In 2014, the Delaware Supreme Court held in Kahn v. M&F Worldwide (MFW) that the business judgment rule applies to a transaction that would otherwise be subject to the exacting entire fairness standard of review due to the presence of a conflicted controlling stockholder so long as the parties condition the transaction at the outset (the “ab initio requirement”) on approval by a fully empowered committee of disinterested and independent directors who comply with their duty of care (the “committee requirement”) and approval by a majority of disinterested stockholders voting on a fully informed and uncoerced basis (the “majority-of-the-minority requirement”). At the time, practitioners generally lauded MFW as a welcome development that rebalanced the litigation risk landscape in a manner that enabled controlled companies to pursue a greater range of value-maximizing transactions. And in the decade that followed, many companies have taken advantage of the MFW framework to do just that.

While running an MFW-compliant process has potential litigation benefits, it is not a cost-free exercise. The corporation will incur significant costs associated with forming a special committee that in turn must hire and solicit advice from its own independent legal and financial advisers. Delays are also likely to occur because the special committee will need sufficient time to get up to speed and evaluate the transaction, and because the company will need to take the necessary steps to hold a meeting and solicit votes of minority stockholders in favor of the transaction. The majority-of-the-minority requirement may encourage controlling stockholders to offer higher prices than would be available in a non-MFW-compliant transaction, but also introduces execution risks in light of the recent rise of passive retail stockholders who are less likely to cast votes at all and gives opportunistic and activist stockholders a greater opportunity to block what may otherwise be a value-maximizing transaction for all stockholders.