Olenik v. Lodzinski

Supreme Court of Delaware · 2019 · Corporations

Corporationscontrolling stockholder transactionsMFW doctrinedisclosureMFWKahn v. M & F WorldwideFlood v. Synutracontroller transaction

Facts

According to the complaint, EnCap controlled both Earthstone and Bold and pushed a transaction combining the two entities. Before Earthstone's special committee formally imposed both MFW protections in an August 19, 2016 offer letter, EnCap, Earthstone, and Bold had spent months exchanging confidential information, performing diligence, discussing valuation, and making presentations valuing Bold at roughly $305 million and then $335 million. After the special committee was formed, negotiations continued and the final deal gave Earthstone stockholders about 39% of the combined company. The proxy disclosed financial information and the transaction was later approved by disinterested stockholders.

Issue

Whether the complaint was properly dismissed under MFW-based business judgment review where the dual protections were not imposed until after months of pre-committee discussions and valuation work. The court also considered whether EnCap could still be treated as a controller and whether the proxy omitted material information.

Rule

MFW business judgment review applies to a controller-led transaction only if, from the beginning of the process, the transaction is conditioned on both approval by an independent, adequately empowered special committee and an uncoerced, informed majority-of-the-minority vote. As clarified by Synutra and applied here, those protections must be in place early and before substantive economic negotiations or economic horse trading begin; if well-pled facts support a reasonable inference that substantive economic negotiations occurred first, dismissal on MFW grounds is improper.

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

Granite Basin Resources, a Delaware corporation based in Denver, is effectively controlled by Red Mesa Capital, which also controls a private target, Prairie Wolf Drilling. For three months before any formal controller conditions are announced, Granite Basin's CEO and Red Mesa exchange confidential data-room access, circulate valuation decks pricing Prairie Wolf between $280 million and $320 million, and build a combined model for the merged business.

If a minority stockholder later challenges the merger at the pleading stage, which is the strongest argument against business judgment review under the controller-transaction framework?

Explanation. The governing rule is that MFW-style business judgment review applies only if, from the beginning of the process, the transaction is conditioned on both special-committee approval and an informed, uncoerced majority-of-the-minority vote. The majority opinion explains that the controller must self-disable before substantive economic negotiations or economic horse trading begin. Exchanging valuation decks, models, and data-room materials can support a reasonable inference that the parties already set the negotiation range or field of play. At the pleading stage, that defeats dismissal on MFW grounds.