Thursday, in a much anticipated decision, the Delaware Supreme Court held in In re Match Group, Inc. Derivative Litigation1 that every member of a special committee must be independent in order to satisfy the MFW2 framework and obtain business judgment deference for a conflicted-controller transaction. The Delaware Supreme Court reversed the Court of Chancery, which had granted dismissal under MFW despite finding that one of the special committee’s three members lacked independence from the company’s controller. Additionally, the Delaware Supreme Court confirmed that in all conflicted-controller transactions (and not just controller-led freeze-out mergers), defendants must satisfy both MFW prongs (i.e., a fully informed vote of disinterested stockholders and approval by a well-functioning special committee) to escape entire fairness review. Moving forward, companies and boards employing special committees to negotiate and approve conflicted transactions should give heightened focus to member independence.
Background
The transaction at issue involved a reverse spinoff of IAC/InteractiveCorp (“IAC”) from its controlled subsidiary, Match Group. Minority stockholders of Match Group sued, arguing that the spinoff was subject to entire fairness because IAC was Match Group’s controller, and that the transaction was not entirely fair to Match Group because it was structured to benefit IAC at Match Group’s expense. IAC responded that the claims should be dismissed under the MFW framework, which holds that business judgment review applies to a transaction that is conditioned from the start on “approval by a well-functioning independent committee and the affirmative vote of the fully informed and uncoerced minority stockholders.”3 The Court of Chancery agreed that MFW was satisfied and dismissed the suit — despite finding that one of the three members of the Separation Committee, Thomas McInerney, lacked independence from IAC. The Court of Chancery reasoned that, to defeat MFW, a plaintiff must show “either (i) 50% or more of the special committee was not disinterested and independent, or (ii) the minority of the special committee somehow infected or dominated the special committee’s decisionmaking process,” neither of which were met.4
Court’s Analysis
The Delaware Supreme Court began by agreeing that McInerney lacked independence. McInerney worked at IAC for thirteen years, served as the CFO of IAC for seven years, served as a director of various IAC affiliates prior to the spinoff, and earned, in total, around $60 million in compensation for those services.5 Although defendants emphasized that those affiliations were years old (as McInerney’s IAC employment ended seven years prior to the transaction under consideration), the Court concluded that “[l]ongstanding business affiliations, particularly those based on mutual respect, are of the sort that can undermine a director’s independence.”6
The impact of McInerney’s lack of independence is where the Supreme Court’s opinion diverged from the court’s below. Specifically, the Supreme Court held that MFW is not satisfied even if a majority of the special committee’s members are independent, holding instead that every single member of a special committee needs to be independent. Thus, McInerney’s conflicts precluded IAC from taking advantage of MFW and obtaining dismissal. The opinion emphasizes that the aim of the MFW committee is to “irrevocably and publicly disable” the controlling stockholder “from using its control to dictate the outcome of the negotiations” and to secure an arm’s length resolution.7
Separately, at issue before the Court was whether use of an independent committee or a majority-of-the-minority vote could trigger business judgment review because the transaction was not a freeze-out merger, as was the case in MFW.8 In the course of the appeal, the Delaware Supreme Court asked for supplemental briefing on this issue, leading many commentators to speculate that the Court might gut MFW’s applicability outside of the freeze-out merger context. However, the Court ultimately reaffirmed that the MFW framework applies across a range of conflicted-controller transactions, noting Delaware precedent establishes that there is “a heightened concern for self-dealing when a controller stands on both sides of a transaction and receives a non-ratable benefit.”9
Takeaways
In re Match Group confirms that the application of MFW is exacting and that “one bad apple can ruin the bunch.” Because MFW is typically the only realistic avenue for obtaining a pleadings stage dismissal of litigation challenging a conflicted controller transaction, this ruling highlights that special attention should be given to the vetting and selection of special committee members tasked with analyzing a transaction. Looking forward, companies could benefit from forming smaller committees of directors whose ties to a controller are beyond reproach.
Moreover, deal lawyers evaluating potential director conflicts should be mindful that even years-old relationships or conflicts can be considered disabling by Delaware courts. As the Supreme Court emphasized, “[d]irectors who owe their success to another” — even if such success was experienced years prior — “will conceivably feel as through they owe a ‘debt of gratitude’ to the individual.”10 Because “older” and more personal conflicts might not always be readily apparent from D&O questionnaires, counsel could benefit from engaging in a more holistic interview process with committee candidates in order to identify potential conflicts that could later be viewed as disqualifying during litigation.
Finally, the Court’s confirmation that the rigorous MFW framework applies to controller transactions is another reminder that Delaware courts will continue to heavily scrutinize such transactions. Accordingly, the pros and cons of using MFW’s “conflict cleansing” measures should continue to be considered and weighed at the start of deal negotiations.
1 No. 368, 2022, 2024 WL 1449815 (Del. Apr. 4, 2024).
2 Kahn v. M & F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014).
3 In re Match Grp., 2024 WL 1449815 at *10 (citing Kahn, 88 A.3d at 644).
4 In re Match Grp., Inc. Derivative Litig., No. 2020-0505-MTZ, 2022 WL 3970159, at *16 (Del. Ch. Sept. 1, 2022), aff’d in part, rev’d in part and remanded, No. 368, 2022, 2024 WL 1449815 (Del. Apr. 4, 2024) (cleaned up).
5 In re Match Grp., 2024 WL 1449815 at *18.
6 Id. (citing Marchand v. Barnhill, 212 A.3d 805, 808 (Del. 2019)).
7 Id. at *19 (quoting Kahn, 88 A.3d at 644).
8 Id. at *6.
9 Id. at *11.
10 Id. at *18 (quoting Marchand, 212 A.3d at 820).
