Securities Law Alert

In This Edition:• First Circuit: Affirms Dismissal of a Securities Fraud Action Challenging Optimistic Statements, “Repletewith Caveats,” Concerning FDA Developments• Second Circuit: Supreme Court’s Decision in Salman Abrogated Newman’s “Meaningfully Close Personal
Relationship” Test for Tipping Liability• Third Circuit: Describing a Risk as Hypothetical Is Not Misleading Unless That Specific Risk Has AlreadyMaterialized• Ninth Circuit: Expressing a Favorable Opinion Concerning FDA Clearance May Be Misleading If the
Speaker Does Not Disclose Adverse FDA Developments• S.D.N.Y.: (1) Courts Must Consider Information in the Public Domain When Assessing the Adequacy of aCompany’s Disclosures, and (2) Allegedly Misleading Statements Must Be Viewed in Context• C.D. Cal.: (1) Plaintiffs Must Allege “Concrete” Details to Plead Scienter Under the “Absurd to Suggest”
Exception to the Core Operations Theory, and (2) Market Knowledge of the Alleged Fraudulent Practice Is
a Prerequisite for Loss Causation• Delaware Chancery Court: (1) MFW’s Framework Governs One-Sided Controller Transactions Involving
Disparate Consideration, and (2) MFW’s Procedural Protections Must Be in Place Before the Controller
Negotiates for Additional Consideration
September 2017

Simpson Thacher’s“[d]ominant securities
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Simpson Thacher & Bartlett LLPFirst Circuit: Affirms
Dismissal of a Securities Fraud
Action Challenging Optimistic
Statements, “Replete with
Caveats,” Concerning FDA
Developments
On August 22, 2017, the First Circuit affirmed
dismissal of a securities fraud action against
a biopharmaceutical company challenging its
communication of a “mix of optimism andcaution” to investors following meetings with
the FDA. Corban v. Sarepta Therapeutics,
2017 WL 3599065 (1st Cir. 2017)(Kayatta, J.). The court found it significant
that the company’s statements were so“replete with caveats” that the company’s“stock dropped nineteen percent” following
certain of its disclosures.
Plaintiffs claimed the company “disclosed
too little of what FDA officials said … andpainted too rosy a picture of their reaction
to [the company’s] data.” Although the court
acknowledged that the company’s “caveats
could have been more fulsome,” the court
determined the company’s cautionary
statements “cut against the inference of
scienter.” The court found that “[a]t worst,
there was positive spin that put moreemphasis in tone and presentation on the realsigns of forward movement … than it did on
causes for wondering if the journey would
prove successful.”The First Circuit further found that “[t]heonly plausible motive for fraud identified by
the plaintiffs [was] revenue generation, which[fell] short of pleading a cogent inferenceof scienter that [could] carry the day.” Thecourt noted the absence of any allegations“suggesting that [the company’s] capital wasinsufficient for continued operations, muchless that [the company] would shutter its
doors unless it padded earnings by deceiving
investors.” The court concluded that thiswas “simply a case in which the complaint
focuse[d] too much on nuance rather thanfalse facts or material omissions to support
the necessary strong inference of scienter.”

Second Circuit: Supreme
Court’s Decision in Salman
Abrogated Newman’s“Meaningfully Close Personal
Relationship” Test for Tipping
Liability
On August 23, 2017, the Second Circuit
held that the “meaningfully close personal
relationship” test established in U.S. v.
Newman, 773 F.3d 438 (2d Cir. 2014) forthe personal benefit requirement for tipping
liability “is no longer good law” in view of theSupreme Court’s decision in Salman v. U.S.,137 S. Ct. 420 (2016).1 U.S. v. Martoma, 2017
WL 3611518 (2d Cir. 2017) (Katzmann, J.).

