Background
IAC, Match, and the Separation
Defendant IAC/Interactive Corp. (Old IAC) acquired Match.com in 1999. Years after this acquisition, Old IAC formed nominal defendant Match Group, Inc. (Old Match) as a subsidiary to hold Match.com along with other dating websites in its market-leading portfolio. Before the spin-off, Old IAC held nearly all of Old Match’s voting power (i.e., 98 percent) through its ownership of approximately 25 percent of Old Match’s outstanding common stock and all of its Class B high-vote common stock. Old IAC, as alleged in Match Group, was itself controlled by its then-Chairman Barry Diller. At the time, Diller and his family collectively owned approximately 42 percent of Old IAC’s voting power.
The Match Group litigation arose out of a multi-step reverse spin-off transaction (the Separation), whereby Old IAC transferred its non-dating businesses into a newly formed subsidiary (New IAC). Following this transfer, Old IAC was left with its ownership interests in Old Match along with certain debt obligations (these debt obligations are referred to, collectively, as the Exchangeables). Post-transfer, Old IAC – with its Old Match interests and the Exchangeables – then reclassified its two classes of high-vote and publicly traded stock into a single class of stock; this reclassification marks the moment that Old IAC became, as termed in the opinion, “New Match.” After Old IAC reclassified into New Match, Old Match merged with and into a New Match merger subsidiary; and, in connection with Old Match’s merger, its minority stockholders’ interests were exchanged for the newly minted New Match stock. Old Match ceased to exist as a result of the Separation.
Challenges to the Separation
The lead plaintiffs in this consolidated class and derivative action were: (i) Construction Industry and Laborers Joint Pension Trust for Southern Nevada Plan A (Nevada) and (ii) Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement Trust (Hallandale). Both plaintiffs were Old Match stockholders before the Separation. Although Nevada used to be a New Match stockholder, it divested before the court resolved the defendants’ motions to dismiss. After Nevada sold its New Match stock, Hallandale – still a New Match stockholder – joined the action and was appointed as co-lead plaintiff. After the dust settled, in November 2021, the plaintiffs filed their operative Amended and Supplemented Verified Consolidated Stockholder Class Action and Derivative Complaint (the Complaint).
The Complaint contained four counts, all for breach of fiduciary duty. Counts I and II were alleged against Old IAC (as Old Match’s controller) and Diller (as Old IAC’s controller). Count I was alleged as a direct claim and Count II as a derivative claim. Counts III and IV – also alleged as direct and derivative claims, respectively – were brought against the 10 Old Match directors who approved the Separation (the Director Defendants).
The plaintiffs claimed the Separation was “orchestrated” by Old IAC to benefit New IAC “to the detriment of Old Match and New Match minority stockholders.” The plaintiffs cited the following aspects of the Separation to support their claim: (i) the Separation left New Match with (a) Old IAC’s debt obligations, (b) 60 percent of the cost of Old IAC’s options, and (c) potential litigation liabilities; (ii) New Match’s board was full of “handsomely compensated directors loyal to IAC”; and (iii) Old IAC reaped certain tax benefits from the Separation (and post-closing covenants ensured continued favorable tax treatment).
The Complaint also alleged that the Separation allowed New IAC to extract cash benefits in connection with the transaction in three different ways: (i) “an equity offering of what would become New Match common stock (the Equity Offering)”; (ii) payment of a $3.00 dividend for each Old Match share that Old IAC held; and (iii) a potential “additional $3.00 per Old Match minority share” that might be paid to Old IAC “depending on how Old Match minority stockholders elected to obtain their merger consideration.” With respect to (ii) and (iii), these per-share payments to Old IAC were funded by a loan from Old Match to Old IAC (the Dividend Loan), which was tied to the number of outstanding shares of Old Match capital stock, as of the Separation.
The process for the Separation
Old IAC announced that it was considering separating Old Match on August 7, 2019. Just over a month later, on September 18, 2019, Old Match’s board of directors (the Board) formed a three-person special committee (the Committee) to negotiate the potential transaction. The Committee’s members were Thomas J. McInerney, Ann L. McDaniel, and Pamela S. Seymon. The relevant Board resolutions authorized the Committee to “structure, review, evaluate, negotiate and propose the terms and conditions of a Separation Transaction.” The resolutions further provided that, “if the...Committee deems it appropriate and in its sole discretion,” the Committee would have the option of “disapproving a Separation Transaction.” They also permitted the Committee to engage its own advisors.
