Declining MOM Conditions in Freezeout Transactions and the MOOM Alternative

In a decades-long series of decisions, 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 (“MOM” approval). Empirical evidence indicated that practitioners largely adopted this dual-pronged approach to freezeouts for most of the following decade. However, a trilogy of decisions from 2022-2023 unintentionally created dis-incentives for MOM conditions. We present the first empirical evidence from this trilogy, and find that MOM conditions have indeed decreased significantly in incidence: from approximately 80% beforehand to approximately 45% afterwards. As a policy matter, we argue that our findings likely reflect a step in the wrong direction because the combination of SC approval and MOM approval tracks the procedural protections in an arms-length deal process. We expect that MOM conditions will rebound as a result of the recent reforms in SB21. However, to the extent that controllers are declining to provide the conditions due to “hold up” risk by activist investors, we propose an additional mechanism to address this concern: the majority-of-the- original minority (MOOM) condition.