IN RE MATCH GROUP, INC. DERIVATIVE LITIGATION
No. 368, 2022
IN THE SUPREME COURT OF THE STATE OF DELAWARE
April 4, 2024
Submitted: December 13, 2023
Before SEITZ, Chief Justice; VALIHURA, TRAYNOR, LEGROW, and GRIFFITHS, Justices; constituting the Court en Banc.
Michael Hanrahan, Esquire (argued), J. Clayton Athey, Esquire, Corinne Elise Amato, Esquire, Kevin H. Davenport, Esquire (argued), Stacey A. Greenspan, Esquire, Jason W. Rigby, Esquire, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Lee D. Rudy, Esquire, Eric L. Zagar, Esquire, J. Daniel Albert, Esquire, Maria T. Starling, Esquire, KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania for Plaintiffs Below/Appellants.
Robert D. Klausner, Esquire, KLAUSNER, KAUFMAN, JENSEN & LEVINSON, Plantation, Florida for Plaintiff Below/Appellant Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement Trust.
William M. Lafferty, Esquire, John P. DiTomo, Esquire, Elizabeth A. Mullin, Esquire, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Theodore N. Mirvis, Esquire (argued), Jonathan M. Moses, Esquire, Ryan A. McLeod, Esquire, Alexandra P. Sadinsky, Esquire, Canem Ozyildirim, Esquire, WACHTELL, LIPTON, ROSEN & KATZ, New York, New York for Defendants Below/Appellees Barry Diller, Joey Levin, Glenn Schiffman, Mark Stein, Gregg Winiarski, and IAC Holdings, Inc. (now known as IAC Inc.).
Blake Rohrbacher, Esquire, Matthew W. Murphy, Esquire, Sandy Xu, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Maeve O‘Connor, Esquire (argued), Susan R. Gittes, Esquire, Amy C. Zimmerman, Esquire, DEBEVOISE & PLIMPTON LLP, New York, New York for Defendants Below/Appellees Ann L. McDaniel, Thomas J. McInerney, and Pamela S. Seymon.
David E. Ross, Esquire, Adam D. Gold, Esquire, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Joshua G. Hamilton, Esquire, Meryn C.N. Grant, Esquire, LATHAM & WATKINS LLP, Los Angeles, California; Blair Connelly, Esquire, LATHAM & WATKINS LLP, New York, New York; Michele D. Johnson, Esquire LATHAM & WATKINS LLP, Costa Mesa, California for Defendants Below/Appellees IAC/InterActive Corp. (now known as Match Group, Inc.), Sharmistha Dubey, Amanda Ginsberg, Alan G. Spoon, and Match Group, Inc. (now merged into Match Group Holdings II, LLC).
Gregory V. Varallo, Esquire, BERNSTEIN LITOWITZ BERGER & GROSSMANN
Ned Weinberger, Esquire, Mark Richardson, Esquire, Brendan W. Sullivan, Esquire, LABATON SUCHAROW LLP, Wilmington, Delaware; John Vielandi, Esquire, Joshua M. Glasser, Esquire, LABATON SUCHAROW LLP, New York, New York for Amicus Curiae, Alpha Venture Capital Management, LLC, in support of Appellants.
Kimberly A. Evans, Esquire, BLOCK & LEVITON LLP, Wilmington, Delaware; Joel Fleming, Esquire, Amanda Crawford, Esquire, BLOCK & LEVITON LLP, Boston, Massachusetts for Amicus Curiae, Charles M. Elson, in support of Appellants.
SEITZ, Chief Justice:
This appeal arises from a Court of Chancery decision dismissing a stockholder suit challenging the fairness of IAC/InterActiveCorp‘s separation from its controlled subsidiary, Match Group, Inc. Through a reverse spinoff, IAC/InterActiveCorp separated its internet and media businesses from Match and other online dating businesses. In their complaint, the plaintiffs alleged that the transaction was unfair because IAC/InterActiveCorp, a controlling stockholder of Match, received benefits in the transaction at the expense of the Match minority stockholders.
Typically, the court would apply entire fairness review to assess whether the reverse spinoff transaction was fair to the Match stockholders. But the defendants claimed that business judgment review applied because they followed the so-called MFW framework,1 which included approval by an independent and disinterested “separation committee” and a majority of uncoerced, fully informed, and unaffiliated Match stockholders. The Court of Chancery agreed and dismissed the complaint.
There are two main issues on appeal. First is the standard of review. We requested supplemental briefing to answer the following question: for a controlling stockholder transaction that does not involve a freeze out merger, like the transaction here, does the entire fairness standard of review change to business judgment if a
defendant shows either approval by an independent special committee or approval by an uncoerced, fully informed, unaffiliated stockholder vote. If the answer is no, then we move to the second question: whether IAC/InterActiveCorp satisfied all MFW‘s requirements to invoke business judgment review.
