United States: Forging Ahead With "Entire Fairness," Or Playing It Safer (Procedurally Speaking)

Controlling stockholder buyouts of Delaware corporations are generally scrutinized under the lens of "entire fairness" to determine whether the transaction was the product of fair dealing and fair price. Notably, however, under M&F Worldwide,1 the Delaware Supreme Court confirmed that a target corporation's use at the outset of a transaction of a special committee of disinterested directors and an informed vote of a majority of the minority of the target's stockholders, among other factors, will result in a transaction that would be reviewed under the deferential business judgment rule instead of the stringent entire fairness test. The burden of proving entire fairness and the perception of a significant risk of a negative outcome under an entire fairness review frequently results in deal participants allowing the fate of the transaction to be determined not only by a special committee, but, even more critically, by the majority of the minority stockholder vote. However, the recent Delaware Chancery Court decision in ACP Master, Ltd. v. Sprint Corp. / ACP Master, Ltd. v. Clearwire Corp. highlights that entire fairness may not be fatal, and that a finding of entire fairness may overcome earlier instances of conduct or process that may fall short or that otherwise had "flaws" and "blemishes."

In ACP Master, the Delaware Chancery Court acknowledged instances of alleged unfair conduct of Sprint Nextel Corporation (the controlling stockholder) and Softbank Corp. (the proposed acquirer of Sprint) in connection with an attempted buyout of Clearwire Corporation, including, among others: obstructing several material business opportunities of Clearwire (including the potential sale of spectrum); vote buying; making retributive threats to Clearwire's minority stockholders; and insisting on dilutive conversion pricing in bridge financing. The Chancery Court noted that "[i]f Clearwire's stockholders had approved the original merger at $2.97 per share . . . this array of misconduct would have resulted in a finding of unfair dealing and a damages award in the form of a fairer price." Notwithstanding, the Chancery Court found that such instances of alleged unfair conduct "made little difference" after Clearwire's stockholders refused to support Sprint's initial $2.97 per share offer and an interloper, DISH, drove the deal price up in an arm's-length process and at a price of $5.00 per share that the Chancery Court found to be fair. The Chancery Court noted that "[t]he stockholders' refusal to take [the $2.97 per share] price, and DISH's intervention in the sale process, freshened the atmosphere and created a competitive dynamic . . . [that] led to the $5.00 per share merger consideration, independent of the earlier acts of unfair dealing by Sprint and Softbank." The transaction presumably did not qualify for business judgment rule review under M&F Worldwide because Sprint and Softbank did not propose the transaction with the procedural protections of a special committee and informed majority of the minority vote at the outset.

In ACP Master, Vice Chancellor Laster accepted, without deciding, that Sprint was Clearwire's controlling stockholder. Under Delaware law, a controlling stockholder exists when a stockholder: (1) owns more than 50% of the voting power of a corporation; or (2) exercises control over the business and affairs of the corporation. Vice Chancellor Laster noted that Sprint owned a majority of Clearwire's equity, which "traditionally sufficed to confer controlling stockholder status and concomitant fiduciary duties." Sprint, however, argued that it was not a controlling stockholder because certain governance provisions in an equityholders agreement had prevented it from exercising effective control over Clearwire, and, as a result, it did not owe fiduciary duties to Clearwire and its minority stockholders. In other words, Sprint attempted to argue that, while it was a majority stockholder of Clearwire, it did not exercise actual control over Clearwire because of contractual provisions that neutered its controller status. While there may be some appeal to Sprint's position, Vice Chancellor Laster did not ultimately rule on Sprint's argument because he found that, in any event, the Clearwire-Sprint merger was entirely fair and Sprint did not breach its fiduciary duties.

Although the Chancery Court found that Sprint's and Softbank's alleged misconduct was later "cleansed" by DISH's intervention in the sale process, ACP Master provides important lessons for a controlling stockholder on actions that it could take, or should avoid taking, when negotiating a transformative transaction with its controlled affiliate to reduce the risk of a Delaware court finding that the controlling stockholder cannot satisfy procedural fairness.

  • Interfering Actively with Potential Alternatives. A controlling stockholder may be permitted to veto any sale to a third party; however, where the controlling stockholder holds more than 50% of the voting equity, the controlling stockholder runs substantial risks, if it uses its control position to foreclose or deter alternatives that may be available to the target company (e.g., the potential sale of Clearwire spectrum to either Qualcomm or Google). With regard to the spectrum sale to Qualcomm, Vice Chancellor Laster concluded that the effect of Sprint's and Softbank's alleged interference on Clearwire's ultimate bargaining position with Sprint was unclear. However, Vice Chancellor Laster noted that the Qualcomm incident would have provided some evidence of unfairness if the final deal price had remained at $2.97 per share. Sprint and Softbank also allegedly interfered with a potential sale of spectrum to Google. After DISH intervened and the merger consideration increased to $5.00 per share, the Google incident diminished in importance because, even if Clearwire's Special Committee had known about Google's interest, it might have enabled them to bargain for a transaction above $2.97 per share, but it could not have led to the realization of value exceeding the final deal price of $5.00 per share.
  • Fiduciary Duty of Candor. The plaintiffs criticized the negotiations between Clearwire's Special Committee and Sprint by arguing that Sprint deprived the Special Committee of material information by failing to disclose its projections for its use of Clearwire's spectrum. Vice Chancellor Laster rejected the plaintiffs' claim, observing that "the controller's duty of disclosure stops at the point when forcing disclosure would undermine the potential for arm's-length negotiations to take place." Thus, he concluded that a controller is not required to disclose private information that reveals how a controller values the company and hence what the controller is willing to pay.2
  • Vote-Buying and Coercion. Vice Chancellor Laster noted that, if the transaction had been approved at $2.97 per share, Sprint could have been liable for fiduciary duty breaches for an array of alleged conduct, which included securing support from a block of minority stockholder votes by promising a broader commercial arrangement and the lack of fulsome disclosure of that side deal and the threat to exercise a conversion right under a note purchase agreement that would have resulted in substantial dilution of the minority stockholders of Clearwire if the Clearwire-Sprint merger was not approved.
  • Pre-emption Ultimatum. While plaintiffs complained that Sprint's demand, as a condition for its offer of $5.00 per share, that Clearwire terminate all discussions with DISH had cut short a potential bidding war between DISH and Sprint that might have yielded a higher price for Clearwire, Vice Chancellor Laster found that Sprint's alleged demand was not unduly coercive or otherwise out of bounds. He noted that the Special Committee's acceptance of Sprint's offer and its decision to not go back to DISH was not evidence of unfair dealing. Controlling stockholders thus remain unfettered by their fiduciary duties from demanding exclusivity or other pre-emptive concessions.

