Business Vantage Point Blog

In case you missed it, the Delaware Supreme Court rendered a decision on this very issue earlier this year in In re Match Group Derivative Litigation.² The ruling held that entire fairness is the presumptive standard of review where (1) a controlling stockholder stood on both sides of a transaction with the controlled corporation and received a non-ratable benefit and (2) the defendant failed to satisfy all of the requirements set forth in MFW to change the standard of review to business judgment.

What the Chancery Court Found

IAC/InterActiveCorp incorporated Match Group Inc. in 2009 to hold its Match.com business and other dating platforms. A portion of Match’s common stock was sold in 2015 to the public in a public offering, and in 2019, IAC announced in a letter to its stockholders that it was considering separating from Match. Match’s board appointed three of its directors to a “separation committee” to assess a proposed transaction.

One of the directors appointed to the separation committee was IAC’s former chief financial officer (CFO), who had worked for IAC from 1999 to 2012, including seven years as the CFO. The separation committee retained its own legal counsel and financial adviser. The proposed transaction envisioned creating two separate public companies and eliminating Match’s dual-class capital structure via a reverse spin-off (the separation).

After reaching a final agreement with IAC, the separation committee recommended that Match’s board approve the separation. The board approved the separation and submitted it to a vote of the stockholders, who voted in favor of the separation. At the time, IAC held 98.2% of Match’s voting power through ownership of 24.9% of Match’s common stock and all of Match’s Class B high-vote common stock.

Certain former Match stockholders challenged the separation in the Delaware Court of Chancery, claiming that the separation was a conflicted transaction where IAC, as Match’s controlling stockholder, stood on both sides of the transaction and obtained significant non-ratable benefits to the detriment of Match and its minority stockholders.

The defendants made a motion to dismiss. The Court of Chancery held that the defendants satisfied the requirements set forth in MFW for the application of the business judgment rule and dismissed the case, finding that the separation conditioned the transaction on the approvals of a fully empowered, well-functioning special committee of independent directors and the uncoerced, fully informed vote of the minority stockholders.

What the Delaware Supreme Court Found

Following the transactions consummated in connection with the separation, the Delaware Supreme Court found that: (1) the former minority stockholders of Match owned common stock in a widely held and highly leveraged corporation (referred to herein as New Match), subject to short-term restrictive governance provisions; and (2) the former stockholders of IAC received most of the interest in New Match, as well as shares in a cash-rich corporation with little to no debt that was spun off from IAC in connection with the separation.

After reviewing the development of Delaware case law related to judicial review of controlling stockholder transactions, the court found that entire fairness is the standard of review in transactions between a controlled corporation and a controlling stockholder when the controlling stockholder receives a non-ratable benefit, except that, under MFW, the business judgment rule applies when all of the following are satisfied:

• A controlling stockholder conditions a transaction from the start on the approval of both a special committee and a majority of the minority stockholders.
• The special committee is independent.
• The special committee is fully empowered.
• The special committee meets its duty of care.
• The vote of the minority is informed.
• There is no coercion of the minority.
   

The defendants argued that MFW and the cases that preceded it involved freeze-out mergers and that outside the context of a freeze-out merger, traditional principles of Delaware corporate law recognize that any one of the following three cleansing mechanisms suffices to invoke the business judgment standard of review in a conflicted transaction: approval by (1) a board with an independent director majority; or (2) a special committee of independent directors; or (3) a majority of the unaffiliated stockholders. According to the defendants, the rule has always been that, other than freeze-out mergers, any one of such procedural devices described in (1) through (3) above could invoke business judgment review in controlling stockholder transactions.

The court rejected that argument and held that the requirements set forth in MFW are not limited to freeze-out merger transactions and that all requirements of MFW must be satisfied for the business judgment rule to apply where a controlling stockholder stands on both sides of a transaction and receives a non-ratable benefit.

The court further found, for purposes of applying the business judgment rule, that when a controlling stockholder transacts with the corporation and receives a non-ratable benefit, the special committee created and empowered to oversee and consider such a conflicted transaction must be fully independent — not just a majority independent. The court noted that a controlling stockholder’s influence is not disabled when the special committee is staffed with members loyal to the controlling stockholder.

In the present case, the court found that the complaint pleaded facts that raise a reasonable doubt about the former CFO’s independence from IAC and, therefore, the entire separation committee’s independence. Accordingly, the court reversed the Court of Chancery’s decision to apply the business judgment rule, dismissed the plaintiffs’ claims, and held that entire fairness remains the standard of review.

Moving Forward

All of MFW’s requirements must be satisfied in order for the business judgment rule to apply when a controlling stockholder stands on both sides of a transaction with the controlled corporation and receives a non-ratable benefit. Companies should ensure that all members of a special committee created and empowered to oversee and consider a transaction involving a controlling stockholder that receives a non-ratable benefit are independent.

¹ 88 A.3d 635 (Del. 2014).

² 315 A.3d 446 (Del. 2024).