For the first question, we conclude, based on long-standing Supreme Court precedent, that in a suit claiming that a controlling stockholder stood on both sides of a transaction with the controlled corporation and received a non-ratable benefit, entire fairness is the presumptive standard of review. The controlling stockholder can shift the burden of proof to the plaintiff by properly employing a special committee or an unaffiliated stockholder vote. 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 MFW‘s requirements. Of course, derivative claims against controlling
For the second question, the separation committee must have functioned as an independent negotiating body. We agree with the Court of Chancery that the plaintiffs have alleged that Thomas McInerney, a separation committee member, lacked independence from IAC/InterActiveCorp. We reverse its finding, however,
that the separation committee functioned as an independent negotiating body. In the MFW setting, to replicate arm‘s length bargaining, all separation committee members must be independent of the controlling stockholder. The plaintiffs have adequately alleged that the defendants have not satisfied the MFW framework. For the remaining issues, we affirm the Court of Chancery‘s rulings.
I.
A.
According to the allegations of the amended and supplemental complaint, Old IAC was a Delaware internet and media company.2 In 1999, Old IAC, through one of its subsidiaries, acquired the Match.com business, a market leader in online dating products in the United States and Europe.3 In 2009, Old IAC incorporated in Delaware a new subsidiary, Old Match, to hold the Match.com business and the other dating platforms held by Old IAC.4 In 2015, Old Match offered shares to the
public through an initial public offering (IPO) of its common stock.5 At the time of the reverse spinoff, Old IAC held 98.2% of Old Match‘s voting power through ownership of 24.9% of Old Match‘s common stock, and all of Old Match‘s Class B high-vote common stock.6
On August 7, 2019, Old IAC announced in a letter to its stockholders that it was considering separating from Old Match.7 Soon after, Barry Diller – Chairman, Senior Executive, and large stockholder of Old IAC – told Old IAC‘s board that he would support a reverse spinoff of Old IAC from Old Match‘s businesses.8 With a deal now likely, the Old IAC board conveyed to Old Match that any transaction would be conditioned from the start upon both the recommendation of an Old Match board special committee and the approval of the holders of a majority of the shares held by Old Match‘s unaffiliated stockholders.9
The Old Match board appointed directors Thomas McInerney, Pamela Seymon,
transaction.10 McInerney was Old IAC‘s former CFO and, at the time, CEO of Altaba, Inc. (formerly Yahoo! Inc.).11 The Old Match board empowered the Separation Committee to retain its own financial and legal advisors, “oversee and consider” potential separation transactions with Old IAC, and in its “sole discretion” to direct, negotiate, and approve or disapprove any separation transaction.12
The Separation Committee retained Debevoise & Plimpton LLP as its counsel and selected Goldman Sachs & Co. LLC as its financial adviser.13 Old IAC delivered its initial proposal to Debevoise. The proposal envisioned creating two separate public companies and eliminating Old Match‘s dual-class capital structure (the “Separation“). All Old Match and Old IAC stockholders would receive stock in New Match with voting power of one vote per share. The initial proposal allocated various assets and liabilities between New IAC and New Match and required New Match to retain and guarantee debt in the form of around $1.7 billion worth of exchangeable notes issued by certain financing subsidiaries of Old IAC (the
“Exchangeables“).14 Additionally, Old Match would issue a $2 billion dividend to its stockholders before the Separation, which would be financed with $1.8 billion of new debt.15 Old IAC, as Old Match‘s majority stockholder, would receive most of the dividend proceeds. The proposal conditioned closing on approval by a majority of the shares held by disinterested Old Match stockholders.16
In the ensuing months, McInerney met several times with Joey Levin, Old IAC‘s CEO, and reported back to the full Separation Committee.17 A day before the Separation Committee and Old IAC reached preliminary agreement, the Separation Committee “determined” that McInerney should be the one to “convey the Committee‘s” counterproposal to Levin.18 On November 22, 2019, McInerney and Levin spoke by telephone and “reached a preliminary agreement on the remaining open key transaction terms.”19 The preliminary agreement differed from the initial
proposal by reducing the Old Match dividend to $850 million, and allocating an additional 2% of equity in New Match to the Old Match stockholders.20
B.
