In Long-Awaited Match Decision, Delaware Supreme Court Expands MFW Requirements in Conflicted Controller Transactions

The Delaware Supreme Court issued its decision in In re Match Group, Inc. Derivative Litigation,¹ on April 4, 2024, in which it made two significant holdings. First, the Court refused to limit the MFW framework² to just those in which the controller seeks to acquire the shares of minority stockholders. Instead, the Court held that to restore the benefit of the business judgment rule to any transaction in which a controller stands on both sides and receives a non-ratable benefit, the controller must irrevocably and publicly pre-condition the transaction on approval by both a special committee of independent board members and an uncoerced, fully informed majority vote of disinterested stockholders. Second, the Court rejected decisions from the Court of Chancery holding that MFW could still protect a conflicted controller transaction if only a majority of the special committee members are independent, and where the conflicted director did not dominate or infect the committee’s process. Instead, the Supreme Court held each member of the special committee must be independent for the committee to satisfy MFW.

Background

The Match decision arose from a reverse spinoff in which IAC/InterActive Corp (called “Old IAC” pre-spinoff) separated from Match Group, Inc. (“Old Match”), a public subsidiary in which Old IAC held a controlling stake.³

In 2019, Old IAC announced its plans to separate Old Match’s businesses, as well as some of Old IAC’s debt obligations, from the rest of its business.⁴ The Old Match board formed a “Separation Committee” to evaluate the proposed transaction.⁵ One member of the Separation Committee was Thomas McInerney, a former CFO of Old IAC who had served on various boards of Old IAC-affiliated entities.⁶

In December 2019, the Separation Committee and Old IAC reached a final agreement.⁷ The agreement was ratified separately by stockholders of both Old IAC and Old Match, and the separation was completed on June 30, 2020.⁸

Old Match stockholders challenged the separation in the Delaware Court of Chancery, arguing that the spinoff was subject to entire fairness review because Old IAC, Old Match’s controlling stockholder, had structured the transaction to provide it with significant non-ratable benefits at Old Match’s expense.⁹ The Court of Chancery dismissed the complaint, agreeing with Defendants that the transaction was subject to business judgment review because they had followed the MFW framework by conditioning the transaction on approval by the independent Separation Committee and a vote of fully informed stockholders.¹⁰ Plaintiffs appealed, and the Delaware Supreme Court affirmed, reversed and remanded for further proceedings.

The Delaware Supreme Court’s Decision

The Delaware Supreme Court resolved two primary issues: (1) whether MFW applied to the challenged transaction; and (2) if MFW did apply, whether the transaction satisfied MFW’s requirements.

MFW Applies to all Transactions Where a Controller Stands on Both Sides and Receives a Non-Ratable Benefit

In MFW, the Delaware Supreme Court held that the standard of review for a buyout transaction in which a controller acquired the outstanding minority shares could shift from entire fairness to the business judgment rule “if and only if” the following conditions were met:

(i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed and (vi) there is no coercion of the minority.¹¹

In the years since it was decided, Delaware courts have applied the MFW framework to other types of conflicted controller transactions, not just buyouts.¹² In Match, Defendants asked the Delaware Supreme Court to put an end to this “MFW creep” and to limit MFW solely to buyout transactions involving controlling stockholders, thus permitting either a special committee or unaffiliated stockholder approval to restore the business judgment rule for non-buyout transactions (rather than requiring use of both those procedural safeguards to relax the judicial standard of review).

Defendants argued that MFW’s protections were designed to foreclose the controller’s ability to bypass equitable review, a unique danger in buyout transactions because of the tender offer mechanism.¹³ In support, Defendants argued that “MFW creep” clashed with existing precedent, which supported that other controlling stockholder transactions require only one of the two MFW procedural safeguards to receive business judgment rule review.¹⁴ Defendants also argued MFW creep clashed with precedent in the context of demand review under Rule 23.1, which holds that inherent coercion alone does not excuse demand. Defendants argued that if inherent coercion does not disable an independent director’s ability to decide whether a corporation should sue a controlling stockholder, then MFW should not be read to presume inherent coercion in every controller transaction.¹⁵ Accordingly, Defendants argued that approval by either a special committee or unaffiliated stockholders should suffice to restore the business judgment rule for non-buyout, conflicted controller transactions.

