Judicial Deference, Procedural Protections, and Deal Outcomes in Freezeout Transactions: Evidence from the Effect of MFW

For several years, merger freezeouts were invariably subject to entire fairness review, a demanding standard of judicial review that enables courts to revise the price of a transaction when the price is challenged by the shareholders of the selling company. But this changed in 2013. In an attempt to incentivize the simultaneous use of independent director approval and majority-of-the-minority conditions, the Delaware Chancery Court held in In re MFW Shareholders Litigation (2013) that when a merger freezeout is subject to those procedural protections, the transaction would subsequently be reviewed under the deferential business judgment rule rather than under entire fairness. This paper examines the impact of MFW on transactional practice and deal outcomes. The results show that majority-of-the-minority conditions increased significantly after the opinion, from an incidence rate below 40% to a rate of more than 80%. Special committees were already the norm before 2013 and their incidence did not change after MFW. The increase in majority-of-the-minority conditions, however, was not followed by significant changes in deal premiums, target returns, changes from the controller’s first offer to the final offer, or deal completion rates. The results therefore suggest that deferential judicial review is an effective way to incentivize procedural protections in freezeout transactions and that the increase in shareholder approval conditions did not come at the cost of higher frustration rates. In addition, the results suggest that procedural protections and entire fairness review seem to have a similar effect on the gains of the target shareholders. Taken together, these results present an assessment of MFW in particular and also shed light on the role of shareholder voting in freezeout transactions more generally.