Delaware’s regime governing controlling shareholders relies on the courts’ ability to police conflicted transactions under the stringent “entire fairness” standard of review. In theory, judicial review under this standard allows judges to distinguish between fair transactions and those that are the product of value-reducing self-dealing. However, this framework depends on courts’ competence in determining transaction fairness, a task that often requires complex financial valuation. This valuation becomes especially unwieldy when courts are asked to review transactions whose value to the company depends on an entrepreneur’s idiosyncratic vision—an inherently subjective and forward-looking concept that defies conventional financial modeling.

Recognizing the limits of judicial valuation, Delaware courts provided a means for transactional planners to contract around entire fairness review in Khan v. M&F Worldwide Corp. (“MFW”). Under MFW, judges apply the deferential business judgment rule if controlling shareholders voluntarily condition a self-dealing transaction on the approval of both a special committee of independent directors and a majority of properly informed minority shareholders. In theory, these two “cleansing mechanisms” eliminate the need for courts to determine a fair price, reducing reliance on judicial valuation.

Yet, in practice, MFW’s procedural protections frequently fail to function as intended. Courts have increasingly invalidated these mechanisms due to a lack of disclosure about the independence and process of special committees. For example, in Tornetta v. Musk, the Delaware Court of Chancery disregarded the shareholder vote approving Musk’s compensation because the proxy statement failed to disclose conflicts within the special committee. This outcome, we believe, deviates from the regime Delaware envisioned when it embraced the cleansing mechanisms and has led to a paradox where both cleansing mechanisms can be undermined by the same procedural flaws, thrusting courts back into the role of primary arbiters of fairness—precisely the scenario MFW aimed to avoid.

In a recent article, we examine the limitations of the current MFW framework and propose reforms to better align it with the realities of controller transactions.

First, we argue that disclosure deficiencies regarding the special committee process should not invalidate an otherwise informed shareholder vote. In controller transactions, the inherent conflict faced by members of the special committee is already obvious. After all, the power of controlling shareholders over independent directors underlies the courts’ reluctance to treat independent directors’ approval as conferring full cleansing of controller transactions. Therefore, shareholders’ understanding of the financial terms of the transaction should be the key question. This is particularly true when the fairness of the transaction that is submitted to a shareholder vote is closely related to the value of the controller’s vision. Although shareholders may err in their valuation, the voting process aggregates their subjective valuations of the transaction and its price and thus serves as a referendum on the value of the controller’s vision. Accordingly, if shareholders are given full information about the financial terms of the transaction, their approval should be respected by the court, and the quality of the special committee process should be addressed separately by MFW’s other cleansing mechanism (and potentially the court’s substantive review of the transaction as well).

One concern with this proposal is that it might discourage companies from disclosing details about the bargaining process and the special committee’s independence. Our second proposal addresses this concern by calling on courts to adopt a Corwin-style rule that would encourage companies to provide full disclosure about the special committee process, including its flaws. If the company fully and accurately describes the special committee process and secures a disinterested vote approving the transaction, this vote should immunize the transaction from post-closing challenges related to the special committee. This approach creates a powerful incentive for companies to provide full transparency regarding the special committee process.

The third and final proposal concerns entire fairness review when only one of the MFW conditions is satisfied. The existing MFW regime treats the two cleansing mechanisms—special committee negotiation and the majority of the minority shareholder vote—as functionally equivalent, meaning each mechanism alone can shift the burden of persuasion to the plaintiff. We argue, however, that courts should weigh these mechanisms differently.

If a majority of disinterested shareholders vote in favor of the transaction, without coercion and with full disclosure of its economic terms, this approval strongly indicates that disinterested parties have accepted the controller’s vision and its price. Therefore, little weight should be given to plaintiffs’ evidence of market practices, competitive benchmarks, or other parameters comparing the price paid by the company with an average market value. Conversely, if a special committee negotiates a transaction that is not approved by disinterested shareholders, courts should be more skeptical. Delaware case law generally casts doubt on a special committee’s ability to negotiate effectively against a controller due to the controller’s influence over the board. Without a vote of the disinterested shareholders, courts should give greater consideration to plaintiffs’ evidence of market benchmarks and process deficiencies, as they do under current entire fairness review.

Taken together, these reforms would refine the MFW framework to better serve its intended purpose. Our framework respects the core goal of protecting minority investors from overreaching by controlling owners by preserving a means for shareholders to secure stringent review of a transaction’s fairness where such review is most needed. Moreover, it addresses the limits of judicial competence in valuation and the comparative advantage of the shareholder voting process, which aggregates each shareholder’s subjective judgment of vision and price. Accordingly, our framework would restore MFW cleansing to its proper role, safeguarding minority shareholders while enabling visionary entrepreneurs to pursue value-creating activities without undue judicial second-guessing.

This post comes to us from professors Zohar Goshen at Columbia Law School, Assaf Hamdani at Tel Aviv University’s Buchman Faculty of Law, and Dorothy S. Lund at Columbia Law School. It is based on their recent article, “Fixing MFW: Fairness and Vision in Controller Self-Dealing,” available here.