Neither Dirks Nor Salman Limited
the Personal Benefit Requirement
to Instances in Which the Tipper
Had a “Meaningfully Close Personal
Relationship” with the Tippee
In Dirks v. S.E.C., 463 U.S. 646 (1983), theSupreme Court held that a “test” for tipping
liability is “whether the insider personallywill benefit, directly or indirectly, from his
disclosure.” The Second Circuit explainedthat the Dirks Court “gave several examplesof situations in which an insider would
personally benefit from disclosing inside
information: disclosing inside information ina quid pro quo relationship, disclosing inside
information with ‘an intention to benefit theparticular recipient,’ and disclosing inside
information as ‘a gift … to a trading relative or
1. Please click here to read our prior discussion of the Supreme
Court’s decision in Salman.

friend.’” Martoma, 2017 WL 3611518 (quoting
Dirks, 463 U.S. 646). The Martoma court
found that Dirks “did not purport to limit
to these examples the situations in which apersonal benefit can be inferred.” Rather, thecourt determined that “the broader inquiry
underlying the examples” in Dirks focused on“‘whether the insider personally will benefit,
directly or indirectly, from his disclosure.’”Id. (quoting Dirks, 463 U.S. 646).
The Martoma court explained that in
Newman, however, the Second Circuit “didview [the] examples [set forth in Dirks] aslimiting the situations in which a personal
benefit could be inferred.” The Newman court“held that the jury was never permitted toinfer that a tipper had personally benefited
from disclosing inside information as a gift
unless that gift was made to someone withwhom the tipper had a ‘meaningfully close
relationship.’” Martoma, 2017 WL 3611518(quoting Newman, 773 F.3d 438).

The Martoma court found “the examples inDirks” did not “support a categorical rulethat an insider can never benefit personallyfrom gifting inside information to people
other than ‘meaningfully close’ friends orfamily members.” While the Martoma court
acknowledged that it would “ordinarily beneither appropriate nor possible for a panel
to reverse existing Circuit precedent,” thecourt found the Supreme Court’s decisionin Salman “alter[ed] the relevant analysis
fundamentally enough to require overruling”
Newman’s “meaningfully close personal
relationship” test.2
2. In Salman, the Supreme Court rejected Newman’s holdingthat the tipper “must also receive something of a ‘pecuniaryor similarly valuable nature’ in exchange for a gift to family or
friends” to satisfy the personal benefit requirement. 137 S. Ct.
420 (quoting Newman, 773 F.3d 438). The Martoma court found“the Supreme Court did not have occasion to expressly overrule
Newman’s requirement that the tipper have a ‘meaningfully
close personal relationship’ with a tippee to justify the inference
that a tipper received a personal benefit from his gift of inside
information—because that aspect of Newman was not at issue inSalman.” 2017 WL 3611518.
2In Salman, the Supreme Court held thattipper liability attached where the defendant“disclose[d] confidential information as a gift
to his brother with the expectation that hewould trade on it.” 137 S. Ct. 420. The Salman
Court stated that “when a tipper gives inside
information to ‘a trading relative or friend,’
the jury can infer that the tipper meant toprovide the equivalent of a cash gift.” Id.
(quoting Dirks, 463 U.S. 646).
The Martoma court found that Salman“strongly reaffirmed” “the straightforward
logic of the gift-giving analysis in Dirks.” 2017
WL 3611518. The Martoma court reasoned
that “[n]othing in” the Salman opinion“supports a distinction between gifts to people
with whom a tipper shares a ‘meaningfully
close personal relationship’ … and gifts to
those with whom a tipper does not share sucha relationship.”

The Personal Benefit Requirement
Is Met Whenever the Tipper
Expects the Tippee to Trade on the
Information, and the Disclosure
Resembles Insider Trading
Followed by a Gift of the Proceeds“[I]n light of Salman,” the Martoma court“reject[ed] … [Newman’s] categorical rulethat an insider can never personally benefit
from disclosing inside information as a
gift without a ‘meaningfully close personal
relationship.’” The court held that “aninsider or tipper personally benefits from a
disclosure of inside information whenever
the information was disclosed with the
expectation that the recipient would tradeon it, and the disclosure resembles tradingby the insider followed by a gift of the profits
to the recipient, whether or not there was a‘meaningfully close personal relationship’
between the tipper and the tippee.” Id.
The Martoma court offered the example of“a corporate insider [who], instead of giving
a cash end-of-year gift to his doorman, gives
a tip of inside information with instructions
to trade on the information and consider
the proceeds of the trade to be his end-ofyear gift.” The court explained that in thissituation, “there may not be a ‘meaningfully
close personal relationship’ between the
tipper and tippee, yet this clearly is an
illustration of prohibited insider trading, as
the insider has given a tip of valuable inside

