In Olenik v. Lodzinski, C.A. No. 2017-0414-JRS, a controlling stockholder conducted discussions with a target for approximately nine months before making a formal offer. As a result, the plaintiffs argued that the controlling stockholder failed to meet the requirements of MFW which require the controlling stockholder to condition a transaction on the uncoerced approval by both an independent special committee and an informed majority of the minority stockholders in order to obtain the benefit of business judgement deference.
The Court disagreed with plaintiff’s proposition that the controlling stockholder failed to meet the requirements and noted the distinction between “preliminary discussions” and “negotiations”. The Court opined that “in most instances, ‘negotiations’ begin when a proposal is made by one party which, if accepted by the counter-party, would constitute an agreement between the parties regarding the contemplated transaction.” The requirement is triggered from the “outset of negotiation” and not by “extensive preliminary discussions”. The Court noted that the negotiation process did not start until the Company submitted an offer letter which was “the first real move in the negotiating bout”. The preliminary discussions did not amount to bargaining but just exploratory exchanges, and did not include discussions on the price, which was a distinguishing feature of negotiations.
BOTTOM LINE: You do not lose the benefit of the business judgement rule when you explore possibilities and do not address price.