Delaware Supreme Court Reaffirms Business Judgment Rule Standard
On April 4, 2024, in In re Match Group, Inc. Derivative Litigation (--- A.3d ---, 2024 WL 1449815 (Del.)), the Delaware Supreme Court, sitting en banc, reaffirmed the requirements for obtaining the business judgment rule standard of review for transactions involving controlling stockholders. The Supreme Court held that the business judgment rule applies to controlling stockholder transactions only if the transaction is negotiated and approved by an independent, special committee and is approved by a fully informed vote of a majority of the minority stockholders. The Supreme Court further held that all special committee members—not just a majority—must be independent of the controlling stockholder.
Background
In 2019, IAC/InteractiveCorp (“IAC”) separated from its controlled subsidiary, Match Group, Inc. (“Match”), through a reverse spinoff. At the time, Match was publicly traded but IAC held 24.9% of Match’s common stock and 98.2% of Match’s voting power. IAC told Match at the outset that any transaction would be conditioned on both the recommendation of a Match board special committee and the approval of the holders of a majority of the shares held by Match’s unaffiliated stockholders. Match’s board appointed a “Separation Committee” to assess a proposed transaction. The Separation Committee included Thomas McInerney, IAC’s former Chief Financial Officer. The Separation Committee negotiated the separation and recommended that the Match board approve the separation. The Match board did so by a unanimous vote. Match’s unaffiliated stockholders also approved the separation.
Former Match minority stockholders challenged the separation in the Court of Chancery, alleging that IAC received disproportionate benefits at their expense. The plaintiffs alleged that the transaction was subject to entire fairness review—not the deferential business judgment rule—because the Separation Committee, and McInerney in particular, was not sufficiently independent from IAC, and the minority stockholder vote was not fully informed.
The Court of Chancery granted defendants’ motion to dismiss. The Court held that the separation satisfied the requirements set forth in Kahn v. M & F Worldwide Corp. (“MFW”) (88 A.3d 635 (Del. 2014)), for controlling stockholder transactions to be subject to business judgment rule review. The Court found that IAC properly conditioned the separation on the approval of a fully empowered, well-functioning special committee of independent directors and the uncoerced, informed vote of the minority stockholders. Although the Court acknowledged that plaintiffs alleged facts undermining McInerney’s independence, the Court found that plaintiffs would need to allege that a majority of the Special Committee lacked independence, which they did not do. The Court further found that the minority stockholder vote was fully informed.
The Supreme Court’s Decision
Controlling stockholder transactions are subject to heightened entire fairness review unless the controller takes steps to ensure that the transaction has the characteristics of an arm’s-length negotiation. In MFW, the Delaware Supreme Court previously held that the more deferential business judgment rule will apply when: (i) a controlling stockholder conditions a transaction from the start 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 fully empowered; (iv) the special committee meets its duty of care; (v) the vote of the minority stockholders is informed; and (vi) there is no coercion of the minority.
In Match Group, the Supreme Court reaffirmed that the MFW requirements apply to all controlling stockholder transactions where defendants seek to shift the standard of review to the business judgment rule. The defendants in Match Group had sought to limit MFW to freeze out mergers and argued that the business judgment rule otherwise applied to a controlling stockholder transaction, as long as the transaction was approved by either a board with an independent majority or an independent special committee or a fully informed, unaffiliated stockholder vote. The Supreme Court rejected defendants’ arguments, and confirmed that the business judgment rule applies only if a controlling stockholder transaction is approved by both an independent special committee and a majority of the minority stockholders. The Supreme Court recognized that there is a heightened concern for self-dealing whenever a controlling stockholder stands on both sides of a transaction and receives a non-ratable benefit.
The Supreme Court further held that MFW’s requirements are satisfied only when all special committee members—not merely a majority—are independent. The Supreme Court agreed that McInerney lacked independence. He had worked for IAC from 1999 through 2012, including a seven-year term as IAC’s CFO. During that time, McInerney earned over $55 million from IAC. McInerney was also close with IAC’s Chairman, senior executive and largest stockholder, Barry Diller. The Supreme Court explained that a controlling stockholder’s influence is not disabled when the special committee is staffed with members loyal to the controlling stockholder. As a result, the Supreme Court held that entire fairness remained the standard of review and that the Court of Chancery improperly dismissed plaintiffs’ claims.
Implications
After the MFW decision, some corporations began to use the MFW structure to shift the standard of review to the business judgment rule for controlling stockholder transactions other than freeze-out mergers, sometimes referred to as “MFW creep,” which led some, including former Delaware Supreme Court Chief Justice Leo Strine, to question whether MFW was necessary to obtain business judgment review for all controlling stockholder transactions. Match Group makes clear that Delaware courts will apply entire fairness—the highest standard of review—to all controlling stockholder transactions where the controller receives a non-ratable benefit unless the controller complies with MFW. The Supreme Court rejected attempts to limit MFW’s requirements to only freeze out mergers and stated that the same concerns that led to MFW being adopted for freeze-out mergers are present any time a controlling stockholder stands on both sides of a transaction.
In the context of controlling stockholder transactions, Match Group also reaffirms the need for boards of directors to take care in setting up special committees to ensure that all members are independent of the controlling stockholder. IAC had attempted to comply with MFW’s requirements by conditioning the separation from the outset on the approval of a special committee and a majority of unaffiliated stockholders. But those efforts were unsuccessful, as the Supreme Court agreed that it was reasonably conceivable that one special committee member lacked independence—even though he had not worked for IAC for seven years.