On December 18, 2019, the parties reached a final agreement.21 The Separation Committee recommended that the Old Match board approve the Separation.22 The next day, following the Old IAC board‘s
The proxy described the transaction as follows:
- New Match will be reclassified into a widely held public corporation with a single class of common stock and no controlling stockholder;24
- Old IAC‘s stockholders will receive stock in New IAC and New Match based on an exchange ratio adjusted for the rest of the consideration comprising the Separation;25
- Old Match‘s minority stockholders will receive, in exchange for one share of their common stock, the right to receive one share of New Match common stock and, at the holder‘s election either $3.00 in cash or a fraction of a share of New Match stock with a value of $3.00;26
- Old Match will issue an $850 million dividend to its existing stockholders, with Old IAC receiving approximately $680 million of that amount because of its equity in Old Match. New IAC will retain the dividend proceeds;27
- New Match will retain and guarantee various Old IAC debt obligations, including the Exchangeables, which are valued at about $1.7 billion;28
- New Match would be subject to certain governance restrictions, giving New IAC a degree of control over New Match for the near future;29 and
- Old IAC would have the right to engage in an equity offering where it may raise $1.5 billion for New IAC by selling shares of Old IAC stock convertible into shares of New Match stock following completion of the Separation.30 The proceeds of the equity offering would be transferred into New IAC.
The Old IAC stockholder exchange ratio was based on the number of outstanding shares of Old Match capital stock owned by Old IAC, plus the value of the tax attributes left behind in the reverse spinoff, minus: (i) the value of the Exchangeables; (ii) the number shares sold in the equity offering; (iii) a portion of
the cost of New Match stock options to be received by New IAC employees in place of their existing Old IAC stock options; and (iv) the number of shares of New Match stock issued to non-IAC stockholders of New Match in respect of additional stock elections and non-elections.31
At their respective special meetings, the stockholders of Old IAC and Old Match voted in favor of the Separation and its
corporation, subject to short-term restrictive governance provisions. The New Match minority stockholders also gained an additional 2% of the Match business. IAC stockholders received most of the interest in New Match, as well as shares in a cash-rich corporation with little to no debt, New IAC.
C.
Former Old Match stockholders challenged the Separation in the Court of Chancery. In their complaint, plaintiffs Construction Industry and Laborers Joint Pension Trust for Southern Nevada Plan A (“Nevada“) and Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement Trust (“Hallandale“) alleged that the Separation was a conflicted transaction in which Old IAC, as Old Match‘s controlling stockholder, stood on both sides of the transaction.38 The plaintiffs claimed that Old IAC obtained significant non-ratable benefits in the Separation to the detriment of Match and its minority stockholders. They argued that the Separation Committee was conflicted and that the proxy disclosures misled the Old Match minority stockholders.39 Count I alleged direct and class breach of fiduciary duty claims against Old IAC as Old Match‘s controlling stockholder, and Diller as Old IAC‘s alleged controlling stockholder.40 Count III alleged direct and class
breach of fiduciary duty claims against the directors of Old Match.41 Counts II and IV were derivative claims that mirror Counts I and III, respectively.42 The plaintiffs alleged that an unfair process yielded an unfair price to the detriment of Old Match‘s minority stockholders.43 They claimed that the Separation left Old Match‘s minority with a “slightly larger piece of a much less substantial pie.”44
The Court of Chancery granted the defendants’ motion to dismiss the complaint.45
stock.48 The only claims that survived the standing analysis were the direct claims brought by Hallandale.49
Next, the Court of Chancery held that the defendants satisfied MFW‘s requirements which led to business judgment review.50 According to the court, the Separation conditioned the transaction on the approvals of a fully empowered, well-functioning special committee of independent directors and the uncoerced, fully-informed vote of the minority stockholders.51 Although the court found that the plaintiffs successfully pleaded facts creating a reasonable inference that McInerney was not independent of Old IAC, the court ruled that a plaintiff must nonetheless show that “either (i) 50% or more of the special committee was not disinterested and independent,”52 or “(ii) the minority of the special committee ‘somehow infect[ed]’ or ‘dominate[ed]’ the special committee‘s decisionmaking [sic] process.”53 Because
the plaintiffs failed to do so, the court found that the Separation Committee was independent under MFW‘s requirements.
The court then held that the minority stockholder vote was fully-informed.54 The court determined that the facts pertinent to McInerney‘s conflicts were material and that the defendants fully disclosed them.55 While the facts of McInerney‘s employment history and board service with Old IAC and its affiliates were not disclosed in the Proxy itself, the Proxy incorporated Old Match‘s 2019 Form 10-K, which disclosed McInerney‘s ties to Old IAC.56 The court also found that the disclosures were sufficient to address the plaintiffs’ concerns about the effect of two prior agreements regarding investor rights and tax sharing between Old IAC and Old Match on the Separation‘s negotiations.57 Finally, the court found that any disclosures about a purported subjective belief regarding the motivation behind the governance provisions following the Separation would not be material.58
II.
