Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article

The Delaware Court of Chancery recently reconsidered most of its earlier dismissal of an investor challenge to IAC/InterActive Corp’s spinoff of its Match.com internet dating subsidiary after the state high court ruled that dual-position Match/IAC fiduciaries may have been too conflicted to get the protection of the business judgment rule in In re Match Group, Inc. Derivative Litigation, No. 2020-0505-MTZ (Del. Ch. Oct, 2, 2024).

Vice Chancellor Morgan Zurn’s September 1, 2022 opinion had dismissed investors’ derivative breach of duty charges over the Match separation for failure to show that the defendant directors lacked the independence to fairly decide whether the suit had enough merit to go forward.  In re Match Gp., Inc. Deriv. Litig. (“Match I”), 2022 WL 3970159 (Del.  Ch. Sept. 1, 2022).

But the Delaware Supreme Court partially reversed, finding that under its seminal MFW decision, no matter what procedure the defendant board used to ensure that the deal was fair in price and method, it would still be questionable if the directors who negotiated and approved it were conflicted. In re Match Gp., Inc. Deriv. Litig. (“Match II”), 315 A.3d 446 (Del. 2024).

Then, the vice chancellor’s Oct 2 opinion deciding that director independence question on remand from the state Supreme Court applied the requirements of the high court’s seminal MFW decision to the actions of the Match/IAC directors and officers and decided the shareholder plaintiffs have grounds to continue their charges against the defendants—except parent company controller Barry Diller.  Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).

That Chancery opinion will be closely examined by corporate law specialists nationwide because it applies the state high court’s September 1 interpretation of MFW to the question of when and why allegedly disloyal inside directors and officers must face derivative charges if they purportedly manipulate transactions for their advantage in a non-freeze-out situation.

 Background

The challenged 2020 transaction involved the creation of two new corporations out of the former IAC and Match.com businesses and a reshuffling of the assets and liabilities of those two entities that was engineered by a “separation committee” composed of IAC directors who also held positions at the Old Match.  Old Match was later dissolved into the new IAC.

Three pension funds that owned that eliminated stock sued, alleging that the separation was a conflicted transaction in which Old IAC, as Old Match’s controlling stockholder, stood on both sides of the transaction. The plaintiffs claimed that Old IAC obtained significant “non-ratable” benefits in the Separation to the detriment of Match and its minority stockholders, and argued that the Separation Committee was conflicted and the proxy disclosures misled the Old Match minority stockholders.

The initial trial court ruling

Although the Court of Chancery initially found that the plaintiffs successfully pleaded facts creating a reasonable inference that one deal approving director was not independent of Old IAC, it ruled that a plaintiff must nonetheless show that “either:

(i) 50% or more of the special committee was not disinterested and independent,” or (ii) the minority of the special committee ‘somehow infect[ed]’ or ‘dominate[ed]’ the special committee’s decision-making process.“

 Finding that plaintiffs failed to do that, the vice chancellor dismissed.

Diller different than directors

But after the state high court’s reversal, on remand, Vice Chancellor Zurn then examined the independence of Diller and each defendant in turn.  First she found, that just because Old IAC held a controlling interest in Old Match and Diller owned a majority of Match through multiple- vote stock, that doesn’t mean he personally controlled Match’s merger decisions directly.  Therefore he should be dismissed for lack of proof that he suffered from a conflict of interest regarding the separation, the court ruled.

The remaining directors argued that they are exculpated from all of the fiduciary charges that the plaintiffs say disables them from deciding whether the suit has enough merit to continue. But the vice chancellor said they all fail the key rule in this area because, “Where a corporate charter contains an exculpatory provision, claims against a director will survive a motion to dismiss if the plaintiff pleads that the director

(1)“harbored self-interest adverse to the stockholders’ interests”;

(2) “acted to advance the self-interest of an interested party from whom they could not be presumed to act independently”; or

(3) “acted in bad faith

The vice chancellor held that the motion to dismiss failed because “The Dual Fiduciary Defendants each face such a conflict, so the claims against them are not exculpated.”