On April 4, 2024, the Delaware Supreme Court issued its decision in In re Match Group, Inc. Derivative Litigation, holding that the MFW framework established in Kahn v. M&F Worldwide Corp. (MFW) applies to all controlling stockholder transactions where the controlling stockholder receives a non‑ratable benefit, and that a defendant must meet both elements of the MFW test to lower the standard of review from the entire fairness standard to business judgment review.
Over the last decade, the Delaware Court of Chancery issued several groundbreaking decisions concerning the standard of review applied to change-of-control transactions. When such transactions pose a conflict of interest, they are subject to the entire fairness standard, under which boards of directors must meet the highest standard of review under Delaware law by showing fair price and fair process as to the disinterested stockholders. In 2014, MFW established that conflicted change-of-control transactions can nonetheless be afforded the deferential treatment of business judgment review if certain safeguards are implemented.
In MFW, the Delaware Supreme Court ruled that business judgment review can apply to squeeze-out “going private” mergers involving controlling stockholders if the transactions are conditioned, at the outset, on approval of both: (1) a properly formed and functioning special committee of only independent and disinterested directors, which (i) is empowered to freely select its own advisors and veto the issue being voted on, without fear of retaliation, and (ii) meets its duty of care in negotiating a fair price, pursuant to a fair process; and (2) a majority of informed and uncoerced, disinterested stockholders (the “dual MFW mechanisms”).
Delaware courts have gradually expanded the application of the MFW doctrine to controlling stockholder transactions other than squeeze-out mergers, such as a company’s purchase of a controlling stockholder’s assets, transactions with companies owned by controlling stockholders or acquisitions of companies with which controlling stockholders have significant relationships. The MFW court also held that a defendant corporation’s demonstration of a transaction’s approval by either of the dual MFW mechanisms could shift the burden of proving the entire fairness of the transaction (or lack thereof) to the plaintiff.
In a similar decision, Corwin v. KKR Financial Holdings, the Delaware Supreme Court held that change-of-control transactions not involving a controlling stockholder, that are approved by a fully informed, uncoerced vote of disinterested stockholders, are entitled to business judgment review, rather than the enhanced scrutiny to show the highest price reasonably available was obtained, as required by Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. Thus, when a defendant corporation adheres to the tenets of Corwin, the burden shifts to the plaintiff stockholders to show insufficient disclosures or other breaches of duty. The court also held that for disinterested stockholders to be “fully informed,” they must be apprised of all material facts relating to the transaction. As a result, after Corwin, companies are incentivized to disclose any troubling facts that could then be “cleansed” of potential liability through the act of disclosure.
Facts
In re Match Group Derivative Litigation is a stockholder derivative suit challenging the multi-step reverse spinoff of Match Group, Inc. by its then-controlling stockholder, IAC/InterActive Corporation. This transaction resulted in Match Group obtaining greater voting rights, while transferring cash from Match Group to IAC and reallocating assets and liabilities between the two entities in a manner more favorable to IAC.
Despite the Delaware Court of Chancery’s dismissal of the suit on the grounds that (i) plaintiffs lacked standing and (ii) IAC defendants met both elements of MFW, the Delaware Supreme Court opted to reconsider the extension of MFW outside the squeeze-out merger context by requesting briefing on the issue, even though IAC defendants raised it for the first time on appeal. The court specified that the issue to be briefed was whether either of the dual MFW mechanisms, standing alone, may be used in non-merger, controlling stockholder transactions to invoke business judgment review.
IAC defendants argued that the more exacting two-prong MFW route to business judgment review should not be applied in controlling stockholder transactions beyond squeeze-out mergers. They argued MFW serves the limited purpose of addressing the “inherent coercion” to which controlling stockholder squeeze-out transactions are susceptible. IAC defendants further asserted that ordinary conflicts concerns arising from other controlling stockholder transactions are adequately addressed by implementing any one of the following safe harbors traditionally recognized by Delaware courts: (1) approval by a majority of the board of directors, so long as a majority are independent; (2) approval by a special committee of independent directors (i.e., the first MFW element); or (3) approval by a majority of disinterested stockholders (i.e., the second MFW element).
Plaintiffs responded that strict compliance with MFW is the only way defendants can shift from the entire fairness standard to business judgment review when a case involves any controlling stockholder transaction. Plaintiffs argued that the entire fairness standard predates cash-out mergers and has continued to be applied by Delaware courts in controlling stockholder transactions that are not squeeze-out mergers, and that inherent coercion necessarily exists whenever both MFW mechanisms are not met.
A number of law professors submitted a brief amici curiae supporting plaintiffs’ arguments. They argued that MFW should dictate whether any controller-conflicted transaction receives business judgment review, because allowing a single safe harbor mechanism to suffice would invite controlling stockholders to manipulate the structure of squeeze-out merger transactions to “smuggle” them past the entire fairness standard and the dual mechanism MFW safe harbor, more easily obtaining business judgment review. They also argued that MFW is indispensable to minority stockholder protection when any controlling stockholder transaction is at issue, given the particular vulnerability of minority stockholders to controller-imposed agency costs, and that this protection creates corporate value.
The court held that defendants must satisfy both MFW mechanisms in order to benefit from business judgment review, reasoning that: (1) contrary to the IAC defendants’ contention, Delaware courts have long recognized the need to satisfy both MFW mechanisms in order to remove the influence of controlling stockholders whenever they receive a non-ratable benefit from an interested transaction; and (2) (i) the MFW court did not indicate any interested-transaction setting where inherent coercion is not a potential issue, and (ii) just because inherent coercion does not disable disinterested directors from exercising their statutory right to consider a litigation demand does not mean there should be a presumption against inherent coercion in business transactions. In addition, the court held that the entire special committee must be independent pursuant to MFW, and not merely a majority that is not dominated by a conflicted director.
Key Takeaway
It is now clear for Delaware corporations contemplating controlling stockholder transactions that, in order for business judgment review to apply in any resulting derivative litigation, the permissibility of a controlling stockholder transaction must be conditioned on approval of: (1) a special committee that is independent, empowered and meets its duty of care in negotiating a fair price, pursuant to a fair process; and (2) a majority of informed and uncoerced, disinterested stockholders.
