Delaware Supreme Court clarifies entire fairness standard for controlling stockholder transactions

Match involved a stockholder derivative action challenging a reverse spinoff transaction (the Reverse Spinoff) of the dating site, Match.com, by its then-controlling stockholder, IAC/InterActive Corporation (Old IAC). In August 2019, Old IAC announced in a letter to its stockholders that it was considering a Reverse Spinoff from its controlled subsidiary, Match Group, Inc. (Old Match). At the time of the Reverse Spinoff, Old IAC held 98.2% of Old Match’s voting power through its ownership of 24.9% of Old Match’s common stock and all of Old Match’s Class B high-vote common stock.

The Old Match board appointed three directors to an independent committee (the Separation Committee) to assess the Reverse Spinoff. The Old Match board empowered the Separation Committee to retain its own financial and legal advisors, oversee and consider potential separation transactions with Old IAC, and, in its “sole discretion,” direct, negotiate, and approve any separation transaction. One of the directors appointed to the Separation Committee was Thomas McInerney. McInerney previously served as Old IAC’s Chief Financial Officer and earned millions of dollars in compensation from Old IAC and its affiliated companies. During the negotiations, McInerney met with Old IAC’s CEO, conveyed counterproposals, and reported back to the Separation Committee.

On December 18, 2019, the parties reached a final agreement and the Separation Committee recommended that the Old Match board approve the Reverse Spinoff, which it did the next day. Among other things, the Reverse Spinoff created two separate public companies (New Match and New IAC) and granted stock in New Match to stockholders of Old Match and Old IAC. The stockholders of both Old IAC and Old Match voted in favor of the Reverse Spinoff. In June 2020, Old IAC carried out the Reverse Spinoff.

The plaintiffs, a group of former Old Match stockholders, challenged the fairness of the Reverse Spinoff. The plaintiffs asserted direct and derivative claims for breach of fiduciary duties against the directors of Old Match, alleging that: (i) the Reverse Spinoff was a conflicted transaction in which Old IAC stood on both sides; (ii) McInerney lacked independence from Old IAC, which resulted in the Separation Committee not being fully independent; (iii) Old IAC obtained significant non-ratable benefits in the Reverse Spinoff to the detriment of Match and its minority shareholders; and (iv) the minority shareholders vote was not fully informed because Old Match did not disclose McInerney’s conflicts.

The Court of Chancery granted the defendants’ motion to dismiss, finding that the defendants had met all of the requirements under the MFW framework, which requires the transaction to be: (i) negotiated by a fully empowered special committee that is well-functioning and independent of the controlling stockholder; and (ii) approved by a fully informed and uncoerced vote of a majority of the minority stockholders. The court agreed that McInerney lacked independence, but nevertheless found that the transaction satisfied both prongs of MFW because the plaintiffs had failed to show that (i) more than 50% of the Separation Committee directors were not independent; or (ii) McInerney’s presence on the Separation Committee “infected” or “dominated” the decision-making process.

On appeal, the Delaware Supreme Court affirmed in part and reversed in part the Court of Chancery. First, the Court held that the entire fairness standard is the default standard of review for all transactions involving a controlling stockholder that receives a non-ratable benefit. The Court rejected the notion that the scope of MFW was limited by the nature of the transaction, and concluded instead that MFW applied to transactions where controller coercion is inherent. Thus, under MFW, for a controlling stockholder to obtain business judgment review, both requirements of the MFW framework must be met: review and approval by an independent special committee that is fully empowered to reject the proposed transaction, and approval by a fully informed and uncoerced vote of a majority of the minority stockholders.

Second, the Court agreed with the Court of Chancery that McInerney lacked independence, finding that the plaintiff’s allegations regarding McInerney’s prior business relationships with Old IAC were sufficient at the pleading stage. The Court then reversed the Court of Chancery’s finding that MFW can be satisfied where a majority of a special committee’s members are independent of the controller. The Court held that under MFW all members (not just a majority) of the special committee must be independent of the controlling stockholder. As a result of defendants’ failure to meet the MFW standard, the Court reversed dismissal of the complaint.

Authored by Allison M. Wuertz, Jordan Teti, and William C. Winter.