The Committee hired Debevoise & Plimpton LLP (Debevoise) as its legal advisor and Goldman Sachs & Co. LLC (Goldman) as its financial advisor. The Committee hired Goldman, rather than two other financial advisors that had been considered, even though “[Goldman] was a counterparty to [Old] IAC on call spreads on two of the [Exchangeables],” and (ii) there were certain conflicts involving members of Goldman’s Investment Banking Division team, who served both Old Match and Old IAC.” These conflicts were fully disclosed by Goldman via letter before the Committee ultimately engaged Goldman, “[a]fter discussion, and with Debevoise’s guidance.”
Old IAC made an initial proposal, “which was conditioned on the vote of the majority of the minority Old Match stockholders,” on October 10, 2019. Following this initial proposal, there were approximately two months of negotiation and “nearly forty meetings among the counterparties’ representative and advisors.” The Committee itself met “at least twenty times and exchanged half a dozen proposals with Old IAC.”
The court observed that “Old IAC’s proposals reflected demands for several billion dollars in a cash dividend, which it initially proposed would be financed by new debt.” But the Committee was able to “negotiate[] a 57.5% reduction of Old IAC’s dividend request, which ultimately took the forms of the proceeds of the Equity Offering, as well as the per-share payments (including the payments contingent upon minority Old Match stockholders’ merger consideration elections) funded by the Dividend Loan. In addition to negotiating the reduction of Old IAC’s dividend requests, the Committee also “obtained a favorable adjustment to the reclassification exchange ratio,” secured “compensation for 40% (as opposed to 0%) of the Old IAC options converted into New Match options,” and renegotiated a tax matters agreement that superseded a previously executed tax sharing agreement that would have constrained (if it had not been superseded) Old Match’s ability to negotiate the Separation.
On December 18, 2019, after the parties reached an agreement, the Committee recommended that the Board approve the Separation (which it did). The next day, the parties executed the transaction agreement along with a real estate transfer agreement and the renegotiated tax matters agreement. On April 30, 2020, the Board and the Old IAC’s board of directors issued a joint proxy statement (the Proxy). It should also be noted that the parties agreed to two amendments, respectively, on April 28, 2020, and June 9, 2019. These amendments – which were promptly disclosed via SEC filings before the stockholders voted on the Separation – did not seem to materially alter the court’s analysis.
On June 25, 2020, both entities “held a special stockholder meeting to vote on the Separation and the related transactions.” Both groups of stockholders voted to approve the transactions. Notably, “approximately 75% of Old Match’s minority stockholders voted in favor of the Separation.” The Separation was consummated on June 30, 2020.
Analysis
The court granted the defendants’ motions to dismiss the Complaint, finding that the direct claims challenging the Separation failed “because the Separation met the [six] elements of MFW, and is [therefore] subject to business judgment protections.”
Standing issues
Before reaching the merits of Hallandale’s direct claims, the court first clarified that neither plaintiff had standing to bring derivative claims on behalf of Old Match because “[n]either plaintiff holds shares in Old Match, which ceased to exist as a result of the Separation.” Although there are limited exceptions that permit former stockholders to bring derivative claims even though they are not current stockholders (as required by 8 Del. C. § 327), here, no such exceptions applied. Nor were the plaintiffs permitted to advance derivative claims on behalf of New Match because they only “became New Match stockholders when the Separation was consummated on June 30, and not before.” The court went on to confirm that had Nevada lost its standing to assert direct claims when it sold its New Match stock, such that only “Hallandale may maintain its direct claims.” Accordingly, the court dismissed “all of Nevada’s claims” as well as “Hallandale’s derivative claims...for lack of standing.”
Legal framework – MFW’s six procedural protections
The parties did not dispute that, because the Separation involved a conflicted controller (i.e., Old IAC) it was “presumptive[ly]” subject to entire fairness review. However, the court agreed with defendants’ argument that, pursuant to MFW, the Separation was properly reviewed under the business judgment rule. As the court observed, “the Delaware Supreme Court held [in MFW] that the business judgment rule is the appropriate standard of review for a challenge to a conflicted controller transaction if the transaction satisfies six procedural protections.” Under MFW, the business judgment rule will apply if:
(i) the controller conditions the procession of the transaction 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 is empowered to freely select its own advisors and say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.
