Missing MOMs: Freezeouts in the New Doctrinal Regime and the MOOM Alternative

Abstract

In a decades-long series of decisions culminating with its 2014 ruling in In re MFW Shareholders Litigation, the Delaware courts constructed a doctrinal infrastructure that encouraged two procedural protections for minority shareholders in freezeout transactions: approval by a special committee of independent directors (“SC approval”), and approval by a majority-of-the-minority shares (a “MOM condition”).  Empirical evidence indicated that practitioners largely adopted this dual-pronged approach to freezeouts for most of the following decade. However, in a trilogy of decisions from 2022-2023, the Delaware Chancery Court unintentionally created dis-incentives for MOM conditions. We present the first empirical evidence from this new doctrinal regime, and find that MOM conditions have indeed decreased significantly in incidence: from approximately 85% beforehand to approximately 50% afterwards.

As a policy matter, we argue that our findings reflect a step in the wrong direction. Delaware courts should encourage the procedural protections of SC approval and a MOM condition, because these protections track the procedural protections in an arms-length deal process.  While jurisdictions around the world are attempting to replicate Delaware’s protections for minority shareholders, Delaware itself has unintentionally moved away from those same protections.  To the extent that controllers and special committees are declining to provide MOM conditions due to “hold up” risk by activist investors, we offer a majority-of-the-original minority (MOOM) condition as an alternative that would address this concern.