Chancery Court Awards MFW Deference to Earthstone Energy Board of Directors in Shareholder Action

The Delaware Court of Chancery dismissed a complaint alleging breach of fiduciary duties against the Earthstone Energy board of directors in Olenik v. Lodzinski(July 20, 2018). The breach claim arose from Earthstone’s acquisition of Bold Energy III LLC. The court held that the acquisition was structured so as to invoke the business judgment rule under Kahn v. M & F Worldwide Corporation (MFW) (March 14, 2014). MFW in part requires the controller to condition the transaction ab initio—from the outset of negotiations—on the approval of both a special committee and a majority of the minority stockholders. The court found that the defendants included such conditions in an offer letter before engaging in negotiations related to the transaction, even though they had engaged in extensive preliminary discussions. The court held that, under the ab initio requirement, the negotiations did not begin until the buyer submitted a definitive proposal and found that Earthstone’s board was therefore entitled to protection under the business judgment rule.