information in lieu of a cash gift and has thus
personally benefited from the disclosure.”
The Martoma court emphasized that its
holding “reaches only the insider who
discloses inside information to someone heexpects will trade on the information.” Thecourt acknowledged that “‘[d]etermining
whether an insider personally benefits
from a particular disclosure, a question offact, will not always be easy for courts.’” Id.
(quoting Salman, 137 S. Ct. 420). Given thefacts of the case before it, however, the court
determined that it “need not consider theouter boundaries of when a jury is entitled
to infer, relying on circumstantial evidence,that a particular disclosure was made withthe expectation that the recipient would
trade on it, and resembled trading by theinsider followed by a gift of the profits to therecipient.” Id.

In a Lengthy Dissent, Judge Pooler
Opined That the Majority’s Decision“Strips the Long-Standing Personal
Benefit Rule of Its Limiting Power”
Judge Pooler, dissenting, expressed herview that “the majority opinion significantly
diminishes the limiting power of the personal
benefit rule” by holding that “an insider
receives a personal benefit when the insider
gives inside information as a ‘gift’ to any
person.” She also observed that under the
majority’s ruling, “[w]hat counts as a ‘gift’
is vague and subjective.” She predicted that“[t]he result will be liability in many cases
where it could not previously lie.”
Judge Pooler strongly disagreed with the
majority’s interpretation of Salman. She
emphasized that Salman “left untouched”
Newman’s “holding that, in order to allow
inference of a personal benefit, gifts must
be exchanged within a ‘meaningfully close
personal relationship.’” She explained that“[a]n opinion considering a relationshipbetween brothers does not need to rule on,or even address, how close two persons’friendship must be for them really tobe ‘friends.’”
In Judge Pooler’s view, “Salman [did] notoverrule the limitation described in both
Dirks and Salman itself—that an inference of
personal benefit may be based on an insider’sgift to relatives or friends, but not a gift tosomeone else.”3

Third Circuit: Describinga Risk as Hypothetical Is
Not Misleading Unless That
Specific Risk Has AlreadyMaterialized
On August 23, 2017, the Third Circuit held
a medical device company had no duty todisclose the materialization of a risk where
the company did not portray that specific risk
as hypothetical. Williams v. Globus Medical,
2017 WL 3611996 (3d Cir. 2017) (Scirica, J.).
At issue was the company’s representationthat if any of its “independent distributor[s]were to cease to distribute [its] products,[the company’s] sales could be adversely
affected.” Plaintiffs contended that thecompany’s disclosures were “misleading”
because the company “warned that the lossof an independent distributor could have anegative impact on sales—but it omitted towarn investors … that [the company] had infact lost an independent distributor.”

The Third Circuit recognized that “[o]nce acompany has chosen to speak on an issue—
even an issue it had no independent
obligation to address—it cannot omit material
facts related to that issue so as to make its
disclosure misleading.” The court “agree[d]that a company may be liable under Section[10(b)] for misleading investors when it
describes as hypothetical a risk that has
already come to fruition.”In the case before it, however, the Third
Circuit found “[t]he risk actually warned of[was] the risk of adverse effects on sales—not
simply the loss of independent distributors
generally.” The court determined that “[t]herisk at issue only materialized—triggering[the company’s] duty to disclose—if sales
were adversely affected at the time the risk
disclosures were made.” Because plaintiffs

did “not plead that [the company] was alreadyexperiencing an adverse financial impact at
the time of the risk disclosures,” the court
held the company had “no duty to disclose its
decision to terminate its relationship with” its
independent distributor.

Ninth Circuit: Expressing a
Favorable Opinion Concerning
FDA Clearance May Be
Misleading If the Speaker
Does Not Disclose Relevant
Adverse FDA Developments
On August 18, 2017, the Ninth Circuit
reversed dismissal of securities fraud claims
where defendants allegedly represented
that “FDA clearance risk has been achieved”
without disclosing that the company had
not obtained clearance for one of the key
products discussed. In re Atossa Genetics
Sec. Litig., 2017 WL 3568088 (9th Cir. 2017)(Gould, J.). The Ninth Circuit found thestatement at issue to constitute an opinion,rather than a statement of fact, but foundplaintiffs adequately alleged the opinion did
not “fairly align[ ] with the information in [thecompany’s] possession at the time” under the
standard set forth in Omnicare v. Laborers
District Council Construction Industry
Pension Fund, 135 S. Ct. 1318 (2015).3

