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Flood v. Synutra International, Inc.

Supreme Court of Delaware

October 9, 2018

ARTHUR FLOOD, Individually and on behalf of all others similarly situated, Plaintiff Below, Appellant,

          Submitted: September 12, 2018

          Court Below: Court of Chancery of the State of Delaware C.A. No. 2017-0032-JTL

         Upon appeal from the Court of Chancery. AFFIRMED.

          Ryan M. Ernst, Esquire, Daniel P. Murray, Esquire, O'Kelly Ernst & Joyce, LLC, Wilmington, Delaware; Donald J. Enright, Esquire (Argued), Elizabeth K. Tripodi, Esquire, Levi & Korsinsky, LLP, Washington, D.C., for Appellant, Arthur Flood.

          Matthew E. Fischer, Esquire, Matthew R. Dreyfuss, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware; Roger A. Cooper, Esquire, Rishi N. Zutshi, Esquire (Argued), Vanessa C. Richardson, Esquire, Hana Choi, Esquire, Cleary Gottlieb Steen & Hamilton LLP, New York, New York, for Appellees, Synutra International, Inc, Jinrong Chen, Lei Lin, and Yalin Wu.

          William M. Lafferty, Esquire, John P. DiTomo, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; Lawrence Portnoy, Esquire, Rebecca L. Martin, Esquire, Davis Polk & Wardwell LLP, New York, New York, for Appellees, Liang Zhang, Xiuqing Meng, and Beams Power Investment Ltd.

          Before STRINE, Chief Justice; VALIHURA, VAUGHN, SEITZ, and TRAYNOR, Justices, constituting the Court en Banc.


         In Kahn v. M&F Worldwide Corp. ("MFW"), [1] we held that business judgment review applied to a merger proposed by a controlling stockholder conditioned before the start of negotiations on "both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders."[2] In this appeal, the question is whether the Court of Chancery properly applied MFW by reading it as: i) allowing for the application of the business judgment rule if the controlling stockholder conditions its bid on both of the key procedural protections at the beginning stages of the process of considering a going private proposal and before any economic negotiations commence, and ii) requiring the Court of Chancery to apply traditional principles of due care and to hold that no litigable question of due care exists if the complaint fails to allege that an independent special committee acted with gross negligence. In our previous affirmance of the Court of Chancery in Swomley v. Schlecht, [3] we held that an interpretation of MFW based on these principles was correct.

         As to the first point, what is critical for the application of the business judgment rule is that the controller accept that no transaction goes forward without special committee and disinterested stockholder approval early in the process and before there has been any economic horse trading. Stressing that in the controller's first expression of interest it failed to condition its proposal on the satisfaction of those two key conditions, the plaintiff ignores that the controller quickly conditioned its offer on both of MFW's dual requirements - approval by an independent Special Committee and an affirmative vote by a majority of the minority stockholders - before the Special Committee had even hired counsel. MFW's required preconditions were therefore in place before any economic negotiation between the Special Committee and the controller occurred. Thus, before the Special Committee began substantive deliberations, it knew that any merger was conditioned on both its approval and the approval of a majority of the disinterested stockholders. So, consistent with our prior decision to identical effect in Swomley, [4] we therefore agree with the Court of Chancery that MFW applies "when the controller announces the conditions 'before any negotiations took place.'"[5]

         As to the second point, the central objective of the MFW standard is to provide an incentive for controllers to embrace the procedural approach most favorable to minority investors, with the incentive of obtaining the protection of the business judgment rule standard of review. To lard on to the due care review a substantive review of the economic fairness of the deal approved by a Special Committee, as the plaintiff advocates, is to import improperly into a due care analysis the type of scrutiny used in entire fairness review and in appraisal cases. Thus, in Swomley and in this case, the Court of Chancery properly held that the business judgment rule applied when the other conditions of MFW applied and the Special Committee employed qualified legal and financial advisors and indisputably engaged in a deliberative process that cannot rationally be characterized as grossly negligent.[6]

         Accordingly, we affirm.


