The debate over “MFW creep” tends to distract from understanding just what protections the Delaware courts have been intending to provide in controller transactions.  Much of the commentary on the Delaware Supreme Court’s recent ruling over Match.com’s restructuring focuses on the “MFW creep” sideshow rather than the main event: the question of who the Delaware courts are trying to protect.

So-called MFW creep consists of the Delaware courts’ expansion of MFW review beyond the controller squeeze-out transaction in which the MFW doctrine was born.  The much-awaited ruling in Match.com was widely framed as a test for whether Delaware’s Supreme Court would push back on such “MFW creep” and limit the expansion of that doctrine.  Even framing the issue this way is confusing and diversionary: MFW reflects a significant protection extended to a controlling stockholder and the board that supports it, an exit ramp off the road to entire fairness review down to the more easily navigated path of business judgment.  By extension, then, a phenomenon known as MFW creep would logically be though to consist of an expansion of those controller protections, and yet it was the company and the controller of Match.com seeking to curb MFW review and encourage a push-back against MFW creep.  The defendants wanted an easier path to business judgment review than what MFW would have required. 

Just like centrifugal force is only an apparent force that appears to contrast with the very real dynamic of centripetal force, the concept of MFW creep is more apparent than real.

This point was nicely captured at the Tulane Corporate Law Institute in New Orleans last month, an annual gathering of Delaware law jurists and lawyers.  At a March 8 panel on Conflicts, Controllers, Entire Fairness & Delaware, several notable panelists, including Justice Karen Valihura of the Delaware Supreme Court and Gregory Varallo of Bernstein Litowitz, discussed evolving Delaware case law regarding controller transactions.  The panel addressed the most notable controller-transaction case of the year and years to come, Tornetta v. Musk, which invalidated Elon Musk’s $55 billion performance-based equity compensation award.  In that case, Chancellor McCormick found Musk to be a controller while owning only a 21.9% ownership stake in Tesla, and also found the shareholder vote approving the compensation package was uninformed.  These factors impelled the holding that the transaction was not “cleansed” under MFW, and the Court utilized entire fairness review rather than business judgment review.

As the panel addressed whether the Musk decision reflected MFW creep, Varallo noted the absurdity of framing the issue in that manner, given that MFW is what allows boards to “cleanse” controller transactions that would otherwise face stricter scrutiny if not for that MFW cleansing.  As Varallo put it, MFW was a gift to defendants, and talking about its “creep” in a manner that was somehow damaging to controllers and boards of directors was non-sensical.

The continuing discussion about MFW creep seems to go hand-in-hand with some muted alarmism about whether Delaware is losing its edge as the cradle of modern corporate law and the most reasonable safe-haven for companies to incorporate.  Musk himself publicized this debate rather widely after griping about having his pay package struck down by the Delaware court.  Like the question of MFW creep, the question of Delaware losing its relevance is overblown.  Nevada and Texas, the natural runners-up to Delaware, are not exactly overloaded with applicants for incorporation fleeing the First State just yet.

Which constituency is the Delaware court trying to protect?  All of them, in a continuing balancing act safeguarding the best interests of the company and its constituent members – the board, management, a controller, minority stockholders.  Match.com itself demonstrates how the narrow focus on MFW creep unfairly limits the analysis to a binary equation of whether the controller will benefit from a cleansed transaction or not, when the reality is more multi-layered: the Supreme Court indeed extended MFW beyond its squeeze-out paradigm, but was willing to give the defendants the benefit of that cleansing if only they met the MFW prerequisites.  But they didn’t.  So, back to Chancery for an entire fairness review.  Nothing creepy about that.