September 8, 2022

Del Chancery Holds Reverse Spin-Off Passes Muster Under MFW

Last week, in In Re Match Group Inc. Derivative Litigation, (Del. Ch.; 9/22), the Chancery Court held that IAC/InterActive’s 2019 reverse spinoff of its dating business satisfied the MFW framework and was subject to review under the business judgment standard.

The spin-off was accomplished through a series of transactions through which IAC/InterActive (“Old IAC”) separated its dating businesses and certain debt obligations from its other businesses. Under the terms of the agreement governing the deal, Old IAC formed a new subsidiary (“New IAC”) and spun its other businesses to New IAC. That left Old IAC holding certain debt obligations and a stake in (“Old Match”). Old IAC then reclassified its high & low vote classes of stock into a single class of common stock and changed its name to Match Group, Inc. (“New Match”). Old Match then merged into a New Match merger sub, and the minority Old Match stockholders received stock in New Match.

The plaintiffs alleged that the Old Match board and Old IAC, as Old Match’s controlling stockholder, breached their fiduciary duties by inappropriately diverting cash to New IAC and by inappropriately allocating assets & liabilities between the entities.  The defendants moved to dismiss the plaintiffs’ complaint, contending that the complied with the MFW framework. The plaintiffs responded that the special committee formed to negotiate the transaction was not independent and not empowered to say “no” to the deal.  They also alleged that the special committee did not satisfy its duty of care and that the Old Match stockholders’ vote wasn’t fully informed.

Vice Chancellor Zurn rejected the plaintiffs’ allegations.  While she found that one member of the special committee was not independent due to his previous employment relationship with Old IAC, she concluded that the plaintiffs’ failed to allege that he “controlled the information flow to his fellow directors, undermined the committee’s process, or exerted any undue influence or control over” the other committee members. She found that the special committee was empowered to reject a transaction, and rejected the duty of care claims, including those relating to the committee’s retention of its financial advisor.

The Vice Chancellor also rejected challenges to the adequacy of Old Match’s proxy disclosures. The most interesting of these was a claim that the proxy statement was misleading because it didn’t disclose that the “real” reason for certain governance changes was to protect New IAC from adverse tax consequences, not to protect New Match’s stockholders. Noting that the proxy described the board’s reasons for structuring the transaction as it did and described the governance changes as being “defensive anti-takeover measures to prevent a change of control,” VC Zurn rejected the plaintiffs’ claim that further disclosure about the board’s motivation for implementing them was required:

This Court has long rejected arguments that disclosures are materially misleading because “they fail to disclose [the] real reason” behind board action because “as a general rule, proxy materials are not required to state ‘opinions or possibilities, legal theories or plaintiff’s characterization of the facts.’” “[D]isclosures relating to the Board’s subjective motivation or opinions are not per se material, as long as the Board fully and accurately discloses the facts material to the transaction.” “Put more simply, asking ‘why’ does not state a meritorious disclosure claim under our law.”

John Jenkins