In this decision, the Supreme Court (the “Court”) affirmed in part and reversed in part a decision by the Court of Chancery, in which the Court of Chancery, applying the framework set forth in Kahn v. M&F Worldwide Corp. (“MFW”), granted defendants’ motion to dismiss stockholder claims challenging a reverse spinoff. The Supreme Court reasserted the applicability of MFW to all controlling stockholder transactions where the controller obtains a non-ratable benefit, holding that a defendant must meet both elements of MFW in order to shift the judicial standard from entire fairness to business judgment review. The Supreme Court, however, found the defendants had failed to satisfy the MFW framework because the special committee was not wholly independent.
Here, stockholders challenged a series of transactions by which a controlling stockholder effectuated a reverse spinoff. In 1999, IAC/Interactive Corp. (“Old IAC”) acquired Match.com. In 2009, Old IAC created a subsidiary, Match Group, Inc. (“Old Match”), to hold Match.com and other dating sites owned by Old IAC. As the controlling stockholder of Old Match, Old IAC held 24.9% of Old Match’s publicly traded common stock and all of Old Match’s Class B high-vote common stock. In 2019, Old IAC separated its online dating business and certain debt obligations from the rest of its business by spinning off its other businesses into a newly formed subsidiary, “New IAC.” Old IAC continued to hold a stake in Old Match. Old IAC then reclassified its two classes of Old Match stock into one class of common stock and became known as Match Group, Inc. (“New Match”). Old Match then merged with and into a New Match subsidiary, and minority Old Match stockholders received New Match stock. As a result of the merger, Old Match ceased to exist. In the Court of Chancery, plaintiff stockholders argued that Old IAC effectuated the separation of Old IAC and New IAC to the benefit of New IAC and to the detriment of both Old Match and New Match’s minority stockholders.
The Court of Chancery held that defendants complied with the MFW framework, and the business judgment rule therefore applied, because the transaction satisfied the procedural protections outlined in MFW. On appeal, plaintiffs challenged the Court of Chancery’s rulings with respect to whether the special committee was independent and whether the stockholder vote was fully informed. The defendants argued on appeal that the Court of Chancery properly applied the MFW framework. Defendants argued, in the alternative, that because the case did not involve a freeze-out transaction, the use of either an independent committee or minority vote procedural devices was sufficient to invoke business judgment review.
The Court disagreed, holding that the MFW framework applies to all controlling stockholder transactions whereby the controller obtains a unique non-ratable benefit, reasoning that a controlling stockholder has inherently coercive authority over the board and its minority stockholders in any transaction setting, not only in freeze-out mergers. Siding with several brief amici curiae submitted by academics supporting plaintiff stockholders, the Court reiterated that both approval by a special committee comprised of independent directors and approval by a majority of disinterested stockholders is required to invoke business judgment versus entire fairness review.
The Court arrived at this conclusion by analyzing precedent decisions in Kahn v. Tremont and Kahn v. Lynch and distinguishing Williams v. Geier, which did not apply the MFW framework because the controlling stockholders received the same benefit as other stockholders. In so holding, the Court recognized a tension between the precedent for conflicted controlling stockholder transactions and the precedent regarding the applicable standard for demand review cases involving controlling stockholders, in which inherent coercion alone will not excuse demand. The Court justified the distinction because the conflicted controlling stockholder transactions precedent applies to the substantive standard of review for the transaction, while the demand excusal precedent is grounded in the directors’ statutory authority to control the business and affairs of the corporation.
After determining that MFW framework applies to the transaction, the Court reversed the Court of Chancery’s holding that the independence of two of three special committee members was sufficient to satisfy the independent-committee aspect of MFW. The Court reasoned instead that, to satisfy MFW, the special committee must be wholly independent, and, therefore, one member’s lack of independence will destroy the entire special committee’s independence for purposes of MFW. Thus, the Court found the Court of Chancery improperly applied the business judgment rule and remanded the case for the Court of Chancery to analyze the transaction applying the entire fairness standard.
