Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

In Olenik V. Lodzinski et al, the Delaware Supreme Court reversed the Court of Chancery finding the conditions required for business judgment review of a transaction with a controlling shareholder had not been conducted in accordance with Kahn v. M&F Worldwide Corp. from the outset and therefore the entire fairness standard applied. In MFW the Delaware Supreme Court held that the business judgment standard of review governs mergers proposed by a controlling stockholder and its corporate subsidiary when subject to the following two procedural protections from the beginning:

  • 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 of stockholders.”

The Delaware Supreme Court noted that while the parties briefed this appeal the Supreme Court decided Flood v. Synutra International, Inc.  Under Synutra, to invoke the MFW protections in a controller led transaction, the controller must “self-disable before the start of substantive economic negotiations.”  The controller and the board’s special committee must also bargain under the pressures exerted on both of them by the MFW protections.” In Synutra, the Delaware Supreme court cautioned that the MFW protections will not result in dismissal when the “plaintiff has pled facts that support a reasonable inference that the two procedural protections were not put in place early and before substantive economic negotiations took place.”

The complaint challenged a business combination between Earthstone Energy Inc. and Bold Energy III LLC and alleged EnCap Investments L.P. controlled Earthstone and Bold.  The Supreme Court held, based on its review of the complaint, the well pled facts support a reasonable inference that the MFW requirements were not put in place early and before substantive economic negotiation took place.

According to the Court, presentations made by Earthstone to EnCap, Earthstone management valued Bold at $305 million in an initial presentation and $335 million in a second presentation. Based on these facts, the Court found it was reasonable to infer that these valuations set the field of play for the economic negotiations to come by fixing the range in which offers and counteroffers might be made.  According to the complaint, that generally turned out to be the case. Earthstone’s first formal offer—the one in which the MFW conditions were finally mentioned—reflected an equity valuation for Bold of about $300 million, and the final deal reflected an equity valuation for Bold of around $333 million.