Fixing MFW

Delaware’s regime governing controlling shareholders relies on courts to police conflicted transactions under the stringent “entire fairness” standard of review. In theory, judicial review under this standard allows courts to distinguish between fair transactions and those that are the product of value-reducing self-dealing. However, this framework critically depends on courts' competence in determining a transaction’s fairness, a task that often requires complex financial valuation. This valuation is challenging even for expert courts, and it becomes especially unwieldy when courts are asked to review transactions whose value to the company depends on an entrepreneur’s idiosyncratic vision—an inherently subjective concept that defies conventional financial modeling.

Recognizing the limits of judicial valuation, Delaware courts provided a means for transactional planners to avoid entire fairness review in Khan v. M&F Worldwide Corp. (“MFW”). Under MFW, courts apply the deferential business judgment rule if controlling shareholders voluntarily condition a self-dealing transaction on the approval of both a special committee of independent directors and a majority of informed minority shareholders. In theory, this regime eliminates the need for courts to determine a fair price, reducing reliance on judicial valuation.

Yet, in practice, MFW’s procedural protections frequently fail to function as intended. Courts have increasingly invalidated these mechanisms due to disclosure deficiencies concerning the independence and process of special committees. For example, in Tornetta v. Musk, the Chancery Court rescinded Tesla’s $55.8 stock-option grant to Elon Musk after it disregarded the shareholder vote approving Musk’s compensation package because Tesla failed to disclose conflicts and poor process within the special committee. This outcome, we believe, has led to a paradox where both cleansing mechanisms can be undermined by the same procedural flaws, thrusting courts back into the role of primary arbiters of fairness—precisely the scenario MFW aimed to avoid.

In our recent article, "Fixing MFW: Fairness and Vision in Controller Self-Dealing," we critically examine the limitations of the current MFW framework and propose reforms to better align it with the realities of controller transactions.

In particular, we argue that disclosure deficiencies regarding the special committee process should not invalidate an otherwise informed shareholder vote. In controller transactions, members of the special committee face inherent conflicts that are already obvious to minority shareholders. After all, the power of controlling shareholders over independent directors underlies the courts’ reluctance to treat independent directors’ approval as conferring full cleansing of controller transactions. Therefore, shareholders’ understanding of the financial terms of the transaction should be the key question. Accordingly, if shareholders are given full information about the financial terms of the transaction, their approval should be respected by the court, and the quality of the special committee process should be addressed separately by MFW’s other cleansing mechanism (and potentially the court’s substantive review of the transaction as well).

One concern with this proposal is that it might disincentivize companies from disclosing details about the bargaining process and the special committee’s independence. Our second proposal addresses this concern by calling on courts to adopt a Corwin-style rule that would encourage companies to provide full disclosure about the special committee process, including its flaws. If the company fully describes the special committee process and secures a disinterested vote approving the transaction, this vote should immunize the transaction from post-closing challenges related to the special committee. This approach creates a powerful incentive for companies to provide full transparency regarding the special committee process. 

Our analysis also challenges aspects of the new controller self-dealing regime brought about under the 2025 amendments to the Delaware General Corporation Law (DGCL). Under this statute, non-freezeout transactions can be cleansed by a single mechanism—either special committee approval or a disinterested shareholder vote. We argue that the amendments erred in giving these mechanisms equal cleansing weight. In our view, the majority of minority vote is a stronger indication of fairness than special committee approval. While in theory, a special committee is better informed than shareholders and can engage in back-and-forth negotiations to secure a share of the surplus, the controller’s power and sway over director appointments raise concerns about its true independence. Moreover, because calling a shareholder meeting is costly and activist shareholders may block proposed transactions, controllers should be incentivized to submit self-dealing transactions to a majority of minority vote. 

Accordingly, we would have given the majority of minority vote greater cleansing power.  More specifically, when only a special committee is used, its effect should vary based on the size of the transaction. If the transaction is significant, the special committee’s approval should not insulate the transaction from judicial review but rather afford a shift in the burden of proof under entire fairness review. To receive business judgment rule protection for significant self-dealing transactions with the controller, the cost and effort of calling a shareholder meeting are justified, given the structural bias inherent in the committee process

All in all, our modified framework would refine the MFW framework to better serve its intended purpose. It respects the core goal of protecting minority investors from overreaching by controlling owners by preserving a means for shareholders to secure stringent review of a transaction’s fairness where such review is most needed. Moreover, it addresses the limits of judicial competence in valuation and the comparative advantage of the shareholder voting process, which aggregates each shareholder’s subjective judgment of vision and price. Accordingly, our framework would restore MFW cleansing to its proper role, safeguarding minority shareholders while enabling visionary entrepreneurs to pursue value-creating activities without undue judicial second-guessing. 

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Zohar Goshen is the Jerome L. Greene Professor of Transactional Law at Columbia Law School and an ECGI Research Member.

Assaf Hamdani is a Professor of Law at Tel Aviv University and an ECGI Research Member.

Dorothy S. Lund is the Columbia 1982 Alumna Professor of Law at Columbia Law School, and an ECGI Research Member.

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