On appeal, the plaintiffs argue first that the Court of Chancery erred when it found that Old IAC satisfied MFW‘s independent committee requirement.60 As they argue, the policy-rationale underlying the MFW framework – replicating arm‘s length bargaining by removing the influence of the controlling stockholder – requires that every director on the committee be independent.61 In the alternative, the plaintiffs claim that they pleaded that McInerney dominated the committee‘s process and improperly influenced the negotiations.62
Second, the plaintiffs contend that the Old Match stockholder vote was not fully informed, as required by MFW.63 They claim that the Proxy did not disclose material information about McInerney‘s conflicts, either directly or through incorporated public filings. Finally, the plaintiffs argue that the court erred by ruling that they lacked standing to pursue derivative claims, because the Separation was a
“mere reorganization” of Old Match – an exception to the contemporaneous ownership requirement for derivative standing.64
The defendants respond that the Court of Chancery correctly applied existing precedent when it decided that the MFW framework does not require that each member of the Committee be independent.65 And, regardless, McInerney was independent.66 As they argue, even though McInerney worked as Old IAC‘s Chief Financial Officer and served on the boards of various Old IAC affiliates other than Match, those relationships ended many years before the Separation and were therefore stale and mere past business relationships.67 Further, according to the defendants, the plaintiffs did not allege that McInerney had close personal ties to either Old IAC or Diller.68 They also contend that the court correctly found that the plaintiffs did not plead facts supporting a reasonable inference that McInerney dominated or infected the Separation Committee‘s work.69
As for disclosure, the defendants argue that Old Match‘s 2019 Form 10K/A, which was incorporated into the Proxy, included all material information about McInerney‘s ties to Old IAC.70 And in any event, they claim that McInerney‘s ties to Old IAC were immaterial because he was independent of Old IAC.
The defendants also argue two alternative grounds for affirmance. First, they claim that the Separation need not employ both of MFW‘s procedural safeguards to
Finally, Diller and IAC argue that we should dismiss all claims against Diller because the complaint fails to plead facts showing he was an Old Match controlling stockholder.74
We review the Court of Chancery‘s motion to dismiss decision de novo.75 We accept all well pleaded factual allegations as true.76 Even if these allegations are vague, they will be considered “well pleaded” if they provide the opposing party with notice of the claim.77 We do not, however, accept conclusory factual allegations unsupported by specific facts.78 But we do draw all reasonable inferences that logically flow from the well pleaded factual allegations in favor of the non-moving party.79 The Court of Chancery‘s judgment will be affirmed only if the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances.80
III.
Under
company.85 If the business judgment standard of review applies, a court will not second guess the decisions of disinterested and independent directors. The reviewing court will only interfere if the board‘s decision lacks any rationally conceivable basis, thereby resulting in waste or a lack of good faith.86
When a stockholder challenges a board‘s business decision, the plaintiff must rebut the business judgment rule. The plaintiff must plead particularized facts supporting a reasonable inference that the board or its committee lacked a majority of informed, disinterested individuals who acted in good faith when making a decision.87 A plaintiff bringing derivative claims must also show that it would be futile to make a litigation demand on the board.88 If the plaintiff rebuts the business judgment rule, the court will review the challenged act by applying the entire fairness standard of review.89
To satisfy entire fairness review, the defendants bear the burden of demonstrating that the corporate act being challenged is entirely fair to the corporation and its stockholders.90 In our recent decision in In re Tesla Motors, Inc. S‘holder Litig., we relied on Weinberger v. UOP, Inc. to define entire fairness:
The concept of fairness has two basic aspects: fair dealing and fair price. The former embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained. The latter aspect of fairness relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company‘s stock. However, the test for fairness is not a bifurcated one as between fair dealing and price. All aspects of the issue must be examined as a whole since the question is one of entire fairness.91
As noted above, entire fairness is a unitary test, under which a reviewing court will scrutinize both the price and the process elements of the transaction as a whole.92
Even though business judgment is the default standard of review, the level of judicial scrutiny increases in certain situations when the danger of conflicts
Controlling stockholders are at times free to act in their own self-interest.96 But a controlling stockholder is a fiduciary and must be fair to the corporation and its minority stockholders when it stands on both sides of a transaction and receives a non-ratable benefit.97 In such cases, the controlling stockholder bears the burden of demonstrating “the most scrupulous inherent fairness of the bargain.”98
This is because, without arm‘s length negotiation, controlling stockholders can exert outsized influence over the board and minority stockholders. In Summa Corp. v. Trans World Airlines, Inc., a case that dealt with a controlling stockholder transaction not involving a freeze out merger, we looked to our iconic cases and explained that:
It is well established in Delaware that one who stands on both sides of a transaction has the burden of proving its entire fairness. Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 710 (1983); Sterling v. Mayflower Hotel Corp., Del.Supr., 33 Del.Ch. 293, 93 A.2d 107, 110 (1952). In the absence of arm‘s length bargaining, clearly the situation here, this obligation inheres in, and invariably
arises from the parent-subsidiary relationship. Weinberger v. UOP, Inc., at 709, n. 7, 709-710; Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 937-38 (1985). This rule applies when “the parent, by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of, and detriment to the minority stockholders of the subsidiary.” Sinclair Oil, 280 A.2d at 720.99
Although close scrutiny is required for transactions where the controlling stockholder receives a non-ratable benefit, it is important to recognize that “an interest conflict is not in itself a crime or a tort or necessarily injurious to others.”100 In other words, “having a ‘conflict of interest’ is not something one is ‘guilty of.”101 Indeed, a corporation and its stockholders may benefit from a controlling stockholder‘s influence.102 Through the evolution of our law in three important decisions, the Supreme Court provided guidance to directors and controlling stockholders about how to navigate judicial review of controlling stockholder transactions.
