September 12, 2022

Delaware Court of Chancery Applies MFW Analysis to a Nonmerger Transaction and Dismisses Stockholders’ Claims With Prejudice

In City Pension Fund for Firefighters and Police Officers in the City of Miami v. The Trade Desk, Inc., et al., the Delaware Court of Chancery dismissed the plaintiff’s challenge to a transaction that extended the controlling stockholder’s voting control, after concluding that the company’s board adhered to the MFW framework, which entitled the defendants to the benefit of the lenient business-judgment review rather than the onerous entire-fairness standard.


The Trade Desk, Inc. (TTD) is a technology company cofounded by Jeff Green, its president, CEO and chairman of the board of directors (the CEO). TTD has two classes of stock: Class A common stock (which trades publicly on the NASDAQ Global Market) and Class B common stock (which is not traded publicly). The holder of Class A common stock is entitled to one vote per share, while the holder of Class B common stock is entitled to ten votes per share. The 10-to-1 voting ratio, along with the CEO’s large share of Class B stock, resulted in the CEO holding 55% of the combined voting power.

TTD’s certificate of incorporation provides that Class B common stock must be eliminated once the number of outstanding shares of Class B common stock represents less than 10% of the total shares of Class A and Class B common stock. This is referred to as the “dilution trigger.” In March 2020, the Class B common stock constituted 11.2% of the total outstanding stock, and it was continuing to decline. As a result, the CEO had initial discussions about avoiding the elimination of the Class B common stock, and then emailed the board to schedule a special meeting to discuss the dilution trigger.

In response, the board formed a three-director special committee, which hired independent counsel and a financial advisor to explore amending the certificate of incorporation to extend the dual-class stock structure. The board also invited the CEO to propose his own solution to the dilution trigger, and the CEO indicated that he would provide a proposal and business rationale “under the MFW [Kahn v. M & F Worldwide Corp.] structure.” Among the reasons it benefited TTD for the CEO to extend his voting control was that the company would be “guided by the same vision and long-term perspective that have made the Company so successful[.]”

After additional negotiations, the special committee and the CEO reached an agreement in principle, which was presented to the full board, who approved it. At the stockholders’ special meeting, 52% of the unaffiliated shares voted in favor.

Analysis of the Case

On behalf of similarly situated stockholders, the plaintiff filed suit against the CEO and TTD’s officers and directors, alleging that the defendants breached their fiduciary duties by approving the amendment of TTD’s certificate of incorporation to prolong the CEO’s control. In support of their motion to dismiss, the defendants argued that the court could not apply the stringent entire-fairness standard typically used to analyze transactions involving controlling stockholders like the CEO. The defendants insisted that under Kahn v. M & F Worldwide Corp. (MFW), the challenged transaction should be evaluated under the lenient business-judgment standard because it met the following circumstances:

  1. The controller conditions the procession of the transaction on the approval of both a special committee and a majority of the minority stockholders;
  2. The special committee is independent;
  3. The special committee is empowered to freely select its own advisers and to say no definitively;
  4. The special committee meets its duty of care in negotiating a fair price;
  5. The vote of the minority is informed; and
  6. There is no coercion of the minority.

According to the plaintiff, the transaction process did not adhere to the MFW framework because the special committee was not independent (element 2), and the stockholder vote was uninformed (element 5). The Delaware Court of Chancery rejected both arguments. But given the fact-intensive nature of disclosure analyses, this article will not address that aspect of this opinion.

The plaintiff alleged that the special committee lacked independence because the chairperson of the special committee was beholden to TTD, and because it operated under a controlled mindset. As to its first argument, the plaintiff argued that the chair was not independent because her compensation for service as a director is more than double her compensation from her consulting company, as reported by Dun & Bradstreet. The court agreed with the defendants that the speculation of marketing companies cannot satisfy the plaintiff’s pleading burden to make allegations of materiality without specific facts. Even assuming the chairperson was not independent, she was the only person, out of the three-person special committee, against whom there were any allegations questioning independence.

The court similarly rejected the plaintiff’s contention that TTD’s board operated under a controlled mindset because the CEO wielded such dominion over the board that he essentially dictated the terms and structure of the challenged transaction. The plaintiff’s fatal mistake was that its complaint lacked any facts supporting the conclusion that the board was beholden to the CEO. Rather, the plaintiff insisted that the special committee’s lack of independence was self-evident because it decided to maintain the dual class structure. The court was not swayed by that argument, finding that there are valid business reasons for a director to conclude that a company should continue to be controlled by its founder. In any event, the vice chancellor noted that the controlled mindset is not part of the MFW analysis.


Although MFW involved a freeze-out merger, its framework for securing the benefit of the business-judgment rule in connection with challenges to controlling stockholder transactions applies to reviews of other corporate conduct, including stock reclassifications, executive compensation to controlling stockholders, sales to third parties and amendments to certificates of incorporation.

Since the MFW framework will earn the benefit of the business-judgment rule in a variety of transactions involving controlling stockholders, it might be wise to follow that framework in any such transaction. Otherwise, directors, officers and controlling stockholders are at significant risk of the expenses associated with responding to challenges under the entire-fairness standard.

It also is relevant that demonstrating that a director’s pay for board service is material requires more than speculation from unverified sources about the director’s net worth, salary or income streams.

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