A Corporate Governance Solution to the Inefficiencies of Entire Fairness
Fall 2024
Publication| Corporate Governance| Corporate Transactions| Mergers & Acquisitions| Special Committees & Investigations| Corporate & Chancery Litigation
In In re Match Group, Inc. Derivative Litigation, the Delaware Supreme Court confirmed that non-ratable transactions between corporations and their controlling stockholders are subject to review under the onerous entire fairness standard unless the transaction is approved by both a fully empowered committee of independent directors and a fully informed and uncoerced vote of the disinterested stockholders. Despite the important role entire fairness review serves in policing potential conflict-of-interest transactions, it is not without cost to corporations and stockholders. In most cases, entire fairness claims cannot be dismissed on the pleadings, presenting plaintiffs with inherent settlement value and inviting litigation without regard to the merits of a claim. Delaware law’s existing safeguards against opportunistic derivative litigation—namely, Delaware’s MFW framework, demand futility requirement, and recognition of special litigation committees—curb inefficient entire fairness challenges to some degree, but offer imperfect solutions that do not fully address the problems facing many corporations under the modern entire fairness paradigm.
This article offers an alternative solution founded in specific statutory authority under the DGCL, longstanding foundational Delaware corporate law principles, and an overlooked aspect of the seminal case Marchand v. Barnhill: a provision in a corporation’s certificate of incorporation empowering an independent board committee (or subset of independent directors) with the sole and exclusive power and authority over derivative litigation demands and related matters. Where this provision is adopted, Delaware law and public policy support assessing demand futility based solely on the independence and disinterestedness of the directors so empowered to review derivative litigation demands. This, in turn, generally concentrates control of derivative litigation in independent directors, who Delaware law deems best suited to manage corporate litigation rights, thereby promoting more efficient management of derivative claims and reducing the costs of opportunistic derivative litigation currently faced by many corporations.