Having found the transaction to be entirely fair, the Chancery Court then determined that, in the related appraisal action, the fair value for Clearwire's shares on the date of the merger was $2.13 per share—an amount significantly lower than the initial negotiated deal price of $2.97 per share. The Chancery Court adopted Sprint's expert's discounted cash flow (DCF) analysis in full, which relied on projections prepared by Clearwire's management team in the ordinary course of business. In contrast, the petitioners' expert's DCF analysis relied on unrealistic projections that were prepared by Sprint's management team and were created for a specific purpose (namely, to help convince Softbank to increase its offer). Because those projections were not prepared in the ordinary course, and included assumptions that were not fully supported by the evidence, they did not reflect the operative reality of Clearwire on the date of the merger. Thus, ACP Master demonstrates the importance of ordinary-course management projections to support a meaningful DCF analysis to determine fair value.

Notably, Vice Chancellor Laster observed that there was no evidence that anyone at Sprint or SoftBank "believed that Clearwire was worth $5.00 per share [on a standalone basis]. Rather, they agreed to pay that price because of the massive synergies from the transaction and the threat that DISH posed as a hostile minority investor." Indeed, Sprint estimated potential synergies of the merger ranging from $1.5 to $2 billion, Softbank's financial adviser estimated synergies between $3 to $5 billion, and Clearwire's own estimate was over $3 billion in synergies. Although Vice Chancellor Laster did not ultimately determine the value of these synergies, the Chancery Court's decision remains an additional reminder—following on the Delaware Supreme Court's decision in DFC Global 3 and Vice Chancellor Laster's prior decision in Lender Processing Services4—that Delaware courts are keenly aware of the central role that synergies play in competitive strategic transactions. However, such synergies are appropriately excluded from the calculation of fair value in an appraisal proceeding. ACP Master suggests that respondents in appraisal actions arising out of competitive strategic transactions are well positioned to litigate synergies in appraisal actions, provided they have adequately documented the role synergies played in the transaction and that the seller successfully extracted the lion's share of the synergies that the buyer hoped to achieve.

In addition, ACP Master demonstrates how events occurring after questionable negotiations, such as an interloper proposing a topping bid, have the potential to cleanse prior unfair conduct. While no controlling stockholder ever hopes for a topping bid on its transaction, it is instructive that subsequent conduct and changes in deal landscape can shift in a way that ultimately changes the result of the entire fairness assessment. Similarly, it would seem plausible, by the Chancery Court's reasoning, that the occurrence of other events—such as a broader market sell-off, or a substantial decline in the target corporation's business—could serve as the basis for a transaction that initially appeared unfair to become entirely fair at a later point in time.

ACP Master also illuminates the potential effect of including a majority of the minority stockholder vote as a condition to a controlling stockholder buyout or in an entity's governing documents. By repeatedly threatening to vote down the deal at $2.97 per share, Clearwire's minority stockholders leveraged the required majority of the minority vote to extract a meaningfully higher final offer from Sprint and Softbank. In light of the Chancery Court's decision that the transaction was ultimately entirely fair, and the resurgence of "bumpitrage," with activist investors threatening to engineer "no" votes on deals unless the acquirer increases the deal price, deal participants would be well-advised to carefully consider the desired benefits of a majority of the minority vote provision against the potential and very real downside of being "held hostage" by activist investors.

Of course, nothing in M&A should ever be done in a vacuum, and there is certainly no "one size fits all" strategy. Deal participants should carefully weigh whether the transaction would benefit more from proceeding without a majority of the minority vote (and therefore having greater deal certainty) and facing entire fairness review if, for example, there are (or are expected to be) stockholders in the target's stockholder base who may use the majority of the minority vote to extract a higher price, or instead, requiring both a special committee and a majority of the minority vote at the outset to benefit from the more deferential business judgment rule review of the transaction.


1. Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014).

2. Note, however, that Schedule 13E-3 may require the controller to disclose, after the deal has been signed, any projections that were prepared in connection with the transaction, and would seem to potentially create an interesting dynamic in post-signing appraisal arbitrage claims.

3. DFC Global Corp. v. Muirfield Value Partners, L.P., No. 518, 2016 (Del. Aug. 1, 2017).

4. Merion Capital L.P. v. Lender Processing Services, Inc., C.A. No. 9320-VCL (Del. Ch. Dec. 16, 2016).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions