Delaware’s top court is weighing a potentially groundbreaking ruling that could streamline corporate dealmaking while scaling back protections for minority investors in many transactions that favor insiders.
A case involving dating site Match.com is giving the leading US forum for M&A disputes a chance to reaffirm or rein in enhanced scrutiny of deals involving a potential conflict of interest between a company and its controlling stockholder.
Delaware’s justices surprised court watchers in May by indicating they would consider if all such transactions—or only a relatively small subset—invite the most rigorous judicial review. The Match case involves the 2019 spinoff of Match Group Inc. from
The legal standard facing an unexpected challenge requires corporate leaders to defend a transaction as “entirely fair” unless the board sets up an independent special committee and seeks “majority of the minority” approval from unaffiliated investors, onerous steps that can derail a deal.
IAC is asking the state high court to reject that “belt and suspenders” approach and instead require only one or the other. Although they raised the argument belatedly, the court cited “the interests of justice” when it agreed to take up the issue, saying a ruling would “provide certainty to boards and their advisors.”
“No one thought that what’s at stake in this case was going to be at stake,” said Eric Talley, a Columbia University law professor who specializes in corporate governance. “This is an important area that’s only going to get more important.”
Talley pointed to the shift in US capital markets over the past 25 years as a driving force. Deals have moved toward a model involving significant shareholders who are increasingly viewed by courts as controllers thanks to their influence alone, even if they own less than a majority.
“We’ve begun to see names like Mark Zuckerberg, Elon Musk, and Larry Ellison all over the titles of cases, because large-block shareholders have started to play an incredibly large role,” he said. “Whatever decision the court makes in the current case is going to cast a longer shadow over the universe of corporate disputes than it would have a quarter-century ago.”
Squeeze-Outs, End Runs
The legal framework getting a hard look from the Delaware’s high court is known as the “MFW” doctrine. Named after the court’s seminal 2014 ruling in Kahn v. M&F Worldwide Corp., it was developed for “squeeze-out” or “freeze-out” transactions that forcibly cash out investors at a price unilaterally set by a controlling stockholder.
But judges on Delaware’s Chancery Court are now applying the standard to a wider range of deals. They include commonplace transactions that bear little resemblance to squeeze-outs, such as consulting agreements with a controller’s affiliate, compensation decisions affecting a controlling stockholder who serves as CEO, and mergers like
In the Match case, the state’s justices are being asked by affiliates of IAC and Diller to confine the doctrine to what they say is its original context.
Columbia’s Talley, who favors a broader view of MFW, said restricting the rule to squeeze-outs would lead to end runs by dealmakers looking for a way around an arbitrary distinction. It would also invite transactional gamesmanship that would otherwise be deterred, he said. He cited a $2 billion judgment in a pre-MFW case involving Southern Peru Copper Corp.'s acquisition of a mining company owned by its controlling stockholder,
“If the rule advocated by the Match Group defendants applied, that case would have gotten buried,” Talley said.
MFW Creep
The first decision to explicitly apply MFW more broadly was a 2016 ruling by Vice Chancellor J. Travis Laster. He said that even outside the squeeze-out context, both types of approval—from a special committee and minority investors—are required to avoid scrutiny into the overall fairness of any transaction involving controller conflicts.
Read More: Delaware’s Judge Laster Is Making His Mark on Corporate America
Other similar decisions followed, with Laster and his colleagues generally expressing the view that the MFW standard was never just about squeeze-outs, despite having come from a squeeze-out dispute.
In opting to reconsider the rule’s scope, Delaware’s justices acknowledged they wouldn’t normally consider an issue that wasn’t raised during lower court proceedings. Vice Chancellor Morgan T. Zurn ruled for Diller and IAC in September 2022, saying the spinoff restructuring approved by a special committee and minority shareholders complied with the MFW process.
But during oral argument, the state high court ordered a second round of briefing anyway. The move signaled the court was interested in deciding whether it was enough for IAC to set up a special committee even if the investor vote was flawed, or vice-versa.
The development came about a year after a leading corporate law scholar and two former justices published an influential paper criticizing the EZCorp line of rulings as “MFW creep.”
The article by Lawrence Hamermesh, former Justice Jack B. Jacobs, and former Chief Justice Leo E. Strine Jr. pushed back against the idea underpinning the decisions that have arguably extended MFW: a dynamic of “inherent coercion” casting suspicion on any transaction involving a conflicted controlling stockholder, even if a board signed off.
The doctrine should be seen as “a bespoke solution” tailored to specific conflicts of interest “unique to the controller going private context,” not “as prescribing a rigid set of procedures” in any case involving a side deal with a controlling stockholder, they wrote.
Requiring “a microscopic review of every situation that might involve unfairness” would “impose a toll on innovation, flexibility, and the cost of capital” that’s only justified in situations where the danger of abuse is most acute, the article said, calling instead for “rules that incentivize the use of high-integrity procedures in most cases.”
“Corporate law is not designed for perfection,” according to the paper.
‘A Fever Dream’
Carliss Chatman, who teaches corporate law at Southern Methodist University in Dallas, said the dispute over the concept of inherent coercion is an extreme example of fundamental disagreements that have emerged about which types of board-level relationships may be compromising.
For instance, Delaware judges sometimes rule that board colleagues are independent enough to make impartial decisions about each other’s potential liability despite vacationing together, sharing alumni collections, belonging to the same clubs, and sending their kids to school together.
But controlling stockholders who command outright loyalty are a special case, according to Chatman. They make it “fair to assume that there’s an inherent conflict” whenever there’s an “800-pound gorilla in the room,” she said. “There’s a point where the law can’t conquer human nature.”
Because the challenge to MFW didn’t surface until late in the Match litigation, it has flown a bit under the radar, according to Talley. He was one of the lead authors of an amicus brief signed by about two dozen corporate law professors who urged the court to take a broader view of MFW.
“This is a fever dream that has now engendered a full briefing,” Talley said.
The Match ruling could also have consequences for the state’s role as “an important nexus and dominating force in corporate law,” according to Claire Hill, a law professor at the University of Minnesota who signed the amicus brief.
Other states, led by Nevada, have been challenging that primacy by adopting management-friendly laws in a bid to lure major corporations away from Delaware, where nearly 70% of Fortune 500 companies are chartered thanks in large part to its specialized judiciary.
How the case comes out could affect that dynamic. “Managers ultimately make the decision as to where to incorporate, but investors are making the decision about where to invest,” Hill said. “This isn’t happening in a vacuum.”
‘The Dog Caught the Car’
Hamermesh, who isn’t directly involved in the court fight, advocated publicly for “MFW creep” Oct. 12 at a University of Delaware event. He was squaring off against Greg Varallo, a partner at the shareholder firm Bernstein Litowitz Berger & Grossmann LLP. Varallo is Delaware counsel for the group of professors who weighed in on the Match case.
Sitting directly between the two men during the panel-style debate was Delaware Chief Justice Collins J. Seitz jr., leader of the five-member court that will decide the issue. Seitz wore a poker face kept mostly quiet as they argued across him.
“One judge told me that the dog caught the car in this case,” Seitz said at one point, to laughter from a crowd that included Jacobs, the former Delaware justice who co-wrote the article with Hamermesh.
“I’m glad you bit at the tailpipe,” Hamermesh said.
Hamermesh called Laster’s EZCorp ruling “remarkably insightful” but nevertheless wrong. Until then, he said, Delaware’s courts had rejected the inherent-coercion idea in most contexts. They instead favored a presumption that directors are capable of pushing back against controllers thanks to market forces like institutional investors, hedge funds willing to seek board seats, and proxy advisers whose judgments can determine if they get future directorships.
“All I’m advocating is a return to what I think of as traditional corporate law principles,” Hamermesh said.
Varallo sought to seize the same ground, describing the MFW doctrine as an exception from a different set of legal norms. The framework should be seen in essentially the opposite terms: as “a great gift” to corporate dealmakers who can slip conflicted transactions past the courts if they set up a special committee and get a shareholder vote, he said.
“If you’re asking the wrong question, it doesn’t matter how good the answer is,” Varallo said.
Penny Wise, Pound Foolish
It’s no accident the argument boils down to a fight over which position reflects a departure from settled law, according to Talley. “With hard, factually rich, difficult-to-research questions, the big debate is over who bears the burden of persuading courts to change the law,” he said. “So everyone says that their side is the status quo and the other side is radical reformers.”
He cited a separate amicus brief by Charles Elson, founder of the University of Delaware’s Weinberg Center for Corporate Governance. The brief argued that MFW reflected an exception to stricter standards for controlling stockholders, not to laxer rules outside the squeeze-out context.
Hamermesh and his co-writers said the MFW framework is a borderline nonsensical fit for some controller transactions, citing examples like CEO pay decisions. But it should be relatively straightforward to prove those types of deals are fair, according to SMU’s Chatman.
She cited shareholder litigation that challenged the SolarCity deal. Both the Chancery Court and the Delaware Supreme Court upheld the transaction as fair despite finding that it didn’t comply with the MFW process.
Talley called the case “the poster child” for debunking “the demonstrably false psychological view that once you’re in entire-fairness territory, you’re going to lose.” The entire-fairness standard isn’t “the death penalty,” he said.
In their court brief, Talley, Hill, and the other scholars argued that limiting the scope of MFW would invite controlling stockholders “to smuggle in squeeze-outs under alternative packaging” using “transactional parlor tricks” that let them divert value away from minority investors.
“The thought of saving millions in litigation costs at the expense of billions of minority investor value is the epitome of being penny wise yet pound foolish,” they said.
The case is In re Match Grp., Inc. Derivative Litig., Del., No. 368,2022, 10/25/23.
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