A few years ago in Kahn v. M&F Worldwide1 (MFW), the Delaware Supreme Court provided a public company controlling stockholder with the recipe for a minority interest acquisition that, if scrupulously followed, would enjoy business judgment rule review at the pleadings stage in the face breach of fiduciary duty allegations against the controlling stockholder regarding that acquisition. But the MFW court left unanswered the question of whether adopting an acquirer’s minority stockholder protections would afford a controlling stockholder the same protection in a sale context.
The Delaware Chancery Court recently answered that question in the Martha Stewart stockholder litigation2and extended the application of the MFW recipe to conflicted one-side controller transactions. With the Chancery Court’s blessing that the MFW recipe was good enough for her, Stewart passed off a stock sale recipe for the enjoyment of all controlling stockholders.
In a consolidated class action, former stockholders of Martha Stewart Living Omnimedia, Inc. (the Company) asserted claims against Martha, the Company’s former controlling stockholder, for breach of fiduciary duty and against Sequential Brands Group, Inc. (Sequential), a third party buyer unaffiliated with her, for aiding and abetting that breach, in connection with a December 2015 transaction in which Sequential acquired the Company via merger. The plaintiffs claimed she leveraged her position as a controlling stockholder to secure greater consideration for herself than was paid to other stockholders in the form of side deals with Sequential.
The two overarching requirements of the MFW recipe for a transaction enjoying business judgment rule protection at the pleading stage are (i) the establishment of a well-functioning, fully independent special committee to negotiate the transaction from the outset and (ii) a nonwaivable condition that the transaction be approved by a fully informed, uncoerced majority of the minority stockholders at the appropriate stage of negotiations. The Chancery Court broke new ground by holding the majority-of-minority stockholder approval provision must be non-waivable prior to the time a controlling stockholder begins negotiations for additional consideration in a transaction separate from that to be received by other stockholders.
Based on the information contained in the Company’s proxy materials, the Chancery Court found the plaintiffs failed to plead sufficient facts to support inferences the Company did not successfully execute the MFW recipe and therefore dismissed the breach of fiduciary duty and aiding and abetting claims against her and Sequential without the need for conflict of interest analysis. Thanks to Martha, controllers now have a stock sale recipe they can call their own.