Cadwalader, Wickersham & Taft LLP
MONTH-IN-BRIEF (Mar 2024)
Business Litigation
Delaware Supreme Court Denies MFW Protection Due to Committee’s Financial and Legal Advisors’ Undisclosed Ties with Controlling Stockholder
By K. Tyler O’Connell, Morris James LLP
Under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) and its progeny, controlling stockholder squeeze-out acquisitions may be subject to deferential review under the business judgment rule if they are approved by a special committee of independent directors and a majority of the minority stockholders. In City of Dearborn Police and Fire Revised Ret. Sys. (Chapter 23) v. Brookfield Asset Mgmt., Inc., __ A.3d __, 2024 WL 1244032 (Del. Mar. 25, 2024), the Delaware Supreme Court considered en banc a stockholder challenge to Brookfield’s 2020 squeeze-out merger of TerraForm Power, Inc., and reversed a Court of Chancery decision granting the defendants’ motion to dismiss under MFW. While the Supreme Court rejected many of the plaintiffs’ grounds for appeal, it found that the proxy statement soliciting stockholder approval was materially misleading for failing to disclose that one of the special committee’s two financial advisors, Morgan Stanley, had invested $470 million in Brookfield and its affiliates. While the amount at issue (comprising roughly 0.1 percent of Morgan Stanley’s total investment portfolio) was not material to Morgan Stanley, and thus would not support a claim that the committee failed to exercise due care (i.e., was “grossly negligent”) in hiring Morgan Stanley, the Supreme Court reasoned the fact was material for purposes of disclosure obligations to stockholders. This was particularly so in light of the proxy statement’s disclosure that Morgan Stanley “may” have had unspecified investments in Brookfield. The Supreme Court similarly concluded that the proxy statement omitted material facts that the law firm representing the special committee had previously represented Brookfield in unrelated matters and was representing Brookfield in a current unrelated matter. The Supreme Court explained that, while it was not a breach of the duty of care for the special committee to hire the firm, an advisor’s “concurrent engagement with a transaction counterparty can present legitimate concerns” in the mind of a reasonable stockholder, particularly given the firm’s simultaneous duty to zealously represent Brookfield in the unrelated matter. Finally, the Supreme Court found the proxy statement was deficient for failure to disclose that, among other benefits from the transaction, Brookfield expected to receive an additional $130 million in management fees over the next five years. While the proxy statement accurately stated the formula for management fees, it did not disclose the inputs a reasonable stockholder would need to derive the expected gain. Accordingly, because disclosure violations undermined the cleansing effect of the stockholders’ majority of the minority vote for MFW purposes, the Supreme Court reversed the Court of Chancery’s decision dismissing the action and remanded the matter for further proceedings.