Match.com Ruling Stresses Investor Protections in Insider Deals

The Delaware Supreme Court has reiterated its intent to protect minority investors who are effectively powerless to sway transactions between companies and their controlling stockholders.

The court on Thursday turned aside arguments that such protections only applied to deals where minority investors get cashed out at a price set unilaterally by a controller.

The 50-page ruling revives litigation over a restructuring that split online dating company Match Group Inc. from billionaire Barry Diller’s tech and media holding company IAC/Interactive Corp.

Here are some takeaways from the five-judge decision, signed by Chief Justice Collins J. Seitz Jr.

MFW Scope

The court took the unusual step of asking for additional briefing and arguments to consider whether the level of judicial scrutiny for many corporate transactions changes if a defendant shows either approval by an independent special committee or approval by fully informed, unaffiliated shareholders.

The framework Delaware courts had applied since 2016 required both of those steps to be taken in order for a transaction to be reviewed under the less onerous “business judgment” standard. Without both, corporate leaders must defend a transaction as “entirely fair.” The test requires them to prove in court that both the process and the price were adequate, questions that can have different meanings in different contexts.

Both steps must be taken whenever “a controlling stockholder stood on both sides of a transaction with a controlled corporation and received a non-ratable benefit,” Seitz wrote.

“But the use of just one of these procedural devices does not change the standard of review. If the controlling stockholder wants to secure the benefits of business judgment review, it must follow all” parts of what’s known as the “MFW” doctrine, after 2014’s Kahn v. M&F Worldwide Corp., Seitz said.

The court rejected the defendants’ arguments that previous Delaware Supreme Court rulings didn’t require application of those procedural devices outside of “freeze out” or “squeeze out” transactions.

“We read our Supreme Court precedent differently,” Seitz said. “Our analysis starts with the common thread running through our decisions: a heightened concern for self-dealing” when there’s a controlling stockholder on both sides of a transaction.

And in the MFW ruling, “we noted that a controlling stockholder generally has inherently coercive authority over the board and the minority stockholders,” he said.

The Supreme Court’s opinion signals frustration among Delaware’s judiciary with transactional planners and “corporate law nerds” trying to push the limits of business judgment review, said Richard Renck, a partner at Duane Morris LLP.

Match shows the state’s high court isn’t swayed by arguments attempting to narrow the scope of previous orders concerning controller-led deals, he said.

“If you’re a Delaware corporate lawyer advising boards and directors, if you’ve got any kind of transaction with your conflicted stockholder, the paradigm is what the Supreme Court has said it is, and that’s even including MFW,” Renck said.

Committee Independence

A trial court judge had found that just a majority of the special committee considering a transaction involving a controlling stockholder needed to be independent. But the Supreme Court disagreed, finding that a board must set up an entirely independent committee.

“We stated in MFW that the special committee must be independent, not that only a majority of the committee must be independent,” Seitz said.

In other contexts where a deal doesn’t include a controlling stockholder, even majority independence isn’t always required, he said.

But transactions where there’s a conflict between a company and its controlling stockholders are special cases. “A controlling stockholder’s influence is not ‘disabled’ when the special committee is staffed with members loyal to the controlling stockholder,” Seitz said.

“Longstanding business affiliations, particularly those based on mutual respect, are of the sort that can undermine a director’s independence. Directors who owe their success to another will conceivably feel as though they owe a ‘debt of gratitude’ to the individual,” he said.

The opinion “ratcheted up” what will be accepted as an independent committee by the courts going forward, said Jill Fisch, a University of Pennsylvania law professor.

“And that, in a way, is almost as important as the fact that you need the sort of two-step process, because true independence and disinterestedness in a company with a real controlling stockholder—it’s going to be pretty hard,” she said.

Musk Up Next?

Diller and former Match board members initially dodged the legal challenge to the online dating company’s spinoff from IAC.

He had argued before Vice Chancellor Morgan T. Zurn that he wasn’t a Match fiduciary because he controlled it only indirectly, through IAC. But the lower court judge never had to address that issue before she dismissed the lawsuit on MFW-related grounds in September 2022.

He’ll have to make that argument now that the case is going back to Delaware’s Court of Chancery.

“Now that the case will be remanded, the Court of Chancery should have the opportunity to decide his dismissal motion in the first instance,” Seitz said.

The Delaware Supreme Court has positioned itself to take on another billionaire—Elon Musk, who’s expected to appeal the Chancery Court’s rescission of his $55 billion pay package at Tesla Inc., said Eric Talley, who teaches at Columbia Law School.

The trial court applied the MFW standard in Musk’s case too, finding that the Tesla directors’ decision to give Musk the excessive compensation plan was rife with conflicts of interest.

Now the justices on the high court are going to be able to clear up any concerns about controller liability without having to invent “a made-up jurisprudence that draws artificial distinctions between freeze-outs and cosmetically different transactions,” Talley said.