Delaware Court Rulings Upend Private Equity Take-Private Strategy

Sponsors are reevaluating their legal strategy in conflicted take-private transactions after last year’s developments in Delaware case law.

For deals in which the acquirer is also a controlling shareholder—thus standing on both sides of the transaction—Delaware’s most onerous standard of review, entire fairness, applies by default.

In the event of a shareholder challenge to the transaction, entire fairness requires defendants to prove fairness in both process and value. Given the high bar, defendants are unlikely to secure an early dismissal of claims in cases subject to entire fairness.

For that reason, a common strategy for such deals is to leverage a framework known as MFW (introduced in the 2014 case Kahn v. M&F Worldwide Corp.), which lets the acquirer avoid the ‘entire fairness’ standard by securing approval from both an independent special committee and a majority of minority stockholders (MoM).

MFW, though, comes with its own set of headaches: acquirers must declare their intent to adhere to MFW upfront and then spend the time and money required to secure minority shareholder approval, which can bring uncertainty at best and, at worst, effectively kill the deal.

Then, in 2024, MFW compliance became even more challenging.

In Match Group, the Delaware Supreme Court clarified that all members of a special committee (not just a majority) must be independent, and, in Inovalon, that disclosure of potential conflicts of interest by the target’s financial advisor was insufficient and invalidated the minority approval.

In response, some firms are now making the decision to abandon MFW altogether.

As an alternative, they’re choosing to pursue just one prong of the strategy—generally, the easier-to-achieve special committee approval.

Though the single-prong approach won’t let the defendant dodge the ‘entire process’ standard, it does shift the burden of proof to the plaintiff in the event of litigation.

In November, Paul, Weiss released data on the latest MFW usage trends.

The firm identified 19 sponsor-backed deals eligible for MFW between January 2023 and September 2024. During the first half of the period, around 63 percent (five of eight deals) implemented the full MFW framework, but only 27 percent did so in the second half (three of 11 deals).

Those that put in the extra effort for MFW may not have gotten much in return.

“While MFW compliance theoretically provides a path to [the less stringent standard of] business judgment review and early dismissal of stockholder suits, data suggests this benefit has proven largely illusory,” notes the analysis.

“Litigation rates show no meaningful difference between deals employing full MFW protections versus those using only a special committee – both approaches face legal challenges at similar rates.”

Out of the firm’s data set of sponsor MFW deals, eight transactions were challenged by stockholders. Of those, half had fully adhered to both prongs of MFW, and half had chosen only the special committee.

With no clear proof that MFW adherence actually deters shareholder challenges, the coming year may see more firms deciding to abandon the formerly consensus strategy.

“Deal parties may be uninclined to introduce the additional deal risk brought on by implementation of the MoM vote when the risk of costly, post-pleadings stage litigation remains relatively high, regardless of their implementation of the full MFW framework,” notes Paul, Weiss.