In re Match Group, Inc. Derivative Litigation
No. 368, 2022 (Del. Apr. 4, 2024) (2024)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
In a controlling stockholder transaction where the controlling stockholder stands on both sides and receives a non-ratable benefit, entire fairness is the presumptive standard of review. To shift to business judgment review, the controlling stockholder must satisfy all six requirements of the MFW framework, including that all members of the special committee negotiating the transaction must be independent of the controlling stockholder.
Facts:
- In 1999, Old IAC, an internet and media company, acquired the Match.com business.
- In 2009, Old IAC incorporated a new subsidiary, Old Match, to hold the Match.com business and other dating platforms.
- In 2015, Old Match offered shares to the public through an initial public offering (IPO); at the time of the reverse spinoff, Old IAC held 98.2% of Old Match’s voting power.
- On August 7, 2019, Old IAC announced it was considering separating from Old Match, a move supported by Barry Diller, Old IAC’s Chairman and a large stockholder.
- The Old IAC board informed Old Match that any separation transaction would be conditioned on the recommendation of an Old Match special committee and approval by a majority of Old Match’s unaffiliated stockholders.
- The Old Match board appointed Thomas McInerney, Pamela Seymon, and Ann McDaniel to a “Separation Committee”; McInerney was Old IAC’s former CFO (from 1999 to 2012) and CEO of Altaba, Inc.
- Old IAC proposed a separation plan that involved Old Match issuing a large dividend, retaining significant debt obligations, and Old IAC (as the controlling stockholder) receiving most of the dividend proceeds.
- McInerney negotiated directly with Joey Levin, Old IAC’s CEO, leading to a preliminary agreement that modified the dividend amount and equity allocation before the final agreement was reached on December 18, 2019, which led to the Separation on June 30, 2020.
Procedural Posture:
- Former Old Match stockholders (plaintiffs Construction Industry and Laborers Joint Pension Trust for Southern Nevada Plan A and Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement Trust) filed a complaint in the Delaware Court of Chancery challenging the Separation.
- Plaintiffs alleged direct/class and derivative breach of fiduciary duty claims against Old IAC (as Old Match's controlling stockholder), Barry Diller (Old IAC's alleged controlling stockholder), and directors of Old Match.
- Defendants moved to dismiss the complaint.
- The Court of Chancery granted the defendants’ motion to dismiss, finding that plaintiffs lacked derivative standing, Nevada lacked direct standing, and Hallandale’s remaining direct claims were subject to business judgment review because the MFW requirements were satisfied.
- Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement Trust (appellant) appealed the Court of Chancery's dismissal to the Supreme Court of the State of Delaware.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Is entire fairness review the presumptive standard for controlling stockholder transactions that do not involve freeze-out mergers, and if so, must all six MFW requirements, including a wholly independent special committee, be met to invoke business judgment review?
Opinions:
Majority - Chief Justice Seitz
No, in a controlling stockholder transaction where the controlling stockholder receives a non-ratable benefit, entire fairness is the presumptive standard of review, and it does not change to business judgment review unless all MFW requirements are met, including that all members of the special committee must be independent. Delaware law applies heightened scrutiny to self-dealing by controlling stockholders who stand on both sides of a transaction and receive a non-ratable benefit, presuming entire fairness review due to the inherent potential for conflict and outsized influence, as established in cases like Sinclair Oil, Summa Corp., and Kahn v. Tremont (Tremont II). While Weinberger v. UOP, Inc. and Kahn v. Lynch clarified that an independent committee or minority vote could shift the burden of proof to the plaintiff, these cases, and others like Emerald Partners and Levco, consistently maintained that the standard of review remained entire fairness for non-freeze-out controlling stockholder transactions. The Kahn v. M & F Worldwide Corp. (MFW) framework allows for business judgment review, but it requires both a well-functioning independent committee and an informed, uncoerced minority vote, structured from the outset, specifically for freeze-out mergers. The Court explicitly rejected the argument that its prior precedent on non-freeze-out transactions misunderstood the law or was obiter dictum. The MFW framework requires the controlling stockholder to 'irrevocably and publicly disable itself from using its control to dictate the outcome of the negotiations' to ensure an arm's-length outcome, which necessitates all special committee members to be independent. The Court agreed with the Court of Chancery that Thomas McInerney lacked independence due to his longstanding business affiliations with Old IAC and Barry Diller, including his former CFO role and significant compensation, creating a 'debt of gratitude.' The Court of Chancery erred by concluding that only a majority of the Separation Committee needed to be independent; the purpose of MFW's special committee is to replicate arm's-length bargaining, which requires a wholly independent committee. Because McInerney was not independent, the Separation Committee was not wholly independent, thus failing an MFW requirement. Therefore, entire fairness remains the standard of review. Separately, Hallandale lost derivative standing because the Separation was not a 'mere reorganization' due to significant changes in New Match's financial interests, capital structure, and governance.
Analysis:
This decision significantly clarifies the application of the MFW framework, limiting its business judgment review benefits to only those controlling stockholder transactions, including non-freeze-outs, where all MFW conditions are strictly met, particularly mandating a wholly independent special committee. The ruling underscores the Delaware Supreme Court's consistent position that inherent coercion by a controlling stockholder is a substantial concern, reaffirming the stringent 'entire fairness' standard as the default for conflicted transactions with non-ratable benefits. It sends a strong signal to boards and controlling stockholders that long-standing business ties, even if not recent, can still compromise a director's independence, thereby impacting the validity of any special committee approvals and requiring meticulous care in committee composition to avoid stricter judicial scrutiny.
