In an en banc, unanimous decision in In re Match Group, Inc. Derivative Litigation, the Delaware Supreme Court rejected the proposal for a less demanding route to business judgment review concerning transactions involving self-interested controlling stockholders that do not amount to complete "squeeze-out" mergers. Instead, Chief Justice Collins J. Seitz, Jr., writing the opinion, upheld that in all instances where the controller has interests on both sides and gains a non-ratable benefit (even in non-squeeze-outs), the presumptive standard of review is entire fairness. Defendants are required to show compliance with both prongs of the framework outlined in Kahn v. M & F Worldwide Corp. ("MFW") to attain business judgment review for the transaction. Additionally, the ruling underscores that within the MFW context, to mimic arm's-length negotiations, every member of the committee, not just a majority, must be independent from the controller. Thus, Match Group v. In re MFW reaffirms that, under Delaware law, MFW remains the exclusive route to trigger business judgment review in transactions involving self-interested controllers and clarifies the necessity of ensuring the independence of each member of the special committee to rely on MFW's safeguards.
Background
In its influential 2014 MFW ruling, the Delaware Supreme Court established guidelines for controller squeeze-out transactions where minority shareholders sell their shares and do not become stockholders of the surviving entity. The court determined that such transactions would undergo business judgment review if they met two conditions: (i) approval by a fully empowered special committee of independent directors fulfilling its duty of care and (ii) the informed, uncoerced vote of a majority of the minority stockholders. Following the MFW decision, the Court of Chancery extended the MFW framework to non-squeeze-out cases where the controller gained a non-ratable benefit. This led to the question of whether this framework was necessary in those scenarios to secure business judgment review for the transactions.
The Match case also unfolded within the context of a non-squeeze-out transaction involving a controller, specifically the 2020 separation of Match from its controlling stockholder, IAC/InterActiveCorp ("IAC"). IAC had conditioned the transaction on approval by an independent special committee and a majority vote of the minority stockholders. The Match board established a three-member separation committee with the authority to approve or disapprove any proposed separation transaction, among other responsibilities. Ultimately, both the separation committee and a majority of the minority stockholders approved the transaction.
Minority stockholder plaintiffs of Match brought direct and derivative claims, alleging, among other things, that the transaction qualified as a controller transaction warranting entire fairness review. They argued that the business judgment rule did not apply under MFW because the separation committee lacked full independence. Initially, the Court of Chancery dismissed the complaint, concluding that the transaction met the MFW requirements. Notably, the Court of Chancery found that the independent committee requirement of the MFW framework was satisfied, even though the complaint alleged that one of the three directors on the separation committee lacked independence from IAC. The court reasoned that the allegedly non-independent director did not exert undue influence or compromise the proper functioning of the committee, which consisted of a majority of independent directors.
Holding
In its ruling, the Delaware Supreme Court affirmed certain aspects and reversed others, issuing two pivotal decisions.
Firstly, the court affirmed that the entire fairness standard remains the default review standard for any challenge to a transaction where the controller has interests on both sides and gains a non-ratable benefit. In such cases, defendants must prove compliance with both prongs of the MFW framework to qualify for business judgment review of the transaction. In this determination, after meticulously analyzing Delaware Supreme Court and Court of Chancery precedents spanning more than four decades, the court dismissed the defendants' assertion that the entire fairness standard of review: (i) is exclusive to squeeze-out mergers and not applicable to other forms of conflicted controller transactions, or (ii) can shift to business judgment review if the transaction receives approval from either an independent special committee or an uncoerced, fully informed, unaffiliated stockholder vote, without necessitating both endorsements. Regarding the latter argument, the court clarified that using only one of the protective measures shifts the burden of proving entire fairness to the plaintiff but does not alter the review standard. Furthermore, the court noted that entire fairness might not be the default standard if the controller does not receive a non-ratable benefit.
Secondly, the court elucidated that MFW's stipulation for an independent committee necessitates the committee's complete independence, not just a majority of its members being independent. Therefore, because the plaintiffs in the Match case adequately alleged facts in their complaint that reasonably inferred one of the three members of the separation committee lacked independence from IAC, the case could not be dismissed in the early stages based on the MFW framework.
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