Recently, the Delaware Supreme Court and the Court of Chancery have had the opportunity to further develop the ab initio requirement.
Shortly before the Supreme Court issued its decision in Flood, the Court of Chancery addressed the difference between discussions and negotiations in Olenik v. Lodzinski.3 The case involved an “Up-C” transaction, whereby two companies with the same controller entered into a stock-for-stock merger. The acquiring company’s stockholders, who ended up with a minority interest in the resulting company, filed suit alleging that the controller and others had breached their fiduciary duties by using the merger as a bailout of their investments in the acquired company. They argued that MFW did not apply because, among other things, the controller did not condition the deal upon satisfaction of the dual procedural protections until after 10 months of “extensive” premerger discussions had occurred.
In 2017, the Court of Chancery addressed the applicability of the MFW framework in a unique setting — third-party transactions where the controller receives a non-ratable benefit. The case, In re Martha Stewart Living Omnimedia, Inc. Stockholder Litigation,4 involved a merger where Sequential Brands Group acquired Martha Stewart Living Omnimedia (MSLO). The MSLO board established an independent special committee in 2014 with full authority to evaluate and recommend strategic transactions. In the spring of 2015, Sequential emerged as a possible buyer after having been spurned by MLSO six months earlier. Sequential did not mention a majority-of-the-minority vote in its initial proposal, but three weeks later sent a revised proposal, conditioning procession of the deal on the minority’s approval. MSLO received the revised proposal before Sequential approached the special committee about negotiating separately with Stewart regarding her employment and intellectual property agreements, which were material benefits she alone would receive in the transaction.
After the merger was announced, minority stockholder plaintiffs filed suit alleging that Martha Stewart was MSLO’s controlling stockholder and that she extracted non-ratable “side deals” in the form of the employment and intellectual property agreements. They argued that the transaction did not satisfy MFW’s ab initio requirement because Sequential did not condition procession of the deal on a majority-of-the-minority vote until well after it began negotiating with MSLO. The Court of Chancery disagreed. The court framed the question as, “[A]t what point must the parties to a potentially conflicted third-party transaction involving a controlling stockholder agree to the dual procedural protections in order for the controller to earn pleadings-stage business judgment deference?” The court stated the plaintiffs’ argument that the procedural protections must be in place at the outset of discussions between the target and the third party “would make no sense.” Instead, the court held the ab initio requirement will be satisfied in a third-party transaction if the dual procedural protections are in place at “the point where the controlling stockholder actually sits down with an acquiror to negotiate for additional consideration.” Ultimately, the Court of Chancery found that the transaction satisfied the ab initio requirement because both the independent special committee and the majority-of-the-minority vote were in place at the time Stewart began negotiating with Sequential.
In 2016, the Court of Chancery held that a controller can regain business judgment rule protection if an offer that does not comply with MFW is terminated and negotiations later begin anew and are conditioned on compliance with MFW. In In re Books-A-Million, Inc. Stockholders Litigation,5 plaintiff stockholders argued that the ab initio requirement was not satisfied because the controllers’ 2015 proposal to acquire Books-A-Million, which was conditioned from the outset on MFW’s dual protections, was a continuation of a prior, rejected proposal from 2012, “which did not have the twin conditions necessary for the [MFW] framework.” Relying on contract law, the court held that was “not a reasonably conceivable inference” because the plaintiffs had acknowledged that “a special committee rejected the 2012 offer, thereby terminating it.” The court went on to explain that “[t]he 2015 offer came nearly three years after the 2012 offer and contained a different price and different terms. The 2015 proposal was a different offer, and it generated a separate process.” The court, therefore, held that the deal satisfied the ab initio requirement and dismissed the complaint.
MFW’s dual protections may be established after initial discussions have occurred, as long as a potential transaction is expressly conditioned on the dual protections before economic negotiations begin.
Once noncompliant negotiations are terminated, the controlling stockholder may get a fresh start by conditioning a new round of negotiations on the dual protections.
1 88 A.3d 635 (Del. 2014).
2	No. 101, 2018 (Del. Oct. 9, 2018).
3 C.A. No. 2017-0414-JRS (Del. Ch. July 20, 2018).
4 Consol. C.A. No. 11202-VCS (Del. Ch. Aug. 18, 2017).
5 Consol. C.A. No. 11343-VCL (Del. Ch. Oct. 10, 2016).