DealLawyers.com Blog

October 8, 2024

Controlling Stockholders: A Parent’s Controller Isn’t Always a Subsidiary’s Controller

The Match Group litigation continues to meander its way through the Delaware courts. The latest round finds us back in Chancery, where Vice Chancellor Zurn recently issued a letter decision addressing the defendants’ motion to dismiss. In that decision, she refused to dismiss breach of fiduciary duty claims against the company’s directors, but did dismiss those claims against its alleged controlling stockholder – and it’s this latter ruling that makes the case interesting.

If you’ve been following the case, you know that Vice Chancellor Zurn originally dismissed the plaintiffs’ challenge to IAC/InterActive’s 2019 reverse spinoff of its Match.com dating business on the grounds that the transaction satisfied the MFW framework. The Delaware Supreme Court reversed that decision earlier this year, and the Chancery Court was called upon to consider alternative grounds to dismiss the plaintiffs’ claims asserted by the defendants.

The plaintiffs alleged that media mogul Barry Diller was a controlling stockholder of the company by virtue of his ownership of over 40% of the stock in its parent company.  Citing the Chancery Court’s prior decision in In re EZCORP Consulting Agreement Derivative Litigation. (Del. Ch.; 1/16), the plaintiffs argued that because Diller was the controlling stockholder of the company’s parent, he was the ultimate controller of the company itself.

Vice Chancellor Zurn rejected that contention. She observed that in order to be a controller, a stockholder must either owns a majority of the voting power, which she referred to as “hard control”, or otherwise exercise control over the company’s business and affairs, which she referred to as “soft control.”  This excerpt summarizes her reasoning:

Plaintiffs argue that because Old IAC had hard control of Old Match, Diller must be Old Match’s ultimate controller under EZCORP. But I do not read EZCORP to stand for the proposition that the controller of a parent company is the subsidiary’s ultimate controller, always and as a matter of law. Put differently, EZCORP does not identify a transitive property of control that redounds through every chain of controllers. Rather, EZCORP applied the first prong of the traditional controller analysis to successive holders of 100% voting power, culminating in hard control of the entity at the bottom.

Plaintiffs have not pled Diller has hard control of Old IAC’s voting power that would necessarily grant him control of Old Match’s voting power. EZCORP does not satisfy or excuse Plaintiffs’ burden of pleading Diller, in the absence of any voting power at Old Match, still exercised actual control over it.

The Vice Chancellor concluded that the plaintiffs failed to adequately plead Diller exerted actual control over the subsidiary entity, at all or through his inferred actual control of its parent. In particular, she noted that the plaintiffs’ sole allegation bearing on Diller’s actual control of the subsidiary was that he used the parent’s voting power to pack the subsidiary board with five officers and directors of the parent and three individuals with close ties to Diller.

Vice Chancellor Zurn pointed out that the plaintiffs did not allege that the use of the parent’s voting power handed Diller actual control over the sub. In that regard, she said that the appointment of five parent company affiliates to the board deepened the parent’s control over the subsidiary, not Diller’s.  The Vice Chancellor concluded that, even assuming the other three directors were beholden to Diller, his ability to influence three members of a 10-member board didn’t amount to control.  Accordingly, she held that Diller was not a controlling stockholder of the subsidiary and dismissed the claims against him.

John Jenkins