Opining That FDA Clearance Risk
Has Been Achieved Is Materially
Misleading If the Speaker Fails to
Disclose Relevant Conflicting FactsAt the outset of its analysis, the court
explained that “[t]here is a difference
between saying that the [a product] was
FDA-cleared, a statement of fact, and that
FDA clearance risk has been achieved, whichsounds more like a statement of opinion.”
The court observed that “[t]he former is aneasily verifiable past event—either the FDA
has granted clearance or it has not” while“[t]he latter is less black and white.” The court
noted that a statement that a risk has been“achieved” “could [either] convey that the riskhas been reduced to zero” or indicate “thatthe risk has been reduced to an acceptable
3. Please click here to read our prior discussion of the Omnicare
decision.
4

level, which could mean that some degree ofrisk remains.” The Ninth Circuit determinedthat “it is the speaker’s personal definition of‘achieved’ that … produces the opinion.”
The Ninth Circuit then measured the opinion
against the standard set forth in Omnicare.
There, the Supreme Court held that when aplaintiff claims an opinion is misleading due
to an omission, the plaintiff “must identify
particular (and material) facts going to
the basis for the issuer’s opinion … whose
omission makes the opinion statement at
issue misleading to a reasonable person
reading the statement fairly and in context.”
Omnicare, 135 S. Ct. 1318.4
The Ninth Circuit found the “lack of [FDA]
clearance” for one of the company’s products“and the FDA’s concerns about that lack ofclearance[ ] relate[d] directly to the basis for[the] opinion that FDA clearance risk had
been achieved.” The court observed that “theomitted facts [were] strikingly similar to [the]hypothetical the Supreme Court offered in
Omnicare” of “an issuer [who] publicly stated,‘we believe our conduct is lawful,’ but did
not disclose the issuer’s knowledge that theFederal Government took the opposite view.”

Expressing “Reasonable
Confidence” in FDA Responses Is
Inactionable Corporate Optimism
Even If There Were Facts Weighing
Against Such Optimism
Plaintiffs also challenged as misleading
the company’s representation that it was“reasonably confident in its responses” toan FDA warning letter because at the time
it made that statement, the company “hadalready submitted and withdrawn” an FDA
submission for the product at issue.
The Ninth Circuit found that “any reasonable
investor would have understood [thecompany’s] alleged statement as mere
corporate optimism” because it was“unspecific, subjective, and only guardedly
optimistic.” The court also rejected plaintiffs’
contention that “by commenting on theprospects for its responses to the FDA,
4. The Omnicare Court addressed the standard for pleading an
opinion-based claim under Section 11. However, the Ninth Circuit
has held that “the Supreme Court’s reasoning is equally applicable
to Section 10(b) and Rule 10b-5 claims.” City of Dearborn
Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., 856 F.3d
605 (9th Cir. 2017). Please click here to read our prior discussionof the City of Dearborn Heights decision.

without also disclosing the newly filed
and withdrawn” submission, the company“materially misled reasonable investors.” The
Ninth Circuit explained that a company is“not obligated to disclose each and every step
it took when interacting with regulators.”

S.D.N.Y.: (1) Courts Must
Consider Information in
the Public Domain When
Assessing the Adequacy ofa Company’s Disclosures,and (2) Allegedly Misleading
Statements Must Be Viewed inContext
On August 24, 2017, the Southern Districtof New York dismissed with prejudice asecurities fraud action against a leading
hotel chain on the grounds that the company
adequately disclosed each of the risks at issue,
including the impact of falling oil prices, theneed for renovations at certain properties, thetransition of the company’s call center and thesale of certain hotels. Police and Fire Ret. Sys.
of the City of Detroit v. La Quinta Holdings,
No. 16-cv-3068 (S.D.N.Y. 2017) (Nathan, J.).5
The court also dismissed claims in connection
with a statement of opinion because the court
found the opinion was not misleading when
considered in context.

Plaintiffs Cannot Allege Misleading
Omissions If the Risks at Issue
Were Disclosed by the Company
and Publicly Known
The court began its analysis by underscoringthat “a securities fraud claim formisrepresentations or omissions does notlie when the company disclosed the veryrisks about which a plaintiff claims to havebeen misled.” “When evaluating whether acompany provided sufficient disclosures,” thecourt explained that it must “consider not
only the disclosures the company ma[d]e, butalso information already in the public domain
and facts known or reasonably available to theshareholders.”