         This case comes before us from a dismissal of the plaintiff's complaint by the Court of Chancery.[7] The relevant pled facts can be summarized briefly. Liang Zhang and entities related to him controlled 63.5% of Synutra International Inc.'s stock.[8] In January 2016, Zhang proposed to take Synutra private by acquiring the rest of the stock he did not control.[9] In an initial letter, Zhang proposed purchasing the remaining shares at $5.91, but he did not include a requirement that the sale be conditioned on the approval of a special committee and an affirmative vote of a majority of the minority stockholders.[10] To assist him in the proposed merger, Zhang retained Davis Polk & Wardwell LLP.[11] Although Davis Polk was traditionally Synutra's corporate counsel, Synutra's CFO agreed to waive Davis Polk's conflicts of interest before the Board met to discuss Zhang's proposed merger.[12]

         One week after Zhang issued his proposal, the Board met and formed a Special Committee.[13] Before the meeting, the Board "agreed that it would not substantively evaluate" Zhang's proposal.[14] Although Davis Polk now represented Zhang, it advised the Board at this meeting on its fiduciary duties.[15] The Board understood that Davis Polk represented Zhang, but nevertheless "requested the attendance . . . of representatives of Davis Polk who frequently advised [the Board] because those representatives were not involved in Davis Polk's representation of [Zhang]."[16] The plaintiff does not allege that any negotiations occurred at this meeting.[17] Rather, the only substantive action the plaintiff alleges was taken at the meeting was the decision to establish the Special Committee.[18] Indeed, the proxy, which plaintiff incorporated into his complaint by reference, says that the Board did not discuss the substance of Zhang's proposal at the meeting.[19] Specifically, the proxy states that, at the January 21, 2016 board meeting, the "board of directors agreed that it would not substantively evaluate the January 14 Proposal at this meeting and that Davis Polk's advice to [the] board of directors would be limited to reminding the directors of their fiduciary duties under Delaware law and advising [the] board of directors on establishing a special committee to evaluate and, if appropriate, negotiate the January 14 Proposal."[20] The plaintiff pleads no facts to the contrary.

         Two weeks after the initial offer, and only one week after the Special Committee was formed, Zhang sent a second letter to the Special Committee stipulating that he would not proceed with the transaction unless it was approved by the Special Committee and approved by the holders of a majority of the voting stock not controlled by Zhang.[21] No negotiations had commenced as of that time; the Special Committee had not met and the complaint is devoid of any facts suggesting that the Special Committee and Zhang had engaged in any economic negotiations.[22] In fact, the plaintiffs complaint makes clear that:

• the Special Committee did not engage its own investment bank or counsel until after this point;[23]
• the Special Committee declined to engage in price negotiations until its banker could do due diligence and obtain projections;[24] and
• the price negotiations did not begin until seven months after Zhang's second offer conditioning any merger on both Special Committee and majority-of-the-minority approval.[25]

         Thus, the plaintiff does not allege any negotiations or other meetings occurred before Zhang's second offer, which conditioned the take-private offer on MFWs dual requirements.

         To highlight this reality, it is useful to underscore the chronology of the facts the complaint outlines. After receiving Zhang's second offer - proposing the same price as the first offer - on January 30, 2016, the Special Committee hired Houlihan Lokey and Cleary Gottlieb as its independent financial and legal advisors.[26] Houlihan began discussions with management regarding the company's financial projections. On March 22, 2016, Houlihan met with the company's CFO to discuss what was needed for Houlihan to advise the Special Committee.[27] The next day, the Special Committee met, received an update from Houlihan, and discussed Davis Polk's preparations of an initial draft of the merger agreement.[28] Houlihan received the company's financial projections on April 22, 2016, met with the company's management on April 28, 2016 to discuss the projections, and provided the Special Committee with "preliminary financial discussion materials" on June 3, 2016.[29]

         The Special Committee met again on July 20, 2016 and decided to have Houlihan initiate a market check.[30] None of the 25 potential bidders Houlihan contacted were interested, which is not surprising given Zhang's 63.5% voting control and the lack of any promise that he was a willing seller.[31]

         In August 2016, management provided Houlhian with updated, lower projections.[32] Houlihan provided an updated financial analysis to the Special Committee on September 8, 2016.[33] At that meeting, after seven months of analysis and consultation with its advisors, the Special Committee authorized Houlihan to negotiate a higher price with Zhang.[34] The next day, Houlihan met with Zhang, and Zhang agreed to increase his offer to $6.05 per share.[35] The Special Committee met again on September 22, 2016 and ultimately agreed to accept the $6.05 price, a 2.4% bump from Zhang's original offer, a 58% premium to the trading price of Synutra's stock when the offer was first made public, a 31% and 20% premium to the 30- and 60-day volume-weighted trading averages, respectively, and a price that Houlihan viewed as fair.[36]