The Supreme Court rejected Defendants’ arguments. In so rejecting, the Court focused on the “common thread running through our decisions: a heightened concern for self-dealing when a controlling stockholder stands on both sides of a transaction and receives a non-ratable benefit.”¹⁶ Accordingly, in the Court’s view the nature of a buyout transaction—in which the controller can exert its power to deprive the minority of continued ownership in the company—was not itself the driving factor necessitating the MFW framework. Rather, it was the inherent coercion for any transaction in which the controller stood on both sides and stood to receive a non-ratable benefit that mandated the procedural safeguards of MFW.

In reaching this result, the Court acknowledged the “tension” between its broad reading of MFW and the Court’s demand review precedent, but held that this precedent “st[ood] apart from the substantive standard of review in controlling stockholder transactions.”¹⁷ In the Court’s view, demand review is “grounded in the board’s statutory authority to control the business and affairs of the corporation, which encompasses the decision to pursue litigation,” a different consideration than the substantive standard of review.¹⁸

The Transaction Did Not Satisfy MFW Because the Separation Committee Was Not Fully Independent

After affirming the Court of Chancery’s application of MFW to the transaction at issue, the Supreme Court then assessed whether Defendants had satisfied MFW.

The Court of Chancery had held that the Special Committee had been sufficiently independent despite finding that one of its three members was not independent because he had a longstanding relationship with Old IAC and a personal relationship of “respect, loyalty, and affection” with Old IAC’s controlling stockholder.¹⁹ In so deciding, the Court of Chancery held that MFW can be satisfied even if a special committee director suffered from a disabling conflict of interest so long as that conflict did not dominate or infect the special committee’s process and a majority of the committee was independent. Because the plaintiff had failed to plead facts that the special committee’s process had been dominated or infected, the Court of Chancery dismissed the complaint.

The Supreme Court disagreed. Instead, the Supreme Court held that to meet the MFW requirement of approval by an independent special committee, each member of the Special Committee needed to be independent. Again, the Court based its decision on the need to disable the inherently coercive power of a controlling stockholder.²⁰ As the Supreme Court reasoned, “[a] controlling stockholder’s influence is not ‘disabled’ when the special committee is staffed with members loyal to the controlling stockholder.”²¹ Accordingly, if one member of a special committee lacks independence, the entire special committee lacks independence and cannot avail itself of MFW protections.²²

The Supreme Court thus reversed the Court of Chancery’s decision to apply the business judgment rule and dismiss the plaintiffs’ claims and instead held that entire fairness remains the standard of review.²³

Conclusion and Takeaways

The Delaware Supreme Court’s decision in Match comes on the heels of concerns increasingly expressed about the caselaw of conflicted controller transactions. Many of those concerns arise from uncertainty as to who is a controller and what constitutes a conflicted controller transaction requiring each of the MFW procedures to restore the protections of the business judgment rule. The Court’s decision in Match does not address the former. As to the latter, the Court’s decision holds that MFW applies to transactions where the controller (i) stands on both sides and (ii) receives a non-ratable benefit not shared with the minority. Moreover, the Court’s holding that the entire special committee must be independent from a controller may raise future concerns given the continuously evolving caselaw around what social and professional relationships will call into question a director’s independence.

Given the recently reinforced skepticism by the Delaware courts for conflicted controller transactions, parties seeking to invoke MFW should be careful to:

• Irrevocably and publicly establish at the outset that the transaction is conditioned on both a fully independent special committee and a fully informed and uncoerced vote of the unaffiliated stockholders;
• Vet any potential special committee members for their independence from the controller and its affiliates;
• Establish “rules of the road” to guide the negotiation process to enable it to replicate the arm’s-length process contemplated by MFW;
• Engage in arm’s-length negotiations with the controller, with the special committee being prepared to reject a deal if the committee believes in good faith that the deal is not fair to the company’s minority stockholders;
• Avoid other actions that could be viewed as coercive, including any threats by the controller to circumvent the special committee process; and,
• Err on the side of caution, and disclosing information to stockholders as a prophylactic to protect the business judgment of the special committee.