Overview
In 2014, the
On
The Match court evaluated a reverse spinoff, and held 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," and "[i]f the controlling stockholder wants to secure the benefits of business judgment review, it must follow all [of] MFW's requirements." The Court further reaffirmed that the elements of MFW would not be met unless all members of the independent committee charged with negotiating the transaction satisfied independence requirements under
Background
In 2019,
The Old IAC board appointed three directors to an independent committee (the "Separation Committee") to assess the transaction; the board also empowered the Separation Committee to retain its own financial and legal advisors, oversee and consider potential separation transactions, and direct, negotiate, and approve any separation transaction. One member of the Separation Committee,
The Separation Committee retained legal counsel and a financial advisor and received an initial proposal from Old IAC. In the ensuing months, McInerney met several times with Old IAC's CEO, reported back to the Separation Committee, and conveyed a counterproposal. McInerney and Old IAC's CEO eventually reached an agreement.
The agreement, as described in the proxy statement, created two separate public companies and eliminated Old Match's dual-class capital structure. All Old Match and Old IAC stockholders would receive stock in New Match. New Match would retain and guarantee debt in the form of exchangeable notes from subsidiaries of Old IAC and would issue a dividend to its stockholders, most of which would go to Old IAC. New Match would also be subject to certain governance restrictions, giving New IAC certain control over New Match, and New IAC would have the right to engage in an equity offering. The stockholders of both Old IAC and Old Match voted in favor of the agreement, with approximately 75% of Old Match's minority stockholders approving the Separation.
Old Match stockholders challenged the fairness of the Separation. Specifically, the plaintiffs alleged that the transaction resulted from a conflicted process because Old IAC, Old Match's controlling stockholder, stood on both sides of the transaction; McInerney lacked independence, resulting in a Separation Committee that was not fully independent; and the proxy statement was misleading. The defendants moved to dismiss.
On appeal, the plaintiffs asked the
The defendants argued that outside the freeze-out context, the business judgment rule should apply if the challenged controller transaction receives approval by either (1) a board with an independent director majority, (2) a special committee of independent directors, or (3) a majority of unaffiliated stockholders.
The Court held that entire fairness—Delaware's most stringent standard of review—applies to all transactions involving a controlling stockholder that receives a non-ratable benefit. When entire fairness applies, the controlling stockholder bears the heavy burden of demonstrating that the transaction was entirely fair to the corporation and its minority stockholders. The controlling stockholder can shift the burden of proof to the plaintiff to show that the transaction was not entirely fair by either (i) relying on a special committee to negotiate the transaction or (ii) putting the transaction to a vote by the unaffiliated stockholders. But the controlling stockholder cannot change the standard of review to the more deferential business judgment standard absent satisfaction of the full MFW framework: (1) negotiation of the transaction by an independent committee and (2) approval of the transaction by a fully informed vote of the majority of minority stockholders.
Key Takeaways
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To obtain review under the deferential business judgment rule for all controlling stockholder transactions—freeze-out or not—the utilization of the full MFW framework (i.e., the transaction is (1) negotiated by an independent committee and (2) approved by a fully informed vote of the majority of minority stockholders) from the outset of the transaction is the best path.
- Deploying only one prong of the MFW framework is insufficient to secure business judgment review. However, to shift the burden to the plaintiff under entire fairness in controlling stockholder transactions, a company can use approval by either an independent committee or a fully informed vote of the minority stockholders.
- The MFW framework requires a special committee of a board of directors that consists entirely of independent directors, not a committee consisting of merely a simple majority of independent directors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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