First, in Weinberger v. UOP, Inc., our Court reaffirmed that entire fairness applies to a controlling stockholder freeze out merger transaction when the controlling stockholder receives a non-ratable benefit.103 But “where corporate action has been approved by an informed vote of a majority of the minority shareholders . . . the burden entirely shifts to the plaintiff to show that the transaction was unfair to the minority.”104 The Court also commented on the benefits of an independent special committee in controlling stockholder transactions:
Although perfection is not possible, or expected, the result here could have been entirely different if [the controlling stockholder] had appointed an independent negotiating committee of its outside directors to deal with [the controlled subsidiary] at arm‘s length. Since fairness in this context can be equated to conduct by a theoretical, wholly independent, board of directors acting upon the matter before them, it is unfortunate that this course apparently was neither considered nor pursued. Particularly in a parent-subsidiary context, a showing that the action taken was as though each of the contending parties had in fact exerted its bargaining power against the other at arm‘s length is strong evidence
that the transaction meets the test of fairness.105
Next, in Kahn v. Lynch, the Supreme Court addressed some uncertainty that followed Weinberger.106 Before Lynch, if a controlling stockholder followed Weinberger‘s lead and formed an independent negotiating committee, there was uncertainty whether a controlling stockholder would secure a burden shift at trial or be subject to business judgment review.107 In Lynch, the Supreme Court clarified that if the defendants demonstrated that the transaction was either (i) negotiated by a well-functioning special committee of independent directors or (ii) conditioned on the approval of a majority of the minority shareholders, then the burden shifted to the plaintiffs to prove that the transaction was not entirely fair.108 The standard of review, however, did not change.
After Lynch, it was unclear what standard of review should apply if both protections were used. The Supreme Court resolved the uncertainty in MFW.109 Entire fairness is the standard of review in transactions between a controlled corporation and a controlling stockholder when the controlling stockholder receives a non-ratable benefit. But a freeze out merger structured to include approval by a well-functioning independent committee and the affirmative vote of the fully informed and uncoerced minority stockholders will be reviewed under the business judgment standard of review.110 If both procedural protections are established pretrial, “the board‘s decision will be upheld unless it cannot be attributed to any rational business purpose.”111
Thus, after MFW, the business judgment rule will apply when: (i) a controlling stockholder conditions a transaction from the start on the approval of both a special committee and a majority of the minority stockholders; (ii) the special committee is independent; (iii) the special committee
A.
Weinberger, Lynch, and MFW were freeze out merger cases. The defendants argue that, outside that context, “[t]ime-tested traditional principles of Delaware corporate law . . . recognize that any one of three cleansing mechanisms — approval by (i) a board with an independent director majority; or (ii) a special committee of independent directors; or (iii) a majority of the unaffiliated stockholders — suffices to invoke the business judgment standard of review in a conflict transaction.”115 In other words, according to the defendants, the rule has always been that, other than freeze out mergers, any one of these three procedural devices could invoke business judgment review in controlling stockholder transactions.
