Chancery Court Reaffirms Application of Business Judgment Rule from M & F Worldwide While Dismissing Unsupported Complaint

By Michael Waller and Molly Mugford

In Franchi v. Firestone, et al., C.A. No. 2020-0503-KSMJ (Del. Ch. May 10, 2020), Defendants’ moved to dismiss Plaintiffs’ action challenging a going-private transaction claiming that the Special Committee set up by the Board of Directors (“Board”) to analyze the merger lacked independence and failed to exercise its duty of care, and the vote of the minority stockholders was not informed. The Chancery Court granted Defendants’ motion to dismiss, relying on the business judgment rule and finding that Plaintiffs’ claims were unsupported and insufficient to undermine “the cleansing effect of the MFW conditions.”

Before the merger, Defendant Carl C. Ichan owned approximately 53% of the voting stock of Voltari Corporation (“Voltari”) through his affiliated entities, Defendants High River LP (“High River”) and Koala Holding LP (“Koala”). Icahn, via High River, became interested in acquiring Voltari’s net operating loss carryforwards (“NOLs”) and offered to buy Voltari’s outstanding shares. Ichan included non-waivable conditions, requiring an independent special committee and an informed vote of the majority of the minority stockholders prior to merger approval.

The Special Committee was comprised of three directors selected from Voltari’s Board. In an effort to avoid a claim of interest, the Board did not select a member who had recently been employed by Ichan. The Special Committee hired its own legal counsel and financial advisors. After meeting seven times and consulting with these advisors, the Special Committee was able to successfully raise the bid price by 48% from Icahn’s initial offer. The merger was then approved by the Special Committee, the Board, and later, a narrow majority vote of the minority stockholders.

The Court applied the business judgment rule under Kahn v. M & F Worldwide Corp. (MFW), 88 A.3d 635 (Del. 2014), which includes six prerequisites for applying this protection. Plaintiffs challenged three of these prerequisites, alleging that the Special Committee was not independent, that Defendant Directors failed to exercise their duty of care, and that the stockholder vote was uninformed.  

Applying MFW, the Court rejected Plaintiffs’ arguments. First, the Court held the Special Committee was independent. This finding was relatively easy for two of the three directors, as Plaintiffs’ counsel admitted at oral argument that their allegations were inadequate as to the first two directors. As for the third, Plaintiffs’ complaint incorrectly stated that the director was currently employed by Ichan, a mistake that Plaintiffs’ counsel acknowledged soon after oral argument. This misstatement of fact rendered Plaintiffs’ claim extremely weak. Although the third director had served as the President of Icahn Enterprises in the past and currently served on the boards of two Icahn-controlled companies, the Court found that an extensive relationship from ten years in the past was insufficient to reasonably question his independence. The Court also found that the Plaintiffs’ second claim was unsupported to meet the necessary gross negligence standard for breach of duty. Third, the Court dismissed Plaintiffs’ claim alleging an uninformed minority stockholder vote, noting that Plaintiffs’ counsel entirely neglected to explain how any of the alleged facts could have reasonably changed a stockholder’s deliberation process.

The Court found that each MFW prong was met and that business judgment protection applied to the merger. Because Plaintiffs’ offered no argument that the complaint stated a claim under this standard, the Court granted Defendants’ motions to dismiss.

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