         The plaintiff argues that this price was not fair. But, the plaintiff fails to allege any lack of independence on the part of the Special Committee, [37] and admits that the Special Committee met 15 times over a nine-month period and was advised by independent financial, legal, and economic advisors.[38] At bottom, the plaintiff just takes issue with the economic outcome of the negotiation and questions how skillful the Special Committee and its advisors were.[39] The plaintiff does not allege that the majority-of-the-minority vote secured to approve the merger was coerced or not fully informed.[40]


         In this appeal, the plaintiff does not quibble with the MFW standard itself, but argues that the Court of Chancery misapplied it in two respects. Despite the fact that the controlling stockholder here conditioned his second offer on approval by the Special Committee and an affirmative majority-of-the-minority vote before any substantive economic negotiations occurred between himself and the Special Committee, the plaintiff argues that, because Zhang's initial offer letter did not contain the Special Committee approval and majority-of-the-minority vote conditions, the business judgment rule does not apply.[41] In the plaintiff's view, if a controller's first approach does not contain the required conditions, then it is stuck with entire fairness review, even if the controller still commits itself to MFW's requirements early on before any economic negotiations.[42]

         The plaintiff grounds its argument in the language of our opinion in MFW that says both procedural protections must be in place "ab initio"[43] (Latin for "from the beginning"[44]), and in language from the Court of Chancery's decision in MFW that uses the phrase "[f]rom inception."[45] The plaintiff argues for a quite specific and exacting reading of that language. Rather than meaning that the conditions be in place at the beginning of the Special Committee's process and before economic bargaining occurs, the plaintiff argues that it means that the controller must include the conditions in its "first offer" or else lose out on the business judgment rule.[46] The plaintiff argues for the brightest of lines.[47]

         The defendants read the requirement that the conditions be in place "ab initio" or "from inception" less rigidly. They argue that what MFW requires is that these conditions be in place at the early stages of negotiations, and that they be in place before any substantive economic negotiations take place, so that the proffer of the conditions cannot be substituted for price concessions.[48]

         Below, the Court of Chancery sided with the defendants' view, stating "[a] process meets the ab initio requirement when the controller announces the conditions 'before any negotiations took place.'"[49] As we did in our previous decision in Swomley, we read MFW as the Court of Chancery did here.

         Admittedly, our opinion and the Court of Chancery's opinion in MFW uses what can be read as ambiguous language to express the requirement that the key dual procedural protections must be in place before economic negotiations so the protections are not used as a bargaining tool in substitution for economic concessions by the controller. In describing this prerequisite to the invocation of the business judgment rule standard of review, we and the Court of Chancery have said the conditions must be in place "ab initio, "[50] before the "procession of the transaction, "[51] "from inception, "[52] "from the time of the controller's first overture, "[53] and "upfront."[54] From these uses, the plaintiff argues that MFW strictly hinges the application of the business judgment rule on the controller including the two key procedural protections in the first offer. A controller gets one chance, as the master of its offer, to take advantage of MFW, and if it fails to do so, that is it. But in an earlier case, the Court of Chancery and we did not embrace this rigid reading of MFW. In the case of Swomley v. Schlecht, the Court of Chancery held that MFW's "ab initio" requirement was satisfied even though "the controller's initial proposal hedged on whether the majority-of-the-minority condition would be waivable or not" because the controller conditioned the merger on both of MFW's dual requirements "before any negotiations took place."[55] We affirmed that well-reasoned conclusion, and adhere to that approach for reasons we now explain.

         For starters, the plaintiff's cramped reading contradicts the use of "beginning" in everyday speech, when that term is applied to a multi-stage process of human events with periods of time leading to an ultimate conclusion.[56] A goal scored in the fifth minute of a 90-minute game would be referred to as a goal at the beginning of the match. Enjoying the beginning of fall refers to those few weeks in late September and early October when the weather gets chilly and the leaves start to change color, not just the autumnal equinox. The beginning of a novel is not the first word, but the first few chapters that introduce the reader to the characters, setting, and plot. Indeed, three years after Britain entered World War II, [57] Winston Churchill famously declared that the War had reached "the end of the beginning."[58]

         Thus, as a matter of language, "from the beginning" can encompass more than the narrow sense in which the plaintiff reads those words. An ordinary person would conclude that Zhang had conditioned the merger on MFW's dual requirements in the beginning stages of the process that led to the merger. More important, even if the plaintiff's linguistic argument is one plausible reading of the literal words of MFW, that reading is at odds with the origins of why that decision requires that the controller condition its offer early in the process - i.e., before any substantive economic negotiations begin - on the two key procedural protections.