We read our Supreme Court precedent differently. Our analysis starts with the common thread running through our decisions: a heightened concern for self-dealing when a controlling stockholder stands on both sides of a transaction and receives a non-ratable benefit. As explained earlier, in the 1988 Summa Corp. Supreme Court decision, which dealt with a controlling stockholder transaction not involving a freeze out merger, our Court held that “one who stands on both sides of a transaction has the burden of proving its entire fairness.”116 We observed that the conflict problem “inheres in, and invariably arises
Summa Corp. did not involve a special committee or an unaffiliated stockholder vote. But in the Kahn v. Tremont series of decisions, the Court of Chancery and the Supreme Court directly addressed the standard of review in non-freeze out controlling stockholder transactions.119 In Tremont I, a controlling stockholder carried out a stock sale transaction between two controlled corporations. The Court of Chancery applied entire fairness review, despite approval by a special committee of independent directors.120 In the court‘s decision, Chancellor Allen observed that “[d]efendants seek to limit Lynch to cases in which mergers give rise to the claim of unfairness, but offer no plausible rationale for a distinction between mergers and other corporate transactions and in principle I can perceive none.121
On appeal, in Tremont II, this Court reversed the Court of Chancery‘s conclusion that the special committee was independent.122 The standard of review did not depend on the nature of the transaction. Instead, we stated that “when a controlling shareholder stands on both sides of the transaction the conduct of the parties will be viewed under the more exacting standard of entire fairness as opposed to the more deferential business judgment standard.”123 Even in non-freeze out transactions, we explained that:
[T]he underlying factors which raise the specter of impropriety can never be completely eradicated and still require careful judicial scrutiny. This policy reflects the reality that in a transaction such as the one considered in this appeal, the controlling shareholder will continue to dominate the company regardless of the outcome of the transaction. The risk is thus created that those who pass upon the propriety of the transaction might perceive that disapproval
may result in retaliation by the controlling shareholder.124
Thus, in Tremont II, we held that, under Lynch, even if an independent committee negotiates a transaction involving a controlling stockholder who receives a non-ratable benefit, entire fairness is the standard of review:
[E]ven when the transaction is negotiated by a special committee of independent directors, “no court could be certain whether the transaction fully approximate[d] what truly independent parties would have achieved in an arm‘s length negotiation.” [Citron v. E.I. Du Pont de Nemours & Co., Del. Ch., 584 A.2d 490, 502 (1990)]. Cognizant of this fact, we have chosen to apply the entire fairness standard to “interested transactions” in order to ensure that all parties to the transaction have fulfilled their fiduciary duties to the corporation and all its shareholders. [Lynch], 638 A.2d at 1110.125
The same is true in later Supreme Court controlling stockholder cases not involving freeze out mergers. In Emerald Partners v. Berlin, this Court held that “an approval of the transaction by an independent committee of directors who have real bargaining power may supply the necessary basis for shifting the burden” and that “the approval of the transaction by a fully informed vote of a majority of the minority shareholders will shift the burden.”126 This Court did not change the standard of review. In Ams. Mining Corp. v. Theriault, we held that “in order to encourage the use of procedural devices that foster fair pricing, such as special committees and minority stockholder approval conditions, this Court has provided transactional proponents with . . . the shifting of the burden of persuasion on the ultimate issue of entire fairness to the plaintiffs.”127 This Court did not change the standard of review. And in Levco Alt. Fund Ltd. v. Reader‘s Dig. Ass‘n, Inc., where we reviewed a plaintiff‘s request to enjoin a recapitalization where a controlled corporation would repurchase its controlling stockholder‘s Class B shares, we held that the burden of entire fairness “may shift, of course, if an independent committee of directors has approved the transaction.”128 This Court did not change the standard of review.129
1.
The defendants offer several counters to what is a straight-forward reading of Tremont II, Emerald Partners, Levco, and Ams. Mining. First, they argue that the parties in those cases assumed that both procedural devices were needed to invoke the business judgment standard of review.130 Stated another way, they claim that, in those cases, the parties and the Supreme Court misunderstood or were unaware of the “traditional principles” outside of freeze out transactions. As an example, they point to Ams. Mining, where
It is correct that throughout the lifecycle of Ams. Mining, the parties, the Court of Chancery, and this Court all agreed that Tremont II established the governing law.132 But rather than chalking it up to a misunderstanding of the law by the parties and the courts, it is more reasonable to assume that all knew that Tremont II was settled law.133 The same is true for Emerald Partners and Levco. The Supreme Court‘s consistent statement of the law in these decisions is not, as the defendants attempt to characterize it, obiter dictum.134
2.
The defendants rely heavily on Williams v. Geier, where we affirmed the Court of Chancery‘s business judgment review of a recapitalization that involved a charter amendment that provided for a form of tenure voting.135 Under the tenure voting plan, common stockholders would receive ten votes per share, and upon a sale or transfer, each share would revert to one vote per share if held for three years. The controlling stockholder group and corporate officers implemented the recapitalization, which included charter amendments implementing tenure voting.136 A majority independent board approved the recapitalization. This Court agreed with the Court of Chancery that the standard of review was business judgment.137
An important aspect of Williams limits its relevance here. It is correct that the recapitalization involved a controlling stockholder group, a majority independent board approved the act, and the Court ultimately applied business judgment review. It is also correct that the controlling stockholders “reap[ed] a benefit” from the transaction.138 But the Williams majority also concluded that “no non-pro rata [sic] or disproportionate benefit . . . accrued to the [controlling stockholders] on the face of the Recapitalization, although the dynamics
3.
The defendants contend that MFW “essentially rejected the inherent coercion theory.”142 They argue that this Court in MFW limited the dual procedural requirements to freeze out mergers because the Court sought to solve a specific problem: a controlling stockholder‘s ability to bypass the board through a tender offer.143 In other words, if the board disagreed with the controlling stockholder, it could bypass the board and make a tender offer directly to the stockholders.144 Outside this context, the defendant‘s claim, the “traditional principles” apply.