5. Simpson Thacher represents La Quinta Holdings Inc., The
Blackstone Group L.P. and certain La Quinta officers anddirectors in this matter.
5Here, the court found “the total mix of
information made available to investors
sufficiently disclosed the purported risk[s]”in question. With respect to the effectof declining oil prices on the company’sbusiness, for example, the court noted thatthe company “made a number of disclosuresrelated to the geographic concentrationof its hotels and the impact changing oil
prices could have on the company.” Thecourt also deemed it significant that “thedrop in oil prices that caused the purported
decline in [the company’s] performance waspublicly known.”

disclosures should have been made earlier.”
The court explained that under Second
Circuit precedent, “‘[m]ere allegations thatstatements in one report should have been
made in earlier reports do not make out aclaim of securities fraud.’” Id. (quoting Acito
v. IMCERA Grp., 47 F.3d 47 (2d Cir. 1995)).
The court stated that “the timing of disclosure
is a matter for the business judgment of
the corporate officers entrusted with the
management of the corporation within
the affirmative disclosure requirements
promulgated by the exchanges and by the
SEC.”

Plaintiffs Must Allege a Specific
Duty to Disclose to Plead an
Omission-Based Claim

Courts Must Consider theComplete Context of a Statement
When Determining Whether It Is
Misleading

The court emphasized that “[u]nder federal
securities law, liability for failure to disclose
certain information exists only if there is anaffirmative legal disclosure obligation.” For
several of the alleged misstatements, suchas the company’s alleged failure to disclose
the need for renovations, the court held
plaintiffs failed to identify “a specific duty or
obligation” requiring disclosure. The court
found, for instance, that the company “in fact
had no duty to disclose” alleged challenges
with the company’s transition to a new callcenter (even though the court determinedthe company did in fact disclose these
alleged issues).

Allegations That a Company Should
Have Made Disclosures Earlier,Standing Alone, Do Not State a
Claim for Securities Fraud
The court also rejected plaintiffs’ contention
that the company should have disclosed
alleged problems with the call centertransition sooner. The court found plaintiffs“fail[ed] to plausibly allege why the

Finally, the court found nothing “untrue
or misleading” about an executive’s
representation that the sale of one of thecompany’s hotels was a “win-win-win” eventhough the company allegedly recorded aseveral-million dollar loss on the property.
The court noted that the statement “was not
an objective fact, but rather an expression
about [the executive’s] expectations for sale.”
The court emphasized that the “‘win-win-win’comment [was] part of a larger statement.”
The court explained that “[w]hen evaluating
whether a defendant’s statements would havemisl[ed] a reasonable investor, a court should
consider the representations together andin context.” The court found the executive“explicitly explained the rationale behind
his opinion that the sale constituted a ‘winwin-win’” in statements preceding andfollowing the opinion. The court concluded
that plaintiffs “failed to plausibly allege” thatthe opinion constituted “a misrepresentationor omission.”6

C.D. Cal.: (1) Plaintiffs Must
Allege “Concrete” Details
to Plead Scienter Under the“Absurd to Suggest” Exception
to the Core Operations Theory,and (2) Market Knowledgeof the Alleged Fraudulent
Practice Is a Prerequisite for
Loss Causation
On August 15, 2017, the Central Districtof California dismissed with prejudice asecurities fraud action against a Chinese
solar energy company for failure to meet the“demanding standard” for pleading scienter
based on the “absurd to suggest” exception
to the core operations theory. Knox v.
Yingli Green Energy Holding Co., 2017 WL
3503358 (C.D. Cal. 2017) (Wright, II, J.).6
The court further held plaintiffs failed toestablish loss causation because there were
no allegations that the market ever learned ofany alleged accounting misstatement.