         The MFW standard emerged out of concerns created by Kahn v. Lynch Communication Systems, Inc., which held that approval of a controlling shareholder transaction by either "an independent committee of directors or an informed majority of minority shareholders shifts the burden of proof on the issue of [entire] fairness from the controlling or dominating shareholder to the challenging shareholder-plaintiff."[59] Lynch incentivized "the use of special negotiating committees in addressing mergers with controlling stockholders," but its practical effect "in the real world of transactions was to generate the use of special committees alone."[60]Controllers were reluctant to condition mergers on a majority-of-the-minority vote upfront because it "added an element of transactional risk without much liability-insulating compensation in exchange."[61] As a result, controllers were likely to, "at most, agree to such a [c]ondition at the insistence of a special committee and/or as a way to settle with the plaintiffs."[62] In essence, those subject to the economic consequences of the process - the minority stockholders - were left either without a say or with a say at the potential expense of additional consideration that might have been extracted by tougher economic bargaining.

         Enter MFW. To avoid one of Lynch's adverse consequences - using a majority-of-the-minority vote as a chit in economic negotiations with a Special Committee - MFW reviews transactions under the favorable business judgment rule if "these two protections are established up-front."[63] MFW's dual conditions create "a potent tool to extract good value for the minority" because from the start of negotiations "the controlling stockholder knows that it cannot bypass the special committee's ability to say no."[64] The key concern of MFW was ensuring that controllers could not use the conditions as bargaining chips during economic negotiations:

[T]he dual procedural protection merger structure optimally protects the minority stockholders in controller buyouts . . . . [W]hen these two protections are established up-front, a potent tool to extract good value for the minority is established. From inception, the controlling stockholder knows that it cannot bypass the special committee's ability to say no. And, the controlling stockholder knows it cannot dangle a majority-of-the-minority vote before the special committee late in the process as a deal-closer rather than having to make a price move.[65]

         This requirement - having MFW's dual requirements in place at the start of economic negotiations - helps replicate a third-party process and, simultaneously, incentivizes controllers to precommit to MFW's conditions early to take advantage of business judgment review.[66] The essential element of MFW, then, is that these requirements cannot be dangled in front of the Special Committee, when negotiations to obtain a better price from the controller have commenced, as a substitution for a bare-knuckled contest over price.[67]

         That is, the purpose of the words "ab initio," and other formulations like it in the MFW decisions, require the controller to self-disable before the start of substantive economic negotiations, and to have both the controller and Special Committee bargain under the pressures exerted on both of them by these protections. Thus, so long as the controller conditions its offer on the key protections at the germination stage of the Special Committee process, when it is selecting its advisors, establishing its method of proceeding, beginning its due diligence, and has not commenced substantive economic negotiations with the controller, the purpose of the pre-condition requirement of MFW is satisfied. In that situation, the Special Committee and the controller know, at all times during economic bargaining, that a transaction cannot proceed if the Special Committee says no, and the Special Committee knows that if they agree to a price, their judgment will be subject to stockholder scrutiny and approval.

         And any ambiguity left by MFW's various semantic phrases was clarified by Swomley where we affirmed the Court of Chancery in holding that MFW's "ab initio" requirement is satisfied if the controller disables "before any negotiations t[ake] place."[68] In Swomley, the controller's first proposal was not conditioned on both of MFW's dual requirements, yet we affirmed the Court of Chancery's holding that MFW applied, and the controller was thus entitled to business judgment rule review, because the controller conditioned the buyout on MFW's dual requirements "before any negotiations took place."[69] We adhere to our prior decision in Swomley, which affirmed the Court of Chancery's decision that to satisfy MFW's "ab initio," or from inception, prong, a controller is required to condition the buyout on both the approval of an independent, fully empowered Special Committee and the approval of a majority of minority stockholders at the beginning stages of the process of considering a going private proposal and before any negotiations commence between the Special Committee and the controller over the economic terms of the offer.

