Kahn v. M&F Worldwide Corp. (“MFW”), where the transaction in question was a merger. Delaware courts today apply this standard when there is a conflict in a transaction.

MFW establishes a two-step process to ensure that transactions involving a controlling shareholder are fair:

1. Approval by an independent, fully independent special committee: This is a committee of directors who bear no responsibility to the controlling shareholder. The committee must be truly independent and have the power to negotiate or reject the deal.
2. Approval by a majority of disinterested shareholders: The transaction must then be approved by a majority of non-conflict shareholders, that is, those shareholders who will receive no special treatment or consideration from the proposed deal.

So what happens when the circumstances of MFW are not paid in a disputed transaction?

If shareholders take the board to court, the board does not benefit from the friendly business judgment rule, a highly deferential judgment standard. Instead, the transaction is assessed according to the standard of ‘complete honesty’ – a significantly stringent level of scrutiny.

Under this standard, the board must prove that both the process and the price of the transaction were completely fair to the minority shareholders.

This increases the legal burden on the defendants and makes it more difficult to defend the transaction if it is challenged in court.

MFW in recent lawsuits

Recent cases in Delaware such as TripAdvisor (which I wrote about here) and Tesla (which I wrote about here) show how important MFWThe company’s procedural safeguards include reviewing transactions involving a controlling shareholder.

The recent Delaware Supreme Court decision involving Match Group strengthened the application of the MFW doctrine to different scenarios.

Match group

The Match Group lawsuit revolved around a dispute over transactions between the company and its then controlling shareholder, IAC/InterActiveCorp (IAC).

In 2024, the case reached the Delaware Supreme Court, which confirmed that the MFW The doctrine can be applied to any transaction in which a controlling shareholder receives a non-computable benefit (a benefit that is not equally shared by other shareholders), and not just to buyout transactions involving controlling shareholders.

To qualify for the business judgment rule, a company must meet these two rules MFW conditions: a fully independent special committee and approval by a majority of disinterested shareholders. If these conditions are not met, the transaction will be subject to the full fairness review, which will scrutinize the price and process of the deal more closely.

Tesla

Tesla’s 2018 compensation package for Elon Musk – a potential reward of $55.8 billion – became the focus of a high-profile lawsuit.

Shareholders sued Tesla, claiming the board failed to meet independence criteria when approving the transaction.

The Delaware Chancery Court applied the “complete fairness” standard due to issues with the board’s independence and Musk’s influence on the process.

The court ultimately rejected the compensation package (an appeal is pending).

TripAdvisor

When TripAdvisor wanted to resettle in Nevada from Delaware, minority shareholders objected. They said this move limited their legal recourse against Delaware’s more robust laws.

However, the board was led by a controlling shareholder (the CEO), and he unilaterally approved the company’s reincorporation into Nevada.

The Delaware courts ultimately allowed the reinstatement, but applied the “full fairness” standard because the transaction was not appropriate. MFW procedural protection.

In both cases (Tesla and TripAdvisor), the boards could have avoided a lot of time and legal trouble if they had followed the rules. MFW learn.

Practical considerations

Here are some steps you can consider to ensure compliance if you are faced with a transaction involving a controlling shareholder:

Tracking a controlling shareholder transaction

A controlling shareholder usually has a significant share of voting rights – often 30% or more – and can have a substantial influence on the board’s decisions.

However, control can also be more subtle, such as the ability of the controlling shareholder to shape the composition of the board or other strategic decisions.

Transactions that can trigger MFW This includes related party transactions, where the controlling shareholder is on both sides of the deal, mergers with preferential benefits or asset sales that favor the controlling party.

Establishment of a truly independent special committee

Directors must form a membership committee without personal or financial ties to the controlling shareholder.

This committee should have real authority to negotiate and potentially reject any transaction. The independence of this group is the key to meeting MFW‘s first requirement.

Ensure a transparent shareholder approval process

Disinterested shareholders must be provided with all relevant information in order to make an informed decision on a transaction. This includes clear and accurate information about the transaction and its implications.

A good process for obtaining shareholder approval can increase the board’s ability to defend the transaction if it is challenged in court.

Why is following MFW difficult?

MFW procedures are simple in theory. Execution is another matter, because why would a controlling person or group want to give up control?

But that is exactly what is needed in a conflicted transaction if a board wants to avoid lengthy litigation.