Understanding Mfw Factors: A Corporate Law Guide

The MFW framework is a set of prerequisites that, if met, allow a controller to earn business judgment rule deference in a squeeze-out merger transaction. The MFW factors, as they are commonly known, were established by the Delaware Supreme Court in 2014 in the case of Kahn v. M&F Worldwide Corp. (MFW). The factors outline the conditions under which a court will apply the deferential business judgment standard of review to a controlling stockholder squeeze-out merger. The six prerequisites are designed to protect the rights of the minority and include the controller conditioning the transaction on the approval of an independent committee and a majority of minority stockholders. While initially developed for squeeze-out mergers, there has been debate and expansion around the applicability of the MFW factors to other types of transactions and corporate decisions.

MFW factors in squeeze-out mergers

MFW factors refer to the six prerequisites developed by the Delaware Supreme Court in Kahn v. M & F Worldwide Corp. ("MFW") to protect the rights of the minority in a "squeeze-out" merger. These prerequisites are:

• The controller must condition the procession of the transaction on the approval of both a special committee and a majority of the minority stockholders from the beginning.
• The special committee must be independent.
• The special committee must be empowered to freely select its own advisers and to say no definitively.
• The special committee must meet its duty of care in negotiating a fair price.
• The vote of the minority must be informed.
• There must be no coercion of the minority.

If these six prerequisites are met, a claim is subject to the business judgment standard of review, which is more deferential than the entire fairness standard. The business judgment standard of review can be applied when the controller voluntarily relinquishes control, replicating the negotiation and approval process of a third-party merger.

The Delaware Supreme Court has since expanded the application of the MFW factors beyond squeeze-out mergers to other types of conflicted controller transactions, such as controller compensation packages and stock reclassifications. However, the legitimacy of this expansion remains uncertain. Some argue that MFW should only apply to squeeze-out mergers, while others claim that it applies to all transactions with a controlling stockholder.

MFW factors in non-squeeze-out mergers

MFW factors are a set of prerequisites that must be met for a claim to be reviewed under the business judgment standard in the context of a controlling stockholder "squeeze-out" merger. The factors were established by the Delaware Supreme Court in the case of Kahn v. M & F Worldwide Corp. ("MFW") in 2014. While MFW factors were originally developed for squeeze-out mergers, Delaware courts have expanded their application to other types of transactions involving controlling stockholders. This expansion has sparked some debate, with critics arguing that MFW should be limited to squeeze-out mergers.

The six MFW factors that must be present are:

• The controller must condition the transaction on the approval of both a special committee and a majority of minority stockholders from the outset.
• The special committee must be independent, with no conflicts of interest.
• The special committee should be able to freely select its own advisers and have the power to say no to the transaction.
• The special committee must fulfil its duty of care by negotiating a fair price.
• The vote of the minority stockholders must be informed, meaning they have all the relevant information.
• There must be no coercion of the minority stockholders in their voting decision.

In the case of non-squeeze-out mergers, the applicability of MFW factors is less clear. The central issue is whether courts should apply the more stringent entire fairness standard of review or the more deferential business judgment rule standard. The entire fairness standard places the burden on the controlling stockholder to demonstrate that the transaction was entirely fair to the corporation and its minority stockholders. On the other hand, the business judgment rule grants deference to the decisions made by a company's board, assuming they acted in the best interests of the company.

In the recent case of In re Match Group Inc., Derivative Litigation, the Delaware Supreme Court addressed this issue. The court held that for non-freeze-out controlling stockholder transactions, the entire fairness standard applies unless all requirements of the MFW framework are met. This means that the controlling stockholder must satisfy both prongs of the MFW framework: negotiation by an independent committee and approval by a fully informed vote of the majority of minority stockholders. The court emphasised that all members of the independent committee must be independent, and the presence of even one conflicted director is sufficient to undermine the committee's independence.

In summary, while MFW factors were originally designed for squeeze-out mergers, their application has expanded to other types of transactions involving controlling stockholders. In non-squeeze-out mergers, the entire fairness standard applies unless the controlling stockholder satisfies all requirements of the MFW framework, in which case the business judgment rule may be invoked.

MFW factors in compensation packages

The MFW factors are a set of six prerequisites designed to protect the rights of the minority in controller transactions. They were established by the Delaware Supreme Court in the case of Kahn v. M & F Worldwide Corp. ("MFW") in 2014. The MFW factors outline when the business judgment standard of review can be applied to a controlling stockholder "squeeze-out" merger.

The MFW factors have also been applied to other types of conflicted controller transactions, such as controller compensation packages. When designing compensation packages, companies must consider a mix of factors, including fixed versus variable pay, short-term versus long-term incentives, cash versus equity, and group versus individual rewards. The MFW factors can provide a framework to ensure fair and competitive compensation practices.