         Of course, adopting any rule, including this one, may give rise to close cases. But our Court of Chancery is expert in the adjudication of corporate law cases. And when a plaintiff has pled facts that support a reasonable inference that the two procedural protections were not put in place early and before substantive economic negotiation took place, the Court of Chancery can be trusted to apply appropriate pleading stage principles and refuse to dismiss the case

         But that situation does not exist here. The plaintiff has pled no facts supporting a reasonable inference that Zhang did not condition the merger on MFW's dual procedural protections before any economic negotiations took place. Although plaintiff is entitled to reasonable inferences from the facts pled, [70] we agree with the Court of Chancery that "[t]he plaintiff has not pled facts sufficient to call into question compliance with the ab initio requirement."[71]

         The Court of Chancery found that Zhang "sent the Follow-up Letter just over two weeks after [he] first proposed the Merger, before the Special Committee ever convened and before any negotiations ever took place. The prompt sending of the Follow-up Letter prevented [Zhang] from using the [MFW] conditions as bargaining chips."[72] And the plaintiff pled no facts suggesting that the Special Committee or any member of the committee communicated with Zhang about the substance of the transaction before he sent the second letter.[73] Indeed, Zhang disabled before the Special Committee had hired its advisors. And the Special Committee spent months working with its advisors before asking Zhang for additional consideration. All of the Special Committee's work was done after Zhang had agreed to condition his buyout on MFW's dual requirement. Zhang thus conditioned the buyout at the beginning of the process and is therefore entitled review under the business judgment rule standard.

         In its briefs before us and below, the plaintiff spent most of his time on its bright line, one shot argument.[74] That was logical because the early second offer was followed by several months of due diligence that occurred before any bargaining took place between the Special Committee and Zhang over the economic terms of the proposed transaction. But in a cursory part of his brief in opposition to the motion to dismiss and his brief in this Court, the plaintiff did argue that the decision of Synutra's CFO to grant Davis Polk a waiver constituted negotiations that, under Swomley, should prevent Zhang's second offer from satisfying the "from inception" requirement of MFW.[75] The plaintiff did so despite other pled facts demonstrating that the Special Committee was not even in existence at the time of the waiver much less involved in granting it.[76] As we have noted, after Zhang sent his initial offer, Synutra's CFO granted the company's law firm, Davis Polk, a waiver that allowed it to represent Zhang. And although the proxy does state that "[t]he waiver of Davis Polk's conflicts was negotiated and agreed by [Synutra's CFO] on behalf of the Company before the Company's board meeting," in context - and from the facts pled - it is clear that the negotiation occurred around the terms of the waiver and not substantive terms of the proposed transaction.[77]

         Consistent with its close and diligent consideration of the record, the Court of Chancery examined the waiver issue and whether it disqualified Zhang's second letter from satisfying MFW's requirement that the two key procedural protections be in place at the beginning of the deal process and before economic negotiations commenced. In coming to the conclusion that the waiver did not preclude invocation of the business judgment rule, the Court of Chancery reasoned:

The only arguably substantive event that happened before the Follow-up Letter was that the Company authorized Davis Polk to represent the Buyer Group by waiving any conflict that Davis Polk might have. Davis Polk was the Company's long-time counsel. It would have been preferable, both optically and substantively, for the Buyer Group to retain its own counsel. That scenario would have given the Special Committee the choice of hiring its own independent counsel or using Davis Polk, if it preferred to take advantage of Davis Polk's knowledge and expertise after considering the firm's potential ties to the Buyer Group. The Special Committee retained Cleary Gottlieb Steen & Hamilton LLP ("Cleary Gottlieb"), a firm fully capable of going head-to-head with Davis Polk. The complaint does not plead facts that would support a reasonable inference that the conflict waiver undercut the Special Committee's effectiveness.[78]

         We find no basis to quibble with the Court of Chancery's analysis on this point. The Special Committee did not engage in any substantive negotiation of Zhang's offer until well after it had engaged in a lengthy due diligence process led by its independent financial and legal advisors.[79] And the complaint pled no facts suggesting - or from which we can rationally infer - that the waiver was exchanged for the two procedural protections or anything else.

