Flood v. Synutra International, Inc.

Supreme Court of Delaware · 2018 · Corporations

CorporationsControlling stockholder mergersStandard of reviewMFWab initiofrom inceptionspecial committeemajority-of-the-minority

Facts

Liang Zhang and related entities controlled 63.5% of Synutra's stock and proposed taking the company private at $5.91 per share, but his initial letter did not condition the deal on approval by a special committee and a majority of the minority stockholders. One week later the board formed a Special Committee and did not substantively evaluate the proposal, and two weeks after the initial offer, before any substantive economic negotiations had begun, Zhang sent a second letter conditioning any transaction on both MFW protections. The Special Committee then hired independent financial and legal advisors, conducted months of diligence, held numerous meetings, performed a market check, and only seven months later began price negotiations, resulting in an increase to $6.05 per share. The plaintiff did not allege that the Special Committee lacked independence or that the minority vote was coerced or uninformed, but argued that the initial omission of the dual protections and the eventual price showed MFW should not apply.

Issue

Whether a controller satisfies MFW's requirement that the transaction be conditioned ab initio on special committee approval and a majority-of-the-minority vote when those conditions are added in a follow-up letter before any substantive economic negotiations begin. Also, whether a plaintiff can avoid business judgment review by alleging that the Special Committee negotiated an insufficient price, despite an otherwise independent and informed process.

Rule

Under MFW as clarified here, the controller need not include the dual protections in its first offer so long as it conditions the buyout on approval by an independent, fully empowered special committee and an uncoerced, informed majority-of-the-minority vote at the beginning stages of the process and before any substantive economic negotiations commence. Once MFW applies, a due care claim requires pleading gross negligence; disagreement with negotiation strategy or the adequacy of price alone does not state a due care violation.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Red Mesa Technologies, a Delaware corporation based in Phoenix, is controlled by Nora Patel, who owns 68% of the voting power. Nora sends an initial take-private letter at $14 per share without any procedural conditions. Six days later, before the board-appointed special committee has met, retained advisors, or discussed price, Nora sends a second letter stating she will not proceed unless the deal is approved by an independent special committee and by a majority of the unaffiliated shares.

If stockholders later sue challenging the merger, which standard of review is most likely to apply on these facts, assuming the committee was independent and the minority vote was informed and uncoerced?

Explanation. The majority held that MFW's ab initio requirement does not demand inclusion of the dual protections in the very first offer. It is enough that the controller self-disables at the beginning stages of the process and before any substantive economic negotiations commence, so the protections are not traded for price concessions. On these facts, business judgment review applies.