Chancery Court Upholds Amendment Prolonging Company’s Dual-Class Structure

Gail Weinstein is senior counsel, and Steven Epstein and Andrea Gede-Lange are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Ms. Gede-Lange, Mr. Soran, Mr. Colosimo, and Mr. Chrisope, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here)  and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.

In City Pension Fund for Firefighters and Police Officers in the City of Miami v. The Trade Desk, Inc. (July 29, 2022), stockholders of The Trade Desk (“TTD”) challenged an amendment to the certificate of incorporation of TTD that effectively extended the duration of the company’s dual-class stock structure—which, in turn, effectively extended the duration of the voting control held by TTD’s co-founder/CEO/chairman of the board, who owned 98% of TTD’s high-vote Class B common stock, representing control over 55% of the combined vote of the stockholders. The plaintiff alleged that the controller, TTD’s board of directors, and certain officers breached their fiduciary duties in approving the charter amendment and recommending it to the stockholders (who voted to approve it).

The TTD board was comprised of the controller and seven outside directors. The amendment was approved by a special committee of the board comprised of three of the outside directors. The transaction, involving a conflicted controller, was subject to the entire fairness standard of review unless the prerequisites for business judgment review as set forth in MFW had been met. Vice Chancellor Fiorvanti concluded, at the pleading stage of litigation, that the MFW prerequisites were satisfied; and the case thus was dismissed.

The court found that the special committee was independent. The plaintiff alleged that the special committee was not independent of the controller, as the chair of the committee received director compensation that was material to her and her non-independence had infected the committee process. First, the court found that the plaintiff “meaningfully” had challenged only the independence of the chair; thus, even if the chair had been non-independent, the court stated, a majority of the committee was independent, thus satisfying the MFW prerequisite. Second, the court rejected the plaintiff’s contention that the chair may have infected the committee process, as there were no allegations that she “dominated” the committee or “steered it in a direction that undermined its independence.” Although the plaintiff alleged that the chair had selected the committee’s financial advisor, the court found that an email she had sent the other committee members, and also the committee minutes, reflected that she had only strongly recommended that the firm be considered as a third potential candidate and that the committee as