195 A.3d 754
Del.2018Background
- Liang Zhang (and related entities) controlled 63.5% of Synutra and proposed a take‑private merger in Jan 2016; his initial January 14 letter offered $5.91/share but did not include the MFW “dual” procedural conditions (Special Committee approval and majority‑of‑the‑minority vote).
- The board immediately formed an independent Special Committee at a January 21 meeting; Davis Polk (buyer counsel, and long‑time company counsel) participated at the meeting after the CFO negotiated a conflicts waiver.
- On January 30 Zhang sent a follow‑up letter that expressly conditioned the deal on both Special Committee approval and a majority‑of‑the‑minority vote before any substantive economic negotiations had occurred.
- The Special Committee then retained independent counsel (Cleary) and financial advisor (Houlihan Lokey), conducted months of due diligence and a market check, and ultimately negotiated the price up to $6.05/share, which the committee and its advisor deemed fair.
- Plaintiff Flood sued, alleging (inter alia) that the initial omission of the dual protections, the Davis Polk waiver, and the alleged insufficient price undermined invocation of business judgment review; the Court of Chancery dismissed and the Supreme Court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether MFW’s “ab initio” requirement means the controller must include the dual protections in its first written offer (bright‑line) | Flood: "ab initio" requires the protections in the controller's initial proposal; absent that, entire‑fairness applies | Defendants: "ab initio" means protections must be in place at the start of substantive economic negotiations so they cannot be used as bargaining chips | Held: Court adopts a practical test — business judgment review applies if controller conditions the deal on the dual protections early in the process and before any substantive economic bargaining (affirming Swomley) |
| Whether the Davis Polk conflict waiver and participation before the follow‑up letter defeated the ab initio requirement | Flood: waiver and Davis Polk's attendance show negotiations or influence occurred before the protections were in place | Defendants: no substantive bargaining occurred; waiver related to representation only and did not impair the Special Committee’s later independent process | Held: Participation/waiver did not preclude MFW treatment on the pled facts; no reasonable inference that waiver undercut the committee or that substantive negotiations occurred before Zhang’s follow‑up letter |
| Standard for pleading a Special Committee duty‑of‑care claim under MFW at motion‑to‑dismiss stage | Flood: challenges the adequacy of the committee’s bargaining (price) can defeat business judgment review | Defendants: due care inquiry is gross negligence, not second‑guessing outcomes | Held: Court reaffirms that a plaintiff must plausibly allege gross negligence by the Special Committee (mere disagreement about strategy or price is insufficient) |
| Pleading‑stage burden and appropriate review standard when MFW factors are present | Flood: ambiguity in MFW’s dicta permits substantive price review at pleading stage | Defendants: MFW’s goal is to incentivize precommitment and avoid judicial review of deal economics where procedural protections exist | Held: Clarifies and narrows MFW — footnote dicta suggesting price‑based duty‑of‑care pleading is overruled; where MFW conditions were timely put in place and committee acted with adequate advisors and deliberation, business judgment rule governs |
Key Cases Cited
- Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (establishes the MFW framework permitting business judgment review when a controller conditions a transaction ab initio on Special Committee and majority‑of‑the‑minority approval)
- In re MFW Shareholders Litigation, 67 A.3d 496 (Del. Ch. 2013) (Chancery Court decision adopting the dual‑protections roadmap and explaining the rationale for requiring them up front)
- Kahn v. Lynch Communication Systems, Inc., 638 A.2d 1110 (Del. 1994) (addresses burden‑shifting and the role of special committees under entire‑fairness review)
- Swomley v. Schlecht, 128 A.3d 992 (Del. 2015) (TABLE) (affirmed that MFW’s ab initio requirement is satisfied where controller conditions the deal on the dual protections before any negotiations take place)
- Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434 (Del. 2005) (sets de novo review standard for appeals from Court of Chancery decisions)