DealLawyers.com Blog

At the risk of sounding like we have absolutely no lives, John and I have been eagerly awaiting the Delaware Supreme Court’s decision in the In Re Match Group Inc. Derivative Litigation for quite some time — at least since the December oral arguments. Yesterday, the comparatively short, 52-page opinion In Re Match Group Inc. Derivative Litigation (Del.; 4/24) was posted.

For background, in September 2022, the Chancery Court held in In Re Match Group Inc. Derivative Litigation (Del. Ch.; 9/22) that IAC/InterActive’s 2019 reverse spinoff of its Match.com dating business satisfied the MFW framework and was subject to review under the business judgment standard, rejecting the plaintiffs’ allegations that the special committee and/or the stockholder approval were insufficient under MFW. On appeal, the Delaware Supreme Court did something unusual, requesting “supplemental briefing to answer the following question: for a controlling stockholder transaction that does not involve a freeze out merger, like the transaction here, does the entire fairness standard of review change to business judgment if a defendant shows either approval by an independent special committee or approval by an uncoerced, fully informed, unaffiliated stockholder vote.”

Per this Morgan Lewis memo, the company took this opportunity to argue “against ‘MFW creep,’ or the expansion of the MFW Doctrine outside of the squeeze-out merger context”:

Specifically, the company reasoned that Delaware courts have historically required companies to use only one of three so-called “cleansing mechanisms” to invoke the protections of the business judgment rule for a conflicted transaction: (1) approval by a majority of independent directors, (2) approval by a special committee of independent directors, or (3) approval by a majority of disinterested stockholders. Accordingly, the company argued that MFW’s holding should be cabined to apply only to squeeze-out mergers, and other controlling stockholder transactions should be entitled to deference under the business judgment rule so long as the company meets one of the three traditional cleansing mechanisms.

The Delaware Supreme Court disagreed — finding that multiple procedural protections are required to change the standard of review — and overturned the Chancery Court’s decision to apply the business judgment rule since the approving committee member was not independent of the controlling stockholder and, therefore, defendants failed to satisfy MFW’s multiple prongs.

[W]e conclude, based on long-standing Supreme Court precedent, that in a suit claiming that a controlling stockholder stood on both sides of a transaction with the controlled corporation and received a non-ratable benefit, entire fairness is the presumptive standard of review. The controlling stockholder can shift the burden of proof to the plaintiff by properly employing a special committee or an unaffiliated stockholder vote. But the use of just one of these procedural devices does not change the standard of review. If the controlling stockholder wants to secure the benefits of business judgment review, it must follow all MFW’s requirements.

Tulane Prof. Ann Lipton points out that the opinion also seemed to apply a tighter independence standard, saying the court wasn’t having the “oh, well, one turned out to be conflicted but it didn’t matter much business,” which had been persuasive to the Chancery Court. My kid would call this argument “sus” — because she uses that word about everything. In a conversation this morning she told me, “only old people use the full word suspicious.” Follow for legal updates; stay for tips on how to be cool to a 10-year-old.

– Meredith Ervine