Recently, the Delaware Supreme Court issued its much-anticipated decision in In re Match Group, Inc. Derivative Litigation, No. 368, 2022 (April 4, 2024), in which the Court reaffirmed certain venerable teachings on the standards of review that the Delaware courts will employ to review challenged transactions involving a controlling stockholder—including when and how controlling stockholders can deploy the “MFW framework” (from Kahn v. M&F Worldwide Corp, 88 A.3d 635 (Del. 2014) (“MFW”)) to shift the standard of review from “entire fairness” to “business judgement.” In general, the MFW framework reflects the Supreme Court’s ruling in that case that where a controlling stockholder conditions a going-private transaction (which would normally be reviewed under the exacting entire fairness standard), from the beginning, on (1) approval by a fully-functioning independent committee of directors and (2) a fully-informed vote of the unaffiliated minority stockholders, the Delaware courts will look to see if that transaction was within the business judgment of the fiduciaries presenting and approving it.
Since the ruling in MFW in 2014, transactional planners, stockholder plaintiffs, and corporate defendants have all probed the contours of the ruling in various ways. For instance, can the MFW framework be deployed outside a squeeze-out merger context or does the entirety of the special committee need to be independent and disinterested or can just a majority of the members of the committee be satisfactory?
In the Match opinion, the Supreme Court discusses in detail (1) the historical framework of the various standards of review that the Delaware courts will use to review challenged corporate transactions and conduct, (2) the history behind, and the nature of, the Court’s ruling in MFW, and (3) additional guidance for corporate constituencies (including controlling stockholders, boards of directors, and their advisors) on the scope of and mechanics for properly deploying the MFW framework to shift the standard of review from entire fairness to business judgment. Specifically, the Supreme Court held:
- Long-standing precedent holds that “in a suit claiming 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”—this is not limited to going-private mergers, but rather applies to all transactions with a controlling stockholder that would historically have been reviewed for entire fairness.
- A “controlling stockholder can shift the burden of proof [to prove the transaction was not entirely fair] to the plaintiff by properly employing a special committee or an unaffiliated stockholder vote” (emphasis added). However, “the use of just one of these procedural devices does not change the standard of review” from entire fairness to business judgment.
- If “the controlling stockholder wants to secure the benefits of business judgment review, it must follow all [of] MFW’s requirements.” That is, the transaction must be conditioned on both the approval by an effective and independent special committee, and the informed vote of approval by the unaffiliated stockholders.
- For the special committee to be effective in “replicat[ing] arm’s length bargaining, all [special] committee members must be independent of the controlling stockholder.”