In In re Match Group Derivative Litigation, No. 368, 2022 (Del. Apr. 4, 2024) (Match Group), the Delaware Supreme Court clarified two lingering issues concerning the scope and application of the procedural protections outlined in Kahn v. M & F Worldwide Corp., 88 A.2d 635 (Del. 2014) (MFW).  Specifically, the Supreme Court explained that: (i) adherence to MFW requires that the transaction be negotiated and approved by an entirely independent (rather than majority independent) special committee; and (ii) MFW’'s applicability is not strictly limited to freeze out mergers. 

The Court of Chancery’s Decision

On September 1, 2022, the Court of Chancery granted defendants’ motions to dismiss fiduciary claims arising out of a multi-step reverse spinoff. As discussed in an earlier post, the Court of Chancery held, among other things, that the spinoff had been approved in accordance with MFW. Although the plaintiffs had adequately alleged that one member of the special committee (which negotiated and approved the spinoff) lacked independence from the controlling stockholder, the Court of Chancery still held that MFW’s procedural protections had been satisfied because the special committee was comprised of a majority of independent directors. Accordingly, the Court of Chancery held that the spinoff was subject to (and withstood) business judgment review and granted the defendants’ motions to dismiss.

The Delaware Supreme Court’s Opinion

The Supreme Court addressed two issues on appeal: (1) whether a controlling stockholder transaction which is not a freeze-out merger is subject to entire fairness review or business judgment review when the transaction was approved by either an independent special committee or received approval by a majority of the fully informed minority stockholders; and (2) if entire fairness applies, whether the controlling stockholder satisfied all of MFW’'s requirements to invoke business judgment review.

First, the Delaware Supreme Court held that, for purposes of a controlling stockholder transaction where the controller receives a non-ratable benefit, adherence to all of MFW’'s procedural protections is required to downgrade the presumptive standard of review from entire fairness to business judgment. Accordingly, the Court rejected the argument that either special-committee approval or approval by a majority of the fully informed minority stockholders can downgrade the standard of review to business judgment. Although utilizing either one of these procedural mechanisms can shift the burden of proof (such that the stockholder would need to prove that the transaction was not entirely fair), more is required to alter the standard of review. To gain the benefit of business judgment review, a controlling stockholder must meet all six of MFW’s requirements.

Second, the Delaware Supreme Court agreed with the stockholders’ argument that MFW requires an entirely independent special committee, such that the Court of Chancery erred by holding that the majority independent special committee was sufficient for purpose of MFW.