Recently, in In re Match Grp., Inc. Derivative Litigation,1 the Delaware Supreme Court overruled the Delaware Chancery's interpretation of the special committee independence requirement under the MFW transaction cleansing framework2 in connection with a reverse spinoff initiated by a controlling stockholder. The underlying transaction involved the separation of IAC/InterActiveCorp (IAC) from Match Group, Inc., IAC's controlled subsidiary (Match). The plaintiffs alleged that the transaction was unfair because IAC, as Match's controlling stockholder, received benefits from the transaction at the expense of Match's minority stockholders. The pre-transaction Match board appointed a three-member separation committee, which included Thomas McInerney (TM). The plaintiffs alleged that TM was not independent of pre-transaction IAC and, therefore, that the MFW framework's committee requirement could not be satisfied for the transaction's review under the business judgment rule. Even though the Chancery Court agreed that plaintiffs had pled facts creating a reasonable inference regarding TM's lack of independence, it nonetheless ruled that plaintiffs had to show that 50% or more of the committee lacked independence in connection with the transaction's approval process. By failing to do so, the Chancery Court held that the committee had met the MFW independence requirement. Having determined that the other MFW framework requirements were satisfied in connection with the approval of the transaction, the Chancery Court applied the business judgment rule and dismissed the case.
On appeal, the Supreme Court emphasized one of the tacit policy concerns motivating its prior articulation of the MFW framework: the need for pre-trial demonstration of arm's length negotiation of the transaction free from inherently coercive controlling stockholder influence. The essential feature of that separation from the controller stockholder is the independence of all committee members.
In discussing TM's connections with IAC, the Supreme Court noted that TM (i) was a long-serving IAC employee, including as its CFO, (ii) was a long-serving director of IAC-affiliated companies, including Match, and (iii) had a relationship with Barry Diller, an IAC senior executive, chairman, and significant stockholder prior the transaction, highlighting their public statements of mutual admiration and respect. In the court's view, such close and pervasive relationships can undermine a director's independence.
Having determined that there existed a reasonable inference that TM lacked independence when negotiating the transactions, the Supreme Court ruled that the Chancery Court erred in its determination that only a majority of the committee needed to be independent to satisfy the MFW framework requirements, noting that the MFW decision was clear that the committee in its entirety must be independent. As such, the Supreme Court reversed the Chancery Court's decision to apply the business judgment rule to the transaction.
This case reinforces the importance of director independence assessments with respect to controlling stockholder transactions and the application of the MFW framework. Parties hoping to avail the framework need to be extremely cautious in their assessments of committee independence and undertake them with the commencement of any internal consideration of such a transaction. This case is another reminder that director independence determinations under Delaware case law often turn on consideration of nebulous interpersonal relationships like personal respect, loyalty and affection, debts of gratitude, longstanding friendship, and the like. Business principals are often surprised that Delaware judges do not share their assumptions about them and that mere hints of them — if adequately pled — can be potentially disqualifying. As a result, they frequently fail to conduct this important work sufficiently in advance of such transactions and can then only hope that a remaining and quickly shrinking slate of potential committee candidates will qualify or that others will not raise the issue down the line.
Footnotes
1. In re Match Grp., Inc. Derivative Litigation, Del. Spr., No. 368, 2022 (Del. April 4, 2024). See also Taft's prior commentary on the underlying case here.
2. See Kahn v. M&F Worldwide Corp., 88 A.3d 635, 645 (Del. 2014) (hereinafter "MFW") (articulating Delaware common law requirements to shift the standard of review of a corporate transaction involving a conflicted controlling stockholder under the entire fairness standard to the business judgment rule where (1) the transaction was approved by a special committee and a majority of the minority stockholders, (2) the special committee was independent, (3) the special committee selected its own advisors and could decline to recommend the transaction, (4) the special committee negotiated a fair price, (5) the minority stockholder vote was an informed one and (6) minority stockholders were not coerced.
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