Ninth Circuit, “a securities fraud plaintiff
cannot ‘rely[ ] exclusively on the core
operations inference to plead scienter underthe [Private Securities Litigation ReformAct].’” Id. (quoting S. Ferry LP No. 2 v.
Killinger, 542 F.3d 776 (9th Cir. 2008)).
“The only exception is the ‘rare’ instance
where ‘the nature of the relevant fact is ofsuch prominence that it would be ‘absurd’to suggest that management was without
knowledge of the matter.’” Id. (quoting
Killinger, 542 F.3d 776).
In the case at hand, plaintiffs contended
that the company’s “executives intended todefraud [the company’s] investors by touting”
a Chinese government subsidy program forsolar energy projects without “disclosing therisk that the government might terminate
the program” due to allegedly “widespread”
fraud. Plaintiffs alleged that companies in
the industry had a “general ‘policy’ to delay
construction after receiving subsidies” forsolar energy projects. However, plaintiffs
did not provide “facts such as how many
companies had this purported policy and how
many projects this policy affected.”
The court found plaintiffs’ reliance on “vague
quantifiers and generalities” insufficient tosatisfy the “absurd to suggest” exception to
the core operations theory. “Without concrete
numbers,” the court explained that it could
not “conclude that the fraud was so pervasive
throughout the entire solar industry that[the company’s] upper management could
not possibly have been ignorant of it and its
potential to shutter” the subsidy program.

Plaintiffs Must Provide Detailed
Allegations to Plead Scienter
Based on the “Absurd to Suggest”
Exception to the Core Operations
Theory“The core operations theory posits thatfacts critical to a business’s core operations
or an important transaction generally areso apparent that their knowledge may
be attributed to the company and its key
officers.” The court explained that in the
6. Simpson Thacher represents Yingli Green Energy Holding
Company in this matter.

Plaintiffs Must Plead Particularized
Allegations Concerning theMarket’s Awareness of the Alleged
Fraudulent Practice to Satisfy the
Loss Causation Requirement
The court explained that “[l]oss causation
requires that the market learn of, and react
to, the company practice that the plaintiff
alleges is fraudulent (although the market
need not have learned that the practice was infact fraudulent).” Here, plaintiffs alleged thatthe company engaged in accounting fraud
by failing to write down one of its accounts.
However, the two allegedly corrective
disclosures neither identified the debtor
by name nor indicated that the company’s“problems collecting the … debt should havebeen disclosed sooner.”
7

Because “the two reports [containing thealleged corrective disclosures] did not identify[the debt at issue] and did not include any
facts from which one [could] infer that the …
debt should have been disclosed [as doubtful]earlier (if they even accounted for the debt
[as doubtful] at all),” the court held plaintiffs
could not “show that [the company’s]
accounting for that debt had any causal
connection to the drops in stock price that
followed the release of the reports.” The court
reasoned that “the market could not havereacted to a fact that it did not know.”

Delaware Chancery Court:(1) MFW’s Framework
Governs One-Sided Controller
Transactions Involving
Disparate Consideration,and (2) MFW’s Procedural
Protections Must Be in
Place Before the Controller
Negotiates for Additional
Consideration
On August 18, 2017, the Delaware Chancery
Court held that “conflicted one-side controllertransactions” in which the controller
negotiated for disparate consideration mustcomport with the requirements adopted in
Kahn v M&F Worldwide Corp., 88 A.3d 635(Del. 2014) (MFW)7 “to secure pleadingsstage business judgment rule review.”
In re Martha Stewart Living Omnimedia
Stockholder Litig., 2017 WL 3568089(Del. Ch. 2017) (Slights, V.C.) (MLO). The
court further ruled that “the correct time atwhich to determine if the [MFW] ab initio
requirement has been met is the point
7. Please click here to read our prior discussion of the MFW
decision.

where the controlling stockholder actuallysits down with an acquiror to negotiate for
additional consideration.”