The MFW fact pattern did involve a freeze out merger. And bypass was a concern. But we cannot find any statement in MFW that distances our law in any transactional setting from the inherent coercion described in Lynch. Instead, in MFW we noted that a controlling stockholder generally has inherently coercive authority over the board and the minority stockholders.145 To make a pretrial showing of arm‘s length negotiation, a controlling stockholder must “irrevocably and publicly disable[] itself from using its control to dictate the outcome of the negotiations and the shareholder vote” to restore the business judgment rule‘s protections.146 We also relied
The defendants also claim that the Lynch rationale for entire fairness review is obsolete because institutional investors can protect minority stockholders from controlling stockholders.148 They also argue that experience has shown that independent directors can serve as an effective check on a controlling stockholder‘s influence. We note, however, that these points have long been subject to debate and are thus not something to be decided in this appeal on the record before us.149 In any event, Lynch and Tremont II remain the controlling precedent, and we have not been asked to overrule them.150
Finally, the defendants argue that we cannot square the circle between entire fairness review for non-freeze out conflicted controlling stockholder transactions and our controlling stockholder demand review precedent.151 In Lynch and Tremont II, we held that, because of the inherently coercive presence of a controlling stockholder and the perceived risk of retaliation, the use of an independent and properly functioning special committee did not replicate arm‘s length bargaining and change the entire fairness standard of review. But according to our demand review precedent in Aronson, which involved derivative claims against a controlling stockholder, inherent coercion alone did not excuse demand.152 The defendants argue that if inherent coercion does not disable an independent director‘s ability to decide whether the corporation should sue a controlling stockholder, then consistency requires that inherent coercion not be presumed in business transaction negotiations with controlling stockholders.
Admittedly, there is a tension in our law in these contexts. But Aronson and our demand review precedent stand apart from the substantive standard of review in controlling stockholder transactions. The distinction is grounded in the board‘s
statutory authority to control the business and affairs of the corporation, which encompasses the decision whether to pursue litigation.In Zuckerberg, we held that layering entire fairness review over our demand review precedent “collapses the distinction between the board‘s capacity to consider a litigation demand and the propriety of the challenged transaction.”153 An “independent and disinterested board” can decide “that it is not in the corporation‘s best interest to spend the time and money to pursue a claim that is likely to succeed.”154 To divest the board of authority over a derivative litigation, however, even when it involves a controlling stockholder, “runs counter to the ‘cardinal precept’ of Delaware law that independent and disinterested directors are generally in the best position to manage a corporation‘s affairs, including whether the corporation should exercise its legal rights.”155
Although Zuckerberg focused on the effect of the substantive standard of review on the demand requirement, its teachings have general application here.
B.
Old IAC was Old Match‘s controlling stockholder during the Separation.158
As alleged in the complaint, in carrying out the Separation, “IAC . . . deliberately advanced [its] own interests[] to the detriment and expense of the [Old Match] minority stockholders, in breach of their fiduciary duties.”159 The presumptive standard of review is entire fairness, unless
IV.
The Court of Chancery decided that the Separation adhered to MFW‘s requirements, applied the business judgment rule standard of review, and dismissed the complaint. Based on the facts as pleaded, it found that, although one Committee member - McInerney – was conflicted, a majority of the Separation Committee was independent, and McInerney did not “infect” or “dominate” the separation committee process.160 The court also decided that the proxy statement adequately disclosed McInerney‘s conflicts.161
On appeal, the plaintiffs argue that the Court of Chancery‘s MFW analysis was flawed on two grounds - the Separation Committee lacked independence, and the proxy statement disclosures were inadequate.162 They contend that, if the goal is to replicate arm‘s length negotiation, each Separation Committee member must be independent. In the alternative, they claim that McInerney, a conflicted committee member, dominated or controlled the negotiation process. As for disclosure, the plaintiffs argue that the proxy statement did not adequately disclose McInerney‘s conflicts.
