Chronicle of Failure Foretold: Controlling Shareholder Enforcement and the Insignificance of NRG Yield

Abstract

The regulation of controlling shareholder related-party transactions is one of corporate law’s animating concerns. In the seminal MFW case, the Delaware Supreme Court adopted a solution that incentivizes the corporation to seek prior approval from both an independent director committee and a majority of minority shareholders. The “MFW framework” regards the endorsement of two independent corporate organs as an adequate defense against the dangers of self-dealing. While this holding was rendered in the context of a freezeout transaction, a recent Chancery Court decision extends the apparent protections of the MFW framework to apply to non-freezeouts as well. This Article explains why the Chancery Court’s innovation will not achieve the desired result. Subjecting a transaction to the MFW framework is a voluntary decision. Transaction planners will willingly traverse this path if the benefits outweigh the loss in deal certainty and attendant costs. When almost every freezeout is challenged in court, the voluntary application of the MFW framework is the logical outcome. The calculus in the non-freezeout context leads to a different result. Non-freezeouts must be challenged by a derivative lawsuit. The procedural hurdles inherent in the derivative mechanism affect both the demand for the MFW framework and the incentive to comply. Without a tangible threat of a lawsuit to coax voluntary compliance in the non-freezeout setting, transaction planners have nothing to gain by subjecting the deal to the double approval gauntlet. This Article’s analysis reveals an enforcement gap at a large swath of self-dealing transactions. Recent high-profile litigation (Oracle’s acquisition of NetSuite, Tesla’s acquisition of SolarCity, CBS’ continued compensation to an apparently incapacitated controller) exposes questionable adherence to the MFW framework for obviously conflicted non-freezeout transactions. The paucity of derivative lawsuits foretells a troubling fate for similar transactions at less enticing litigation targets. Worse yet, the superficial step towards improved minority shareholder protection stifles the discussion on additional reform. Note - this Article is accepted for publication in the American Business Law Journal.