Pursuant to MFW, the Separation was entitled to business judgment review
In Match Group, there was no dispute that the Separation satisfied the first element and the sixth element. Hallandale only argued that “the...Committee was not independent; the...Committee was not empowered to freely select its own advisors and definitively say ‘no’; the...Committee did not meet its duty of care; and the minority of Old Match stockholders’ vote was not informed.”
As to the second element, the court found that Hallandale was unable to cast sufficient doubt on the Committee’s independence because the pleadings did not “support a reasonable inference that either (i) 50% or more of the [Committee] was not disinterested or independent, or (ii) [a] minority of the [Committee] somehow infected or dominated the... decisionmaking process.”
The court found that the allegations only supported a pleadings-stage inference of independence with respect to one director, McInerny; as to McInerny, a pleadings-stage inference that he was not independent was appropriate because, for a period of over 20 years, he “relied on Old IAC, or its affiliates, as his primary employment.” As to the Committee’s other two members, the Complaint alleged that: (i) Seymon “was outside counsel to Old IAC since at least 1994,” and “[Seymon’s] former firm represented Old IAC” in several transactions years before the Separation; and (ii) McDaniel was employed by a company that had Diller and another Director Defendant on its board of directors. The court was unpersuaded by either of these allegations, reasoning that: (i) “[a]s pled, Seymon’s relationship with Old IAC and its affiliates is that of an arms’ length service provider, and no more”; and (ii) “Hallandale has not even alleged simultaneous board service” with respect to McDaniel (which alone would still be insufficient to create a reasonable inference of a lack of independence). As such, because the pleadings did not support the inference that McInerny somehow “infected or dominated” the Committee’s process, the second element of MFW was met.
The third element of MFW was met because, contrary to its arguments otherwise, “Hallandale specifically pled the...Committee had the ability to say ‘no.’” Per the court, Hallandale’s arguments regarding the Committee’s failure to adequately consider or wield its power to say no “goes to the quality of the...Committee’s work, not whether it was adequately empowered.”
As to the fourth element, to demonstrate that an “independent committee failed to exercise its duty of care, a plaintiff must plead that the committee acted with gross negligence...[and] [t]o plead gross negligence, a plaintiff must allege conduct that constitutes reckless indifference or actions that are without the bounds of reason.” To carry this burden, Hallandale claimed that the Committee acted with gross negligence by operating with a controlled mindset. But the court swiftly rejected this argument, emphasizing that the “Committee met at least twenty times, consulted with its own legal and financial advisors, considered the implications of saying ‘no’ to the Separation, and successfully negotiated benefits for the minority not included in Old IAC’s initial proposal.”
Hallandale also argued that hiring Goldman constituted gross negligence, citing its potential conflicts with Old IAC. The court acknowledged that “[t]here may be some conflicts a special committee cannot consent to in discharging their fiduciary duties” but rejected that Goldman had suffered from such a conflict. Instead, the court reasoned that there was nothing to suggest that Goldman’s past services – which were disclosed to the Committee and, ultimately, within the Proxy – had any effect on Goldman’s advice to the Committee, such that hiring Goldman did not constitute gross negligence.
Lastly, the court found that the fifth element of MFW was met because Old Match’s minority stockholders were fully informed when they voted to approve the Separation. The court found that Hallandale’s arguments regarding the adequacy of the Proxy’s disclosures – which centered on potential conflicts (most notably, McInerny’s) and the effects (if any) of agreements that were previously entered into – failed to establish that the Proxy was materially misleading or incomplete.
Takeaways
- Companies with controlling stockholders remain able to invoke the protections of MFW through the use of a sufficiently empowered special committee of independent directors
- Long-standing relationships with a company or its affiliates continue to threaten a director’s independence, especially if that director relied upon the company and/or its affiliates for primary employment
- The frequency of meetings and the duration of the parties’ negotiations continue to serve as strong indicia regarding the functioning of a special committee empowered to negotiate a controller transaction
- A special committee empowered to negotiate a controller transaction can reasonably consent to some potential financial advisor conflicts without committing gross negligence, but courts will examine the nature and extent of the potential conflict (as well as the adequacy of the surrounding disclosures)
Client Alert 2022-243