One-Sided Controller Transactions
Involving Disparate Consideration
Must Satisfy MFW’s Prerequisites
to Merit Business Judgment Review
The Delaware Chancery Court explainedthat MFW established a “road map by whicha controlling stockholder’s buyout of its
subsidiary in a negotiated merger will earn
the controller” the benefit of the businessjudgment standard of review, “even at thepleading stage.”8 MLO, 2017 WL 3568089.
In considering whether the MFW test applies
to transactions in which the controllingstockholder is the seller only, the Delaware
Chancery found that “the risks andincentives [do not] differ significantly as
between two-sided controller transactions
and one-sided controller transactions where
the controller is alleged to have competedwith the minority for consideration.” Thecourt further determined that “[t]he needto incentivize fiduciaries to act in the bestinterests of minority stockholders, likewise,
is equally important in one-sided and twosided conflicted controller transactions.”
The court stated that “[i]n both instances,
the key is to ensure that all involved in
the transaction, on both sides, appreciatefrom the outset that the terms of the deal
will be negotiated and approved by aspecial committee free of the controller’s
influence and that a majority of the minority
stockholders will have the final say on
whether the deal will go forward.”
Based on its finding that “[t]he potential for
conflict is omnipresent in both scenarios,”
the Delaware Chancery Court held that “strict
compliance with [MFW’s] transactionalroad map … is required for the controllingstockholder to earn pleadings-stage businessjudgment deference when it is well-pledthat the controller, as seller, engaged in a
conflicted transaction by wrongfully divertingto herself merger consideration that otherwise
would have been paid to all stockholders.”
8. The MFW court held that the business judgment standardof review governs “mergers between a controlling stockholder
and its corporate subsidiary, where the merger is conditioned
ab initio upon both the approval of an independent, adequatelyempowered [s]pecial [c]ommittee that fulfills its duty of care;and the uncoerced, informed vote of a majority of the minority
stockholders.” 88 A.3d 635.
8

A Controlling Stockholder Must
Implement MFW’s Procedural
Protections Before Negotiating for
Disparate Consideration
The court then considered when MFW’s
procedural protections must be in place inorder for a one-sided controller transaction
involving disparate consideration to qualify
for deferential business judgment review.
The court declined “to adopt a rule thatwould require the procedural protections to
be implemented at the outset of discussions
between the target and the third party even if
the controller and third party have not evenhinted that they might engage in separate
negotiations.” The court reasoned that“[s]uch a rule would make no sense for thesimple reason that the [MFW] protections

serve no purpose at the outset of discussions
between a target and third party when the
only proposal from the putative buyer is thatall shareholders receive the same price for
their shares.”
Rather, the court found that “the ‘get go’ of
the process in the disparate considerationcase is the moment the controller and third
party begin to negotiate the controller’s sidedeals.” The court held that the controller
must “ensure that the third party and thetarget have agreed to both [MFW] procedural
protections before she begins to negotiate
separately with the third party for disparate
or non-ratable consideration” since “[t]hat iswhen the potential conflict with the minority
surfaces.”

The Securities Law Alertis edited by Paul C. Gluckow
pgluckow@stblaw.com /+1-212-455-2653, Peter E. Kazanoffpkazanoff@stblaw.com /+1-212-4553525 and Jonathan K. Youngwood
jyoungwood@stblaw.com /+1-212-455-3539.

9

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mstein@stblaw.com

Nicholas S. Goldin+1-212-455-3685
ngoldin@stblaw.com

Alan C. Turner+1-212-455-2472
aturner@stblaw.com

Peter E. Kazanoff+1-212-455-3525
pkazanoff@stblaw.com

Craig S. Waldman+1-212-455-2881
cwaldman@stblaw.com

Joshua A. Levine+1-212-455-7694
jlevine@stblaw.com

George S. Wang
+1-212-455-2228
gwang@stblaw.com

Linton Mann III+1-212-455-2654
lmann@stblaw.com

David J. Woll
+1-212-455-3136
dwoll@stblaw.com

Joseph M. McLaughlin+1-212-455-3242
jmclaughlin@stblaw.com

Jonathan K. Youngwood+1-212-455-3539
jyoungwood@stblaw.com

Alexis S. Coll-Very+1-650-251-5201
acoll-very@stblaw.com
James G. Kreissman+1-650-251-5080
jkreissman@stblaw.com

Washington, D.C.
Jeffrey H. Knox
+1-202-636-5532
jeffrey.knox@stblaw.com
Cheryl J. Scarboro+1-202-636-5529
cscarboro@stblaw.com
Peter C. Thomas+1-202-636-5535
pthomas@stblaw.com

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lawyers who authored it are rendering legal or other professional advice or opinions on specific facts
or matters, nor does the distribution of this publication to any person constitute the establishment of an
attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection withthe use of this publication. Please contact your relationship partner if we can be of assistance regardingthese important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.
10SimpsonThacherWorldwide

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Minato-Ku, Tokyo 106-0032
Japan+81-3-5562-6200
11