Summary:

In April 2024, in an eagerly anticipated decision, the Delaware Supreme Court issued an order in In re Match Group Deriv. Litig., C.A. No. 2020-0505 (April 4, 2024) (“Match”) that clarifies the application of the framework articulated in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (the "MFW Doctrine”). Under the MFW Doctrine, the standard of review of a conflicted controlling stockholder transaction, which is typically viewed under entire fairness scrutiny, can be shifted to the business judgment rule if certain conditions are met. These conditions include: (1) approval by an independent special committee of directors; and (2) fully informed approval by the majority of the company’s disinterested stockholders. Essentially, the doctrine aims to simulate a fair, arm’s-length deal by eliminating conflicts of interest and undue influence from the controlling stockholder. A failure to adhere to the MFW Doctrine in a controlling stockholder transaction will result in the court evaluating the transaction based on the more stringent entire fairness standard instead of the more lenient business judgment rule.

Match involved a legal challenge regarding the spinoff of Match.com by IAC/InterActiveCorp (“IAC”), its then-controlling stockholder. In the lower court, the Court of Chancery dismissed the plaintiffs’ challenge to the spinoff merger under the business judgment rule, finding that the defendants had satisfied the requirements of the MFW Doctrine. During the appeal process, the Delaware Supreme Court requested supplemental briefing on a novel question regarding MFW's applicability beyond controller freeze-out merger. The defendants argued that the MFW Doctrine should be restricted to freeze-out mergers. Conversely, Plaintiffs asserted that MFW should continue to apply universally to all transactions involving a conflicted controlling stockholder and that deviating from this would significantly limit stockholder protections.

In ruling for the Plaintiffs, the Court held that entire fairness is the presumptive standard of review in any suit where a controlling stockholder stood on both sides of a transaction with the controlled corporation or received a non-ratable benefit. Furthermore, in a win for stockholders everywhere, the Court clarified that to shift the standard of review under the MFW Doctrine, fiduciaries must demonstrate that the transaction was approved by both an entirely independent special committee and a fully informed vote of the unaffiliated stockholders.

The Conflicted Transaction:

Match Group was acquired by IAC in 1999. In 2009, IAC incorporated Match Group in Delaware as its subsidiary. The transaction in question involved the separation of Match Group, and some debt obligations, from the rest of IAC’s businesses. To complete the separation, IAC formed a subsidiary, “New IAC,” and spun off its other businesses into that new entity. This left “Old IAC” holding Match Group, as well as a considerable amount of debt. At the time of this reverse spinoff, Old IAC held 98.2% of Match Group’s voting power—a benefit conferred through its ownership of 24.9% of Match Group’s common stock and all of the Class B shares, which had disproportionately high voting rights. Old IAC reclassified three classes of stock into a single class of common stock and became known as “New Match.”

Negotiations for this transaction were led by a “Separation Committee” composed of three of the ten Match Group directors: Thomas McInerney, Pamela Seymon, and Ann McDaniel. Led by McInerney, the Separation Committee negotiated and ultimately reached an agreement with IAC CEO Joey Levin to spin IAC off from Match Group. Later, a majority of the unaffiliated stockholders of both IAC and Match Group voted to approve the transaction. McInerney was the former CFO of IAC and a director of several Diller-controlled companies. Both IAC and Match Group were controlled by IAC’s chairman and largest individual stockholder, Barry Diller.

The Chancery Court Litigation:

On September 1, 2022, Match Group stockholders brough a suit challenging the fairness of the reverse spinoff, through which IAC would separate from its controlled subsidiary, Match Group. The lawsuit named IAC and ten of its directors as defendants and alleged that they had breached their fiduciary duties to the company by conferring non-ratable benefits on IAC  to the detriment of Match Group’s minority stockholders. The plaintiffs further alleged that the Separation Committee was conflicted, and that the proxy disclosures regarding the spinoff misled the Match Group stockholders who had voted in favor of the transaction.

Defendants moved to dismiss the Plaintiffs’ claims, arguing that IAC had complied with the MFW framework and therefore the Court of Chancery should review the transaction under the business judgment rule. In granting defendants’ motion, the Delaware Court of Chancery held that plaintiffs failed to plead facts sufficient to call into question whether any of the MFW Doctrine’s procedural requirements had been satisfied. Specifically, the Court of Chancery held that the special committee approval prong of MFW did not require complete independence of all members of a special committee in order for business judgment to apply.

The Delaware Supreme Court Decision:

In a welcome decision for stockholders, the Supreme Court clarified that the protections outlined in MFW applied to all controller transactions, not just controller cash-out mergers. Additionally, while the Court of Chancery had deemed a majority-independent special committee sufficient, the Supreme Court disagreed, emphasizing the necessity of full independence of all members of a special committee to meet MFW standards. Notably, a special committee member who was also IAC’s former CFO's IAC was found to be plausibly conflicted, leading to the application of entire fairness review and a remand to the Court of Chancery for further assessment.

Why It Matters:

This ruling clarifies a key aspect of Delaware law, potentially preventing dismissals of well-founded lawsuits where certain members of a special committee may not have been independent, and reinforcing the Delaware Court’s inclination towards heightened scrutiny in controller transactions. The impact of this decision is a clear win for stockholders, who now have a firm rule in place that governs and controls the exact type of behaviors and procedures that a company must follow when engaging in transactions with controlling stockholders if they hope to enjoy the protections of the business judgment rule. Following the Match.com decision, in order to qualify for business judgment review, conflicted controlling stockholder transactions must satisfy both of MFW's requirements: (i) approval by a committee of an independent directors that is fully empowered and meets its duty of care, and (ii) approval from a majority of minority stockholders in a fully informed, uncoerced vote. If a conflicted controlling stockholder transaction fails to satisfy both of those requirements, then entire fairness will remain the standard of review. Special committees must be comprised solely of independent directors. Entire fairness will remain the standard of review if plaintiffs can show significant connections between even one special committee member and the controlling stockholder.

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