In the 2013 Delaware Chancery case In re MFW Shareholders Litigation, then-Chancellor Strine faced the issue of whether a controller buyout that was both negotiated by a special committee and approved by a majority of the minority stockholders would avoid the onerous burdens of proving entire fairness ordinarily associated with such transactions. Before MFW, Kahn v. Lynch had held that approval by either a special committee or a majority of the minority would shift the burden to prove entire fairness—ordinarily on the controller—onto the challenging stockholder. However, no case before MFW had addressed what resulted if a controller implemented both protections.
Chancellor Strine answered that question by holding that a controller who implemented both protections at the beginning of negotiations would receive the protection of the business judgment rule. Combined with the widespread use of § 102(b)(7) exculpatory clauses, the business judgment rule places a heavy burden on a plaintiff to plead that a board made its decision in bad faith or acted disloyally, making it significantly more likely that the transaction is protected from substantive judicial review. The Delaware Supreme Court affirmed, using the term “ab initio” for the requirement that the protections be implemented before the beginning of negotiations. Since then, the MFW framework has been expanded from freeze-out mergers to all controller transactions. However, figures no less than Strine himself and former Delaware Supreme Court Justice Jack Jacobs have recently questioned the expansion of MFW.