Chancery Court Extends MFW in Dismissing Fiduciary Duty Claim for Dual-Class Company Share Reclassification Deemed a Controller Transaction

On December 11, 2017, in IRA Trust FBO Bobbie Ahmed v. Crane, the Delaware Court of Chancery dismissed a challenge to a share reclassification it deemed a conflicted transaction, applying the business judgment rule due to adequate protections put in place under the Kahn v. M&F Worldwide (MFW) framework. NRG Yield, Inc. (Yieldco) had been controlled by NRG Energy (Energy) since its formation, but acquisitions increasingly diluted Energy’s voting power, putting its control at risk. Energy proposed that Yieldco recapitalize by issuing new classes of stock pro rata with minimal voting rights to potentially use in future acquisitions. The Court found that because Energy received a unique benefit – the perpetuation of its control – the reclassification was a conflicted controller transaction. However, the Court did not apply the entire fairness standard of review and instead applied the business judgment rule by extending the *MFW *framework from the context of squeeze-out mergers to the controller transaction at issue. The Court found that the transaction met both elements of the *MFW *framework: it was subjected to approval by a special independent committee that fulfilled its duty of care and a “majority of the minority” stockholder vote. The Delaware Supreme Court has not yet ruled on whether the *MFW *framework can be applied outside of squeeze-out mergers.