• The controller conditions the transaction on the approval of both a special committee and a majority of minority stockholders from the outset: In the context of compensation packages, this means that any changes or decisions regarding compensation should be approved by a designated committee and a majority of minority stockholders. This ensures transparency and accountability in the decision-making process.
• The special committee is independent: The committee responsible for making compensation decisions should be independent, with no conflicts of interest. This helps ensure that the decisions are made objectively and in the best interests of the company and its employees.
• The special committee is empowered to freely select its own advisers and to say no definitively: The committee should have the authority to seek advice and input from experts and advisers of their choice. They should also have the power to reject proposals or recommendations regarding compensation if they believe it is in the best interests of the company and its employees.
• The special committee meets its duty of care in negotiating a fair price: The committee should carefully consider and negotiate fair compensation packages that are competitive and in line with market trends. They should take into account factors such as years of experience, education level, in-demand skill sets, and variable compensatory factors (e.g., shift work, hazardous working conditions).
• The vote of the minority is informed: When making decisions regarding compensation packages, the minority stockholders should be provided with all relevant information and data. This includes information about market trends, similar jobs in the industry, and the company's financial position.
• There is no coercion of the minority: There should be no pressure or coercion on the minority stockholders to accept or approve compensation packages. The decision-making process should be free from undue influence or manipulation.

By applying the MFW factors to compensation packages, companies can ensure that their compensation practices are fair, transparent, and in the best interests of all stakeholders, including minority stockholders and employees. It helps protect the rights of minority stockholders and ensures that compensation packages are carefully considered and negotiated.

MFW factors in controller transactions

In the 2014 case of Kahn v. M&F Worldwide Corp. ("MFW"), the Delaware Supreme Court ruled that a court will apply the entire fairness standard of review to freeze-out merger transactions between a controlled corporation and its controlling stockholder when the controlling stockholder receives a non-ratable benefit. This ruling established a set of factors, known as the MFW factors, which provide a checklist of procedural protections that must be followed for a controller to earn business judgment rule deference in a squeeze-out merger transaction.

The MFW factors outline six prerequisites designed to protect the rights of the minority and include the following:

• The controller must condition the procession of the transaction on the approval of both a special committee and a majority of the minority stockholders from the outset (ab initio).
• The special committee must be independent.
• The special committee must be empowered to freely select its own advisers and to definitively say no.
• The special committee must meet its duty of care in negotiating a fair price.
• The vote of the minority must be informed.
• There must be no coercion of the minority.

The MFW factors have since been applied by the Delaware Chancery Court to other types of conflicted controller transactions, such as controller compensation packages. However, the legitimacy of this expansion beyond squeeze-out mergers has been questioned.

To obtain review under the deferential business judgment rule for all controlling stockholder transactions, it is essential to utilize the full MFW framework from the outset of the transaction. Deploying only one prong of the framework is insufficient to secure business judgment review. Nevertheless, the MFW framework offers an incentive for controllers to embrace procedural approaches that favour minority investors.

MFW factors in freeze-out mergers

In the 2014 case of Kahn v. M & F Worldwide Corp. ("MFW"), the Delaware Supreme Court ruled that the MFW factors—a checklist of procedural protections—could allow a controller to earn business judgment rule deference in a squeeze-out merger transaction. The MFW factors are applied to freeze-out mergers, which are a type of squeeze-out merger where the controlling shareholder takes a company private.

A freeze-out merger, also known as a shareholder squeeze-out, is when a firm's majority shareholders pressure minority holders to sell their stakes in the company. This can be done by terminating minority shareholder-employees or refusing to declare dividends. Freeze-outs are often accomplished through acquisitions, where the controlling shareholder(s) may set up a new corporation that they own and control, which then submits a tender offer to the target company. If the tender offer is successful, the acquiring company may choose to merge its assets into the new corporation.

In the context of freeze-out mergers, the MFW factors require that, at the outset, the transaction must be subject to approval by both an independent special committee and an uncoerced, fully informed majority of the minority shareholder vote. This ensures that the transaction is fair to the minority shareholders and protects their rights.

The Delaware Court has applied the MFW factors to various transaction structures involving a controlling stockholder, including freeze-out mergers, and has offered clarification on the requirements that must be met for each factor to be satisfied. For example, in the 2018 case of Flood v. Synutra International, Inc., the Court explained that to satisfy the ab initio prong of the MFW factors, a controller must condition the transaction on the approval of both an MFW-compliant special committee and a majority-of-the-minority shareholder vote before economic negotiations begin.

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