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Sullivan & Cromwell Discusses Delaware Supreme Court Ruling on MFW’s Application to Controller Transactions

In the important 2014 case of Kahn v. M & F Worldwide Corp., the Delaware Supreme Court held that freeze-out mergers, in which a controlling stockholder takes a company private, are subject to Delaware’s heightened “entire fairness” standard of review unless subject, at the outset, to approval by both (i) an independent special committee, and (ii) an uncoerced, fully informed majority of the minority stockholder vote (“MFW Framework”). If the MFW Framework is satisfied, the freeze-out will be subject to Delaware’s more deferential “business judgment” standard of review. Since that ruling, there has been debate about whether the MFW Framework applies to all transactions—not just freeze-outs—where a controlling stockholder stands on both sides and receives a non-ratable benefit. On April 4, 2024, in In re Match Group, Inc. Derivative Litigation, the Delaware Supreme Court held that it does.

Match concerned the reverse spinoff of Match Group, Inc. and other online dating businesses by its controlling stockholder, IAC/InterActiveCorp. (“IAC”). Match formed a three-member special committee of its Board to negotiate the separation with IAC. After the special committee approved the terms of the separation, a majority of Match’s minority stockholders approved the separation. Certain minority Match stockholders sued, asserting that the separation was unfair and left the new Match entity with certain expenses and potential litigation liabilities that benefitted IAC to the detriment of other Match stockholders.

At the motion to dismiss stage, the Court of Chancery found that the IAC board satisfied the MFW Framework in order to invoke business judgment review, and dismissed the Match stockholders’ complaint. The Court of Chancery further held that, despite one of the three members of the Match special committee lacking independence from IAC, the separation nonetheless complied with the MFW Framework because a majority of the special committee remained independent from IAC and no facts indicated the non-independent special committee member dominated the special committee’s decision-making process.

On appeal, the Delaware Supreme Court held that, even in the non-freeze-out merger context, conflicted controller transactions will be subject to entire fairness review unless the transaction strictly complies with both prongs of the MFW Framework. The Court also held that the MFW Framework requires that all members of the special committee be independent in order to replicate arm’s-length bargaining akin to a negotiation with an unaffiliated third party.

Similar to recent Court of Chancery cases, including the Sears and TripAdvisor decisions, the Delaware Supreme Court’s decision continues a trend of reviewing controller transactions with significant skepticism, emphasizing the need for a careful process even where such conflicted controller transaction does not involve a freeze-out merger.

This post comes to us from Sullivan & Cromwell LLP. It is based on the firm’s memorandum, “Delaware Supreme Court Holds MFW Applies to Controller Transactions Beyond Freeze-Out Mergers,” dated April 8, 2024, and available here. 

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