         At oral argument, the plaintiff seized on this issue in a way that it did not emphasize below or in its briefs to us. As the defendants argue to us, it is likely that had the waiver not been granted, this would not have meant that Davis Polk could have represented the Special Committee. Had it done so, the plaintiffs would likely have argued that its role as counsel for the company controlled by Zhang rendered it incapable of bargaining adversely to him on behalf of the Special Committee.

         At best, therefore, Davis Polk would have been put in a neutral position, representing neither Zhang nor the Special Committee. This would have been perhaps the ideal, optimal situation to create a level playing field. But, on the pled facts, we agree with the Court of Chancery that the waiver did not obviate the application of the business judgment rule because no pled facts suggest any connection between the Davis Polk waiver and substantive consideration and negotiation of the economics of Zhang's offer.[80] Thus, as to the only question posed to us, which is whether Zhang conditioned his offer sufficiently early to satisfy the "from inception" requirement of MFW, the Court of Chancery correctly answered yes.


         The plaintiff's other contention is that the Court of Chancery erred in finding that no due care violation was pled. The plaintiff reads dicta in footnote 14 of our MFW decision - dicta that conflict with the actual due care holding in MFW - as indicating that somehow a plaintiff may avoid the business judgment rule by raising questions about whether the Special Committee, despite concededly being independent, being advised by independent advisors, and conducting a lengthy procedural process, was adroit in bargaining. The plaintiff argues that this dicta allows him to plead a duty of care violation based on an insufficient price.[81]

         But the entire point of the MFW standard is to recognize the utility to stockholders of replicating the two key protections that exist in a third-party merger: an independent negotiating agent whose work is subject to stockholder approval.[82]If that standard injects the reviewing court into an examination of whether the Special Committee's good faith efforts were not up to the court's own sense of business effectiveness, the standard is without the very utility it was designed to accomplish, motions to dismiss will not be able to be granted, and controllers will therefore have no incentive to use the approach most favorable to minority stockholders.[83]

         For that reason, the key paragraph of MFW itself addressing whether there was any disagreement of fact about whether the Special Committee had acted with gross negligence reads as follows:

The Special Committee Exercised Due Care. The Special Committee insisted from the outset that MacAndrews (including any "dual" employees who worked for both MFW and MacAndrews) be screened off from the Special Committee's process, to ensure that the process replicated arm's-length negotiations with a third party. In order to carefully evaluate M & F's offer, the Special Committee held a total of eight meetings during the summer of 2011 . . . . In scrutinizing the Special Committee's execution of its broad mandate, the Court of Chancery determined there was no "evidence indicating that the independent members of the special committee did not meet their duty of care . . . ." To the contrary, the Court of Chancery found, the Special Committee "met frequently and was presented with a rich body of financial information relevant to whether and at what price a going private transaction was advisable." The Court of Chancery ruled that "the plaintiffs d[id] not make any attempt to show that the MFW Special Committee failed to meet its duty of care . . . ." Based on the undisputed record, the Court of Chancery held that, "there is no triable issue of fact regarding whether the [S]pecial [C]ommittee fulfilled its duty of care."[84]

         As can be seen, that paragraph, which is a holding, focuses as it should on due care and not whether someone might question whether the Special Committee's sufficiently diligent efforts resulted in a negotiated price that was fair. The price question is not one for a court applying the business judgment rule standard, and was for MFW's stockholders to vote on themselves.

         Any ambiguity arguably created by the confusing dicta in MFW - suggesting that challenging price was sufficient to state a duty of care violation - was clarified by Swomley. In Swomley, the Court of Chancery held that, in the context of a controlling stockholder transaction that was preconditioned on MFW's dual requirements, a plaintiff could not get past a motion to dismiss merely by suggesting that the Special Committee "could have negotiated [ ] differently" because that is "a matter of strategy and tactics that's debatable and isn't a duty of care violation."[85]And the Court of Chancery in Swomley held that the "[d]uty of care is measured by a gross negligence standard," and "disagree[ing] with the [special] committee's strategy" is not a duty of care violation.[86]

         This Court affirmed that holding, eliminating any ambiguity created by MFW and confirming that a plaintiff can plead a duty of care violation only by showing that the Special Committee acted with gross negligence, not by questioning the sufficiency of the price.

