Reed Smith Client Alerts

In re Match Group, Inc. Derivative Litigation, C.A. No. 2020-0505-MTZ, 2022 Del. Ch. LEXIS 212 (Sept. 1, 2022) (Match Group), the Court of Chancery granted the defendants’ motions to dismiss direct and derivative fiduciary claims arising out of a multi-step reverse spin-off, an interested transaction which conferred a non-ratable benefit to the company’s controlling stockholder. In its opinion, the court first held that only one of the co-lead plaintiffs – a stockholder of the post-spin-off company – had standing to assert direct claims challenging the transaction. After resolving this threshold issue, the court found that, as pled, the process for the spin-off adhered to the framework enunciated in Kahn v. M & F Worldwide Corp., 88 A.2d 635 (Del. 2014) (MFW), such that the transaction – which would have otherwise been evaluated under entire fairness – was subject to (and withstood) business judgment review.


IAC, Match, and the Separation

Defendant IAC/Interactive Corp. (Old IAC) acquired in 1999. Years after this acquisition, Old IAC formed nominal defendant Match Group, Inc. (Old Match) as a subsidiary to hold 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.