Delaware’s entire fairness doctrine – response to which in part drove the SB 21 amendments to Delaware corporate law enacted on March 25, 2025 – is not dead. Thus, it is especially helpful that a new Delaware Court of Chancery opinion reminds us that conflict transactions that fail to meet safe harbors and are therefore subject to entire fairness scrutiny nonetheless have a pathway to dismissal on the pleadings.
This is an important reminder because:
- the new SB 21 statutory safe harbors from entire fairness review include several requirements with which plaintiffs will be on the look-out for non-compliance;
- there are costs (both monetary and from an execution perspective) to complying with some of these safe harbor criteria to which parties to conflict transactions are, from time to time, going to elect not to undertake; and
- the availability of dismissal on the pleadings of entire fairness cases holds out the potential to substantially reduce litigation costs.
The SB 21 safe harbors from entire fairness review are considerably easier to fit into, and provide more certainty, than the MFW safe harbor with its six core factors and several sub-factors.1 The SB 21 safe harbors nonetheless contain requirements, including for votes by independent directors and/or disinterested stockholders to be informed, for independent directors to act in good faith and without gross negligence, and for determinations of independence. In addition, there remains a grey zone as to whether a stockholder with less than a majority but at least a third of the voting power has sufficient managerial control to constitute a controller and therefore be subject to additional safe harbor requirements. Allegations by stockholder-plaintiffs of failures to fit into the new statutory safe harbors risk putting boards and controllers back into entire fairness review, as is the case for all suits brought before February 17, 2025 that fail to have navigated their way into the MFW safe harbor.
Against this backdrop, Vice Chancellor Lori W. Will reminds us in Roofers Local 149 Pension Fund v. Fidelity National Financial, Inc.2 that conflict transactions that fail to meet applicable safe harbors and are therefore subject to entire fairness are nonetheless “not in itself a crime or a tort or necessarily injurious to others” and do not give plaintiffs “a free pass to trial.” Relying on precedent dating back to at least 2010, the Court in Roofers granted a motion to dismiss before any discovery despite the applicability of entire fairness review.
The transaction at issue in Roofers involved a controlling stockholder’s capital contribution that the plaintiff alleged was the product of an unfair process and at an unfair subscription price. The controlling stockholder had negotiated the transaction with a special committee, but there was no approval by a majority of the minority stockholders and therefore this pre-SB 21 case failed to make it into the MFW safe harbor and had to satisfy entire fairness – i.e., both the process and the price had to be fair. Vice Chancellor Will observed that the complaint may have contained adequate allegations (which, at the pleading stage, were assumed to be true and where all reasonable inferences were drawn in the plaintiff’s favor) to support a claim that the special committee process (i.e., procedural fairness) was lacking, but the Court followed in the footsteps of Chancellor Chandler’s 2010 Monroe County4 opinion to hold that the complaint contained no “specific allegations” to support a reasonable inference that the price (i.e., substantive fairness) was problematic.5 The Court emphasized that the complaint merited dismissal, per longstanding precedent, because “the plaintiff’s claim rests on conclusory allegations of unfair price,” rather than any specific facts that, if proven true, would indicate that the price was unfair.6 The Roofers and Monroe County cases instruct that even if a plaintiff were to adequately plead unfair dealing or process, the absence of well-pleaded allegations as to unfair price is fatal.
If the Roofers case had been brought post-SB 21, the challenged transaction could have been insulated from entire fairness review if the special committee satisfied the independence, information, good faith, and absence of gross negligence requirements in the SB 21 safe harbor. But if those requirements had been found lacking, the Court in Roofers would have likely employed the same common law entire fairness analysis and pleading burdens, reached the same conclusion, and dismissed the complaint. Monroe County’s path of providing a means for dismissal of entire fairness cases on the pleadings is valuable to keep in mind as directors learn to navigate the new safe harbors and potentially find themselves back in entire fairness territory.
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1 The six factors of MFW are: “(i) a controlling stockholder conditions a transaction from the start 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 fully empowered; (iv) the special committee meets its duty of care; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.” In re Match Grp., Inc. Deriv. Litig., 315 A.3d 446, 462-63 (Del. 2024) (citing Kahn v. M & F Worldwide Corp., 88 A.3d 635, 639 (Del. 2014)). Sub-factors include requirements relating to establishment of when the commitment to the committee and majority of the minority vote had to be made, the requirement that the denominator in the stockholder vote be the outstanding voting power held by the disinterested stockholders (not the votes cast), a requirement that the majority of the minority condition be unwaivable, and a number of requirements relating to the independence of the special committee members, the requisite vote of the special committee directors, and the determination of which stockholders qualified to be included in “the minority.”
2 2025 WL 1354973 (Del. Ch. May 9, 2025).
3 Id. at *7 (cleaned up).
4 Monroe Cnty. Emps.’ Ret. Sys. v. Carlson, 2010 WL 2376890 (Del. Ch. June 7, 2010).
5 2025 WL 1354973, at *11.
6 Id. at *7, *11.