         Here, the Court of Chancery appropriately read MFW as requiring it to determine, under the high standard of gross negligence, whether the plaintiff had stated a due care claim. Given the Special Committee's extensive deliberations, receipt of extensive advice and information from its financial and legal advisors, and negotiations with Zhang, the Court of Chancery correctly found "[t]he complaint's allegations, considered individually and in the aggregate, do not support an inference of gross negligence."[87]


         The Court of Chancery faithfully applied our precedents in holding that the business judgment rule applied and dismissing the plaintiff's complaint. Its decision is hereby affirmed.

          VALIHURA, Justice, dissenting.

         I. Overview

         I differ with the views of my learned colleagues on the important question of what the test should be for invoking business judgment protection in controller buyout transactions. The Majority's adoption of the "when the negotiations begin" test invites factual inquiries that defeat the purpose of what should be more of a bright line and narrower pathway for pleading-stage dismissals in this context. Instead, I believe this Court did conclude in M&F Worldwide, and should reaffirm now, that in controller squeeze-out transactions where the controller is on both sides, the ab initio requirement is satisfied when the Dual Protections are contained in the controller's initial formal written proposal. This bright-line makes sense because the controller dictates when to commence the transactional process so that the outset is clear. Here, the outset was the January 14 Proposal.

         Ordinarily, transactions involving conflicts of interest are subjected to our most rigorous form of judicial review: entire fairness. Under such circumstances, Defendants bear the burden of proving two elements: fair dealing and fair price. This is a heavy lift. However, this Court has recognized that conflicted transactions may merit a more deferential type of judicial examination when certain procedural protections are in place: when such conditions are satisfied, the sale process may be said to replicate arm's-length dealing and, thus, the business judgment rule is appropriate.

         The Court of Chancery outlined these preconditions for business judgment review of conflicted transactions in In re MFW Shareholders Litigation, [1] and this Court adopted its framework-albeit, with some refinements-in Kahn v. M&F Worldwide.[2] Adopting six prerequisites set forth by the trial court, this Court held that in controller buyout transactions:

[T]he business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction[s] on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.[3]

         We explained further that "business judgment is the standard of review that should govern mergers between a controlling stockholder and its corporate subsidiary, where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders."[4]

         Thus, for the so-called MFW standard to apply: (1) the transaction must be conditioned ab initio on (2) approval by both (a) "an independent, adequately-empowered Special Committee that fulfills its duty of care," and (b) "the uncoerced, informed vote of a majority of the minority stockholders."[5] For simplicity, I refer to the six-factor test quoted above as the MFW Framework, and the two conditions- (a) special committee approval, and (b) stockholder vote approval-as the Dual Procedural Protections.

         In reviewing the role of a Special Committee, we observed that "the special committee must 'function in a manner which indicates that the controlling stockholder did not dictate the terms of the transaction and that the committee exercised real bargaining power "at an arms-length."'"[6] This requirement, which implicates the second, third, and fourth MFW factors, is a qualitative inquiry as to how the committee actually functioned-not simply a finding that the process checked certain boxes in the MFW formula.[7]

         As such, M&F Worldwide was careful to warn that defendants would have difficulties in invoking such protections through a motion to dismiss.[8] We observed that, "[i]f a plaintiff that can plead a reasonably conceivable set of facts showing that any or all of those enumerated conditions did not exist, that complaint would state a claim for relief that would entitle the plaintiff to proceed and conduct discovery."[9]

         In my view, the plaintiff Arthur Flood ("Plaintiff") has pled facts making it reasonably conceivable that at least one of the MFW preconditions was not satisfied. Plaintiff has sufficiently pled that the controller did not establish the Dual Procedural Protections as preconditions to a deal up front, ab initio. As to other preconditions, I agree with the Majority that the Plaintiff presented some refined arguments on appeal that were, at best, only weakly alluded to below. For example, Plaintiff did not expressly allege in the Amended Complaint that the Davis Polk conflict and conflict waiver gave rise to a challenge to the Special Committee's empowerment to freely select its own advisors, although he did raise the Davis Polk conflict in the complaint and opening brief below.[10] At oral argument before the trial court, the Davis Polk conflict waiver was raised by Plaintiff-but more in the context of arguing that "negotiations" had commenced and, therefore, the ab initio requirement had not been satisfied.

         It was only in response to a question from the trial court at oral argument on the motion to dismiss that Plaintiff eventually argued that there was an issue with the Special Committee's empowerment to freely select its advisors.[11] Thereafter, on appeal, Plaintiff's counsel argued before this Court that the empowerment issue was "intertwined" with the ab initio argument, but he conceded that he had not framed the issue as an "empowerment" issue before the trial court.[12] Though I agree that the "empowerment" issue was not fairly presented below, those intervening events are intertwined with the ab initio requirement and illustrate how the "negotiations" test can devolve into the type of fact-intensive inquiry we were trying to avoid. Accordingly, I believe the motion to dismiss should have been denied based upon Defendants' failure to satisfy the ab initio test. For the reasons set forth below, I respectfully dissent.

         II. Facts

         I focus my examination of the facts on the three weeks relevant to Plaintiff's most salient allegations on appeal, from mid-January 2016 to early February 2016.

         On January 14, 2016, Mr. Zhang and Beams Power sent a letter to the Company's directors that included a non-binding proposal to acquire all issued and outstanding shares of Synutra's common stock not already beneficially owned by them for $5.91 per share in cash (the "January 14 Proposal").[13] The letter indicated, among other things, that they arrived at the $5.91-per-share price because they believed it represented a "fair and attractive opportunity for the minority stockholders to exit their investment in the Company."[14] The letter mentioned that the prospective buyers still needed to conduct the customary due diligence and that they had engaged Davis Polk & Wardwell LLP ("Davis Polk") as their U.S. legal counsel. According to the letter, Davis Polk was prepared to negotiate and finalize the definitive transaction documents "promptly."

         But Davis Polk was also counsel to the Company. Thus, "[t]o avoid any conflict of interest arising from the role of Davis Polk, "[15] the Company's CFO, Ms. Ning Cai, began the process of engaging separate U.S. legal counsel for work related to the January 14 Proposal. On January 15, 2016, Ms. Cai reached out to Wilson, Sonsini, Goodrich & Rosati P.C. ("Wilson Sonsini") about the possibility of retaining that firm.

         Meanwhile, Ms. Cai had been conducting diligence on Mr. Yalin Wu as a potential candidate for independent director of the Company. Mr. Zhang had referred him to her in early December 2015 after a "personal friend" of Mr. Zhang's had recommended Mr. Wu as a potential candidate for an open seat. On January 19, 2016, Ms. Cai nominated Mr. Wu as director.

         Ahead of the Company's special telephonic board meeting scheduled for January 21, 2016, Ms. Cai also negotiated and signed a conflicts waiver with Davis Polk and asked Davis Polk representatives to attend that meeting. According to the Proxy, the Board requested the participation of Davis Polk despite the firm's role as counsel to the Buyer Group because Davis Polk had "frequently advised" the Board, and the Company had not yet engaged separate U.S. legal counsel.[16] The Davis Polk attorneys advising the Buyer Group were not the same Davis Polk attorneys advising the Board.

         At the special telephonic meeting held on January 21, 2016, the Board unanimously voted to appoint Mr. Wu as an independent director, and he then joined the meeting. According to the Proxy:

Representatives of Davis Polk advised the directors as to their fiduciary duties under Delaware law in considering and evaluating the January 14 Proposal and further stated that it would be advisable for our board of directors to consider forming a special committee solely consisting of independent and disinterested directors to ensure that unaffiliated stockholders would be adequately protected during the board's evaluation of the January 14 Proposal and any other alternative offers involving the Company.[17]

         The Board followed Davis Polk's advice as disclosed in the Proxy. Other than Mr. Zhang, who abstained, the Board unanimously resolved to form a special committee (the "Committee") of three independent directors "to consider and attend to all matters in connection with the January 14 Proposal and any other alternative proposals, and to ensure that the unaffiliated stockholders would be adequately protected during the Company's consideration and evaluation of the proposed transaction."[18] Ms. Jinrong Chen served as chair, and Mr. Lei Lin and Mr. Wu rounded out the Committee.

         According to the Proxy, the Board authorized the Committee to retain its own legal counsel, financial advisor, or other agents related to the transaction contemplated under the January 14 Proposal. The Board further resolved that the Committee could pass resolutions by majority vote, and that it would direct the Company's officers, advisors, and employees to provide any information and assistance to the Committee or its advisors.

         Following the meeting, Davis Polk ceased representing the Company in connection with the January 14 Proposal or any such transaction. However, the firm continued to represent ...

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