Delaware Business Litigation Report

Delaware Supreme Court Reverses MFW Dismissal Due to Inadequate Disclosures Regarding Special Committee’s Advisors’ Material Conflicts

City of Sarasota Firefighters’ Pension Fund v. Inovalon Holdings Inc., No. 305, 2023 (Del. May 1, 2024).
The Delaware Supreme Court’s decision in Khan v. M & F Worldwide Corp. (“MFW”) established a cleansing process for a corporation’s transactions with a controlling stockholder: “(i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.” If all those elements are met, the transaction is reviewed under the deferential business judgment standard.

In this case, the Delaware Supreme Court reversed the Court of Chancery’s order dismissing the complaint on MFW grounds because the Delaware Supreme Court found that the complaint adequately alleged that the stockholder vote was not fully informed, thereby negating the protections afforded by MFW. Specifically, the Supreme Court found that the Court of Chancery had erred in applying a duty of care analysis in reviewing whether the proxy statement issued in connection with the merger adequately disclosed that the advisors to the special committee had material conflicts. Here, according to the Delaware Supreme Court, the Court of Chancery had improperly based its holding regarding the adequacy of the disclosures on its duty of care analysis—which is insufficient when a materiality assessment is necessary. The Supreme Court held that facts concerning financial advisors’ concurrent representations of transaction counterparties and the amount of fees earned from such counterparties were material and should have been disclosed. Accordingly, the Delaware Supreme Court remanded the case back to the Court of Chancery for further proceedings.

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