Doing a post on Chancellor Strine’s opinion in MFW Shareholders Litigation, granting summary judgment to the defendants in a suit challenging a merger with a controlling stockholder, induces serious blogger’s guilt. It is nothing short of presumptuous to try to say anything analytical about an opinion just days after it was issued, when the opinion itself is so obviously the product of assiduous care in analyzing precedent and doctrine.
But kibitzing is an academic’s business, so here goes. First, a note to my fellow corporate law professors: if you haven’t already done so, you might as well read this opinion now. You’re going to be teaching it next year, and perhaps for quite a while after, or at least you should. There’s nothing surprising about the proposition that Leo Strine has written an opinion worth reading, but for my money this is one of his – and therefore one of the – best corporate opinions ever, on a par with or perhaps even better than my previous favorite, Pure Resources.
Several aspects of MFW make it a great opinion. First, its persuasiveness derives in large part from its modesty. (Hat tip to former Chancellor William T. Allen for teaching me the persuasive value of modesty). It is (probably quite intentionally) devoid of “because I said so” assertions. At practically every turn, the opinion acknowledges the debatability of its conclusions.
Second, the MFW opinion is a marvelous lesson in common law jurisprudence and, in particular, the meaning of the term “dictum.” Inevitably in judicial opinions, judges provide explanations or reasoning that later factual situations reveal to be overbroad or imprecise, or both. Nothing wrong with that: it’s impossible to foresee all the ramifications of any generalized statement. The MFW opinion repeatedly exposes instances in which language about standards of review and burdens of proof strays beyond the factual boundaries of its original context. More importantly, MFW then reminds us that it behooves common law judges not to become enslaved to that language in deciding subsequent cases. Rather, they have to carefully examine the extent to which such language was actually necessary to determine the outcome of the case in which the language is expressed. Where it wasn’t, it becomes important to examine whether to extend the application of that language to a different set of facts.
Finally, MFW is extraordinary for its transparency in addressing the empirical foundation of the conclusions it draws. One notable aspect of MFW’s analysis illustrates this point, and exposes the distinct possibility that the Delaware Supreme Court will reverse the grant of summary judgment. The Chancellor’s analysis emphasizes the bipartite idea that in approving a merger with a controlling stockholder, a fully empowered, independent special committee fulfills the function served by the full board of directors in an arm’s length merger, and the informed vote of a majority of the minority stockholders fulfills the function served by the statutorily required vote of stockholders on an arm’s length merger. To reach the latter aspect of this conclusion, however, the MFW opinion analyzes at some length whether the majority of the minority vote is qualitatively equivalent to the stockholder vote on an arm’s length merger.
The question is whether the stockholder vote is any less voluntary in respect of a proposed merger with a controlling stockholder than it is in respect of a merger with a third party. To answer that question, the MFW opinion notes instances in which stockholders have voted down, or threatened to vote down, merger proposals, including the pending effort by Sprint to acquire the balance of Clearwire’s equity. The opinion also reviews the increasingly concentrated holdings of institutional investors, who presumably have a greater ability to resist merger proposals they don’t like (a phenomenon facing Michael Dell at the moment).
But whether a minority stockholder vote is as voluntary as a vote in the absence of a controller is an empirical question that may be impossible to resolve definitively in any particular case, let alone as a general proposition. Moreover, it’s a question on which the Delaware Supreme Court has spoken, repeatedly. Quoting what it had held in 1990 in Citron v. E.I. duPont de Nemours, Inc. , the Supreme Court in Kahn v. Lynch Communications explained at some length why one should conclude that the minority stockholder vote is never entirely voluntary and uncoerced:
Parent subsidiary mergers, unlike stock options, are proposed by a party that controls, and will continue to control, the corporation, whether or not the minority stockholders vote to approve or reject the transaction. The controlling stockholder relationship has the potential to influence, however subtly, the vote of [ratifying] minority stockholders in a manner that is not likely to occur in a transaction with a noncontrolling party.
Even where no coercion is intended, shareholders voting on a parent subsidiary merger might perceive that their disapproval could risk retaliation of some kind by the controlling stockholder. For example, the controlling stockholder might decide to stop dividend payments or to effect a subsequent cash out merger at a less favorable price, for which the remedy would be time consuming and costly litigation. At the very least, the potential for that perception, and its possible impact upon a shareholder vote, could never be fully eliminated. Consequently, in a merger between the corporation and its controlling stockholder–even one negotiated by disinterested, independent directors–no court could be certain whether the transaction terms fully approximate what truly independent parties would have achieved in an arm’s length negotiation. Given that uncertainty, a court might well conclude that even minority shareholders who have ratified a . . . merger need procedural protections beyond those afforded by full disclosure of all material facts. One way to provide such protections would be to adhere to the more stringent entire fairness standard of judicial review.
This, of course, is a decidedly pessimistic view of the prospect that minority stockholders will vote their convictions about the value of the controller’s merger proposal. It may be that the particular retaliatory threats identified by the Supreme Court wouldn’t apply in MFW’s situation, because, for example, the controlling stockholder had committed not to proceed with a merger unless approved by both the special committee and the majority of the minority stockholders. Nevertheless, the plain language of the Supreme Court’s assessment of minority stockholder vulnerability makes it seem almost impossible to believe that a minority stockholder vote could contribute to dispensing with the obligation of the court to evaluate the fairness of a merger with a controlling stockholder. But make no mistake: the Supreme Court’s assessment of minority stockholder voting behavior was, when first announced in Citron and later reiterated in Kahn, unsupported by any empirical or even anecdotal evidence. It was simply speculation – plausible, perhaps – about the subjective state of mind of minority stockholders.
And if the Court of Chancery accurately perceived the plaintiffs’ own position in the MFW case, the Supreme Court’s empirical assessment is not shared by the plaintiffs themselves: the Chancellor noted that “the plaintiffs themselves do not argue that minority stockholders will vote against a going private transaction because of fear of retribution … .”
But the Delaware Supreme Court must inevitably make law for all cases, not just the one shaped by the position of counsel in the case before it. It remains to be seen, then, whether the empirical assessment expressed in MFW will survive appellate consideration. If it doesn’t, and if the Supreme Court adheres to its prior empirical pronouncements, it seems quite possible that the doctrinal structure advocated in MFW, in which dual approval by an effective special committee and a majority of minority stockholders obviates the need to examine fairness, will fall away, leaving entire fairness as the continuing test for evaluating mergers with controlling stockholders. The Court of Chancery rightly notes that this view would perpetuate the unfortunate result that controllers will have no incentive to seek minority stockholder approval through a vote, and will instead follow the path of a tender offer and short form merger, which provides less protection for minority stockholders but, oddly, greater protection from judicial scrutiny.