On July 29, the Delaware Court of Chancery issued a noteworthy decision1 confirming the broad application of the "MFW" framework—based on the Delaware Supreme Court's decision in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014)—to the range of corporate transactions involving controllers. In this case, Vice Chancellor Paul A. Fioravanti applied MFW to grant motions to dismiss in a novel context: a challenge to a stockholder-approved charter amendment extending the sunset of the company's dual-class structure. The court held that because the charter amendment was properly approved by both a special committee of independent directors and a majority vote of the unaffiliated stockholders, the deferential "business judgment rule" standard of review applied to the board's decision to adopt the amendment, thus warranting dismissal.
The action arose from a proposal by Jeff Green—the founder, chairman, and CEO of The Trade Desk, Inc.—to amend the company's charter to eliminate the requirement that the company's Class B high-vote shares (which entitled the holder to 10 votes per share) comprise at least 10 percent of the total outstanding common stock of the company. At the time of Green's proposal, the Class B shares (of which Green held the vast majority) represented just 10.7 percent of the total shares outstanding, thus approaching the 10 percent threshold at which all of the Class B shares would convert to single-vote Class A shares. Green's proposal to eliminate this 10 percent dilution trigger would "extend[] the duration of [the company's] dual-class stock structure" and thereby effectively prolong Green's voting control.
From the outset, Green conditioned the proposal on MFW's dual requirements: approval by a special committee of disinterested and independent directors, and majority-of-the-minority stockholder approval. The board formed a three-director committee empowered to negotiate the terms of the amendment, and the requisite unaffiliated stockholders approved the deal the committee struck with Green. The plaintiff challenged the amendment, arguing that the special committee lacked independence and that the stockholder vote was not fully informed.
The court rejected the plaintiff's challenge to the committee's independence, which focused almost entirely on the committee's chairperson. In particular, the court rejected the plaintiff's ipse dixit that the special committee's approval of the charter amendment alone was sufficient to show that the committee operated under a "controlled mindset," reasoning that directors can believe in good faith that a governance structure under which a founder retains control is "optimal." The court also rejected the plaintiff's multi-pronged challenge that the stockholder vote was not fully informed.
The decision reaffirms that employing MFW's dual protections can be a powerful and efficient means to prevent application of the exacting "entire fairness" standard of judicial scrutiny to transactions involving controllers. The court's analyses also provide new and useful examples of what independence-related factors for special committee members may be found to be MFW-compliant and what level of disclosure on certain aspects of a deal (including the controller's motives and desires in doing the deal) is necessary.
Wilson Sonsini represented The Trade Desk's founder, Jeff Green, in negotiating the charter amendment and in the litigation.
[1] City Pension Fund for Firefighters and Police Officers in The City of Miami Beach v. The Trade Desk, Inc., et al., C.A. No. 2021-0560-PAF, memo. op. (Del. Ch. July 29, 2022).
