In re Match Group, Inc. Derivative Litig., C.A. No. 2020-0505-MTZ (Del. Ch. Sept. 1, 2022) (Zurn, V.C.).
In this decision, the Court of Chancery granted defendants’ motion to dismiss stockholder claims challenging a reverse spinoff in which the controller obtained a nonratable benefit because the transaction complied with the framework set forth in Kahn v. M&F Worldwide Corp. (“MFW”), and therefore was subject to business judgment review.
In this action, stockholders challenged a series of transactions by which a controlling stockholder effectuated a reverse spinoff. In 1999, IAC/Interactive Corp. (“Old IAC”) acquired Match.com. In 2009, Old IAC created a subsidiary, Match Group, Inc. (“Old Match”) to hold Match.com and other dating sites owned by Old IAC. Old IAC was a controlling stockholder of Old Match, holding 24.9% of Old Match’s publicly traded common stock and all of Old Match’s Class B high-vote common stock. In 2019, Old IAC separated its online dating business and certain debt obligations from the rest of its business by spinning off its other businesses into a newly-formed subsidiary, “New IAC.” Old IAC continued to hold a stake in Old Match. Old IAC then reclassified its two classes of Old Match stock into one class of common stock and became known as Match Group, Inc. (“New Match”). Old Match then merged with and into a New Match subsidiary and minority Old Match stockholders received New Match stock. As a result of the merger, Old Match ceased to exist. Plaintiff stockholders argued that Old IAC effectuated the separation of Old IAC and New IAC to the benefit of New IAC and to the detriment of Old Match and New Match minority stockholders.
The Court previously appointed two lead plaintiffs, and in moving to dismiss defendants challenged each plaintiff’s standing to assert either direct or derivative claims. The Court held that both plaintiffs lacked standing to bring derivative claims on behalf of Old Match, which ceased to exist as a result of the spinoff. Plaintiffs argued they had standing to assert derivative claims on behalf of a company that no longer exists because the separation was structured to deliberately eliminate derivative suits. The Court held that plaintiffs failed to plead that the purpose of the separation itself was fraudulent and perpetrated to deprive stockholders of standing, and instead only pleaded that the structure of the separation was designed to eliminate derivative suits. Similarly, the Court rejected plaintiffs’ arguments that the transaction was “in reality a mere reorganization which does not affect plaintiff’s ownership of the business enterprise.” Furthermore, the Court held plaintiffs lacked standing to bring derivative claims on behalf of New Match because plaintiffs did not hold New Match stock at the time of the alleged wrongdoing. The Court also held that one of the lead plaintiffs lost standing to assert direct claims when it sold its New Match stock.
Regarding the merits of the remaining direct claim, the Court held the transaction was properly reviewed under the business judgment rule because the transaction satisfied the six procedural protections outlined in MFW. Plaintiff acknowledged defendants met the first element of MFW, that the controller conditioned the transaction on approval of both a special committee and a majority of the minority stockholders. The Court rejected plaintiff’s challenge to the second element, requiring the special committee be independent, because plaintiff did not plead a reasonably conceivable set of facts showing that at least two of the three members lacked independence. Plaintiff also failed to successfully plead that the special committee was not sufficiently empowered, the third element of MFW, because the special committee was empowered to pick its own advisors and to say “no.” The Court also held that plaintiff failed to plead the special committee failed to meet its standard of care, the fourth element of MFW. Finally, plaintiff failed to plead that minority stockholders were not fully informed and uncoerced when voting to affirm the transaction, the fifth and sixth elements of MFW. Specifically, disclosures related to possible conflicts of members of the special committee were adequate to inform stockholders, and plaintiff failed to plead any other additional possible disclosure violations were material. Because the procedural protections outlined in MFW were satisfied, the Court found the transaction was properly analyzed under the business judgment rule, which required dismissing the claims as pled.