In 2014, the Delaware Supreme Court in Kahn v. MFW held that the business judgment standard could apply to review of a controlling stockholder merger if at the outset the controlling stockholder conditioned the squeeze-out transaction on negotiation and approval by a committee of independent and disinterested directors and the informed, uncoerced approval of a majority of the minority stockholders (dual stage approvals). The Delaware Supreme Court later affirmed a Delaware Court of Chancery transcript opinion holding that MFW could apply to a pleadings-stage dismissal where the controlling stockholder did not condition its initial proposal on the dual stage approvals, at least where the board, with the majority stockholder’s participation, did so in a resolution establishing a special committee to negotiate prior to any substantive negotiations. The question remained, however, how much latitude the court would afford a controlling stockholder who did not ab initio condition its merger transaction on the requisite dual stage approvals. In Flood v. Synutra International, C. A. No. 101, 2018 (Del. Oct. 9, 2018), the Supreme Court in a majority opinion provided additional guidance, holding that the MFW standard of review could apply to a transaction where the controlling stockholder did not from the beginning condition its transaction on the requisite dual stage approvals, as long as those conditions were established prior to any substantive economic negotiations. The court’s holding and its reasoning provide important guidance to transactional planners and litigators assessing whether to challenge a controlling stockholder merger transaction.

Background

In Flood the majority stockholder proposed a merger transaction to acquire the shares of Synutra International Inc. he did not already own. Prior to a board meeting to consider the proposal, the company’s CFO waived a conflict that allowed the company’s longtime counsel to represent the controlling stockholder. One week after the controlling stockholder made his initial proposal, the board met and appointed a special committee. The board took no other action regarding the merger proposal at this meeting. One week later, the controlling stockholder sent a second letter in which he indicated he would not go forward with the transaction unless it included the dual stage approvals. Actual price negotiations did not begin until seven months after this second offer. Independent legal and financial advisers advised the special committee during the negotiations. Eventually, the special committee approved a transaction at a price 2.4 percent greater than the original offer, at a 58 percent premium to the company’s trading price when the offer first became public, and at a price that the financial adviser deemed fair. The special committee met fifteen times over a nine-month period to achieve the negotiated price. Thereafter a majority of the minority stockholders approved the transaction.

The Plaintiff’s Claims

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