Delaware Chancery MFW Framework Does Not Require Best Deal

As Kahn v. M&F Worldwide Corp. (MFW) establishes, the Business Judgment Rule must be applied to a transaction involving a controlling shareholder, if the deal is conditioned upon the approval of: (1) an independent special committee, which satisfied its duty of care; and (2) the uncoerced, informed vote of a majority of the minority shareholders. However, SMART Local Unions & Councils Pension Fund v. BridgeBio Pharma, Inc., et al., No. 2021-1030-PAF, opinion (Del. Ch. Dec. 29, 2022) provides that the inadequacy of a deal price in the face of a superior third-party bid is improper basis to challenge a transaction that was approved under the MFW framework. There, the Delaware Chancery Court dismissed claims brought by a minority stockholder of Eidos Therapeutics Inc., who alleged that Eidos’ controlling stockholder, BridgeBio Pharma, as well as director defendants, breached their fiduciary duties in connection with BridgeBio’s acquisition of Eidos’ minority shares. According to the pension fund plaintiff, BridgeBio’s wrongdoing included prioritizing its offer to acquire Eidos’ minority shares over a third party’s offer at a higher premium. Ultimately, Vice Chancellor Fioravanti held that the plaintiff was not entitled to Entire Fairness review of a merger that followed the MFW framework simply because another, better deal surfaced that was rejected by the controller and not considered by the board.

Relevant Facts

In October 2020, BridgeBio announced its agreement to acquire Eidos’ minority shares (36.6% of Eidos’ common stock) for either $73.26 per share in cash or 1.85 shares of BridgeBio’s common stock (the “Merger”). The deal was approved by Eidos’ board, based on the unanimous recommendation of the board’s special committee of independent directors (the “Special Committee”). In November 2020, a third party, international pharmaceutical company (IPC) expressed interest in acquiring all of Eidos’ stock at a significant premium to BridgeBio’s Merger price. The Special Committee concluded that the proposal would be more favorable than BridgeBio’s Merger offer, but BridgeBio, who owned 63.4% of Eidos, refused to sell.

In December 2020, IPC made its second offer — an upfront payment of $2 billion and equal profit-sharing to co-develop Eidos’ drug candidate. The Special Committee asked BridgeBio whether it would accept either of IPC’s offers or increase the consideration offered in the Merger. BridgeBio rejected all options other than consummating the Merger. Afterwards, BridgeBio filed an amendment to the proxy statement disclosing IPC’s proposal and characterizing IPC as an unsuitable merger partner. BridgeBio then informed IPC that it was not interested in pursuing any of its proposals. The Merger closed in January 2021.

Once the Merger closed, the plaintiff sued, alleging that BridgeBio breached fiduciary duties to Eidos’ minority stockholders by facilitating the Merger at an unfair price.

A Superior Third-Party Bid Is Inadequate Basis Not to Apply the Business Judgment Rule to a Transaction That Was Approved Under the MFW Framework

Controlling stockholders involved in the acquisition of minority shares that they do not already own must demonstrate that the transaction at issue was the product of fair dealing and resulted in a fair price. If, however, the transaction follows the MFW framework, the more lenient Business Judgment standard will apply. BridgeBio argued that the plaintiff’s claims must be dismissed because the Merger was approved under the MFW framework, and the complaint failed to demonstrate that BridgeBio engaged in grossly negligent conduct. The plaintiff, on the other hand, insisted that the Merger did not comply with four of the six elements under the MFW framework that are necessary for application of the Business Judgment Rule: the Special Committee (1) was not empowered to reject the deal; (2) failed to meet its duty of care; (3) did not adequately inform its minority stockholders; and (4) effectively coerced the vote.

At the core of the plaintiff’s opposition to the motion to dismiss was its belief that the MFW framework cannot be satisfied where a third-party bidder has presented an objectively better offer. The Court of Chancery disagreed, finding that a controlling stockholder is neither required to accept a sale to a third party nor give up its control, and the controlling stockholder’s express refusal to do either does not preclude MFW’s applicability. Moreover, the Merger was properly approved under all elements of the MFW framework and should not be subject to Entire Fairness review.

The plaintiff argued that the Special Committee was not empowered and failed to satisfy the duty of care because it negotiated the transactions with BridgeBio instead of engaging with IPC or exercising other leverage. In rejecting the plaintiff’s arguments, the vice chancellor reasoned that the plaintiff actually challenged the quality of the Special Committee’s recommendation rather than whether it was sufficiently empowered. Moreover, the plaintiff did not establish that the Special Committee breached its duty of care because neither the adequacy of Merger price nor the Special Committee’s alleged failure to pursue a third-party proposal were proper bases for breach.

The Court of Chancery also declined to hold that the minority vote was uninformed simply because Eidos’ board chose not to disclose the details of IPC’s first proposal, which had been considered by the board and rejected prior to Eidos’ stockholders receiving notice of the Merger. The court reasoned that IPC’s proposal was not material because it already had been rejected and was a competing offer to the Merger. Although the Special Committee concluded that the IPC offer was better than the terms of the Merger, the court refused to find that Eidos’ minority stockholders were uninformed simply because the relevant proxies did not disclose IPC’s name. According to the court, it was enough that the minority stockholders knew that the IPC was a bona fide purchaser that could close the transaction, and that IPC’s proposal was better than BridgeBio’s offer. The court further determined that the minority stockholders were not rendered uninformed by the fact that BridgeBio characterized IPC as an unsuitable collaborator for Eidos’ proposed drug development. Regardless of the plaintiff’s belief, or what might be considered the objective truth, nothing in the complaint established that BridgeBio’s opinions about IPC were not honestly or sincerely held.

The Court of Chancery similarly found that the minority stockholders were not subjected to situational coercion — exposure to a status quo or eventuality so unpleasant that it forces minority stockholders to vote in favor of a transaction. Unlike the textbook example of situational coercion, in this case Eidos was not a distressed target and had other viable alternatives to BridgeBio’s proposed merger.

Takeaways

The holding demonstrates that adhering to the MFW framework for deals involving controlling stockholders will avail a company’s board of the protections of the Business Judgment Rule, even when the transaction approved is inferior to others that had been considered and rejected.

Another worthwhile lesson from this case is that companies should make sure that they adequately memorialize their special committees' efforts. In BridgeBio, the Court of Chancery concluded that the Special Committee did not breach its duty of care, in part because the corporate records the plaintiff obtained before filing suit demonstrated that the Special Committee (1) responded to IPC’s proposals; (2) pushed the controller to consider selling its shares; and (3) caused discussions of all proposals at a board meeting.