To begin with, we agree with the Court of Chancery that McInerney lacked independence. McInerney worked at IAC from 1999 to 2012 - including a seven-year term as IAC‘s CFO.163 The plaintiffs alleged that he earned over $55 million during his employment at IAC, which began when he was 35 years old.164 They also alleged that IAC was his primary employment for over a decade. When McInerney announced his departure from IAC, he stated that he was “more than grateful to Barry Diller for the opportunities he and IAC have given me.”165 And Diller said of McInerney that he held “total respect for [McInerney‘s] ability, trustworthiness, and decency.”166 McInerney also served as a director of various IAC-affiliated companies since 2008, including Old Match.167
Longstanding business affiliations, particularly those based on mutual respect, are of the sort that can undermine a director‘s independence.169 Directors who owe their success to another will conceivably feel as though they owe a “debt of gratitude” to the individual.170 The plaintiffs have adequately pleaded that McInerney may have such a relationship with IAC and Diller – one with “personal ties of respect, loyalty, and affection” - and it is therefore a reasonable inference that he was not independent of Old IAC when negotiating the Separation.171
Next, the Court of Chancery found that the Separation Committee adhered to MFW as only a majority of the committee had to be independent. According to the court, the plaintiffs had not pleaded that the other two committee members lacked independence. And, the court found, the plaintiffs did not plead that McInerney “dominated” or “infected” the Committee‘s decision-making process.172
We disagree with the Court of Chancery that only a majority of the Separation Committee must be independent. First, the cases it relied on are distinguishable. In In re Dell Techs. Inc. Class V S‘holders Litig., the Court of Chancery decided that, because one member of a two-member committee was conflicted, the defendants did not satisfy MFW‘s requirements.173 The failure of the two-person committee does not rule out the need for a wholly independent committee.174 And in Voigt v. Metcalf, the court did state that “the business judgment rule would still apply if the Board relied on the Committee‘s recommendation,
The defendants rely on City Pension Fund for Firefighters & Police Officers in the City of Miami v. The Trade Desk, Inc.177 There, the Court of Chancery recently held that a MFW special committee was independent, despite the challenge to the committee chair‘s independence.178 In their submissions, the plaintiffs - as the defendants here acknowledge - did not address whether MFW requires full independence of the special committee. Accordingly, the court held that they waived their right to challenge the committee‘s independence because it was not wholly independent.179
In contexts other than those involving a controlling stockholder, forming a special committee is a delegation of the board‘s general authority to a subset of its directors.180 Consequently, akin to the board itself, majority independence is not a requirement. To apply the business judgment rule when a controlling stockholder transacts with the corporation and receives a non-ratable benefit, however, the inherently coercive presence of the controlling stockholder requires it to “irrevocably and publicly disable[] itself from using its control to dictate the outcome of the negotiations” to ensure an “arm‘s-length” outcome.181 A controlling stockholder‘s influence is not “disabled” when the special committee is staffed with members loyal to the controlling stockholder. We stated in MFW that the special committee must be independent, not that only a majority of the committee must be independent.182 And, as we stated in Weinberger, fairness “can be equated to conduct by a theoretical, wholly independent, board of directors acting upon the matter before them.”183
A special committee created to secure the protections of MFW should function “in a manner which indicates that the controlling stockholder did not dictate the terms of the transaction and that the committee exercised real bargaining power at an arm‘s length.”184 Because the complaint pleads particularized facts that raise a reasonable doubt as to McInerney‘s independence from Old IAC and therefore the entire Separation Committee‘s independence, we reverse the Court of Chancery‘s decision to apply the business judgment rule and dismiss the plaintiffs’ claims. Entire fairness remains the standard of review.185
Under Delaware law, if a plaintiff is no longer a stockholder by reason of a merger, it loses standing to continue a derivative suit.186 There are two exceptions to the rule: (1) a transaction alleged to be fraudulent to eliminate stockholder standing to bring or maintain a derivative action; and (2) where the merger is effectively a reorganization that does not change the stockholder‘s relative ownership in the post-merger enterprise.187
The Court of Chancery ruled that, after the reverse spinoff, when Old Match was merged out of existence, Hallandale lacked derivative standing to bring claims on behalf of Old Match. The court found that: (1) the minority stockholders received a slightly higher percentage of ownership of New Match; (2) Old Match was capitalized in a vastly different way, with limited cash, much higher debt, and restrictive governance provisions; and (3) the boards were different.188 As the court observed, “[i]ndeed, Plaintiffs’ theory of wrongdoing is that the Separation left ... [New] Match public stockholders holding equity in a company with different ownership and inferior assets than the company in which they chose to invest.”189
On appeal, Hallandale limits its grounds for error to the “mere reorganization” exception to derivative standing. It argues once again that the Separation did not meaningfully affect its ownership in the business enterprise because they continue to own, in New Match, the same operating business and income-producing assets of Old Match.190 We are unpersuaded for the same reasons explained by the Court of Chancery. Hallandale‘s New Match stock represents a different financial interest than its Old Match stock.191 The Separation was “far more than a corporate reshuffling.”192 New Match received the Exchangeables, an expanded board with different board members, and a different capital structure with a single class of stock instead of two. It is not reasonably conceivable that the Separation was a mere reorganization of Match.193
Finally, Diller argues on appeal that he was not a fiduciary of Old Match and therefore should be dismissed from the case. Although the issue was raised below, it became moot once the Court of Chancery dismissed the complaint. Now that the case will be remanded, the Court of Chancery should have the opportunity to decide his dismissal motion in the first instance.
VII.
The judgment of the Court of Chancery is affirmed in part, reversed in part, and remanded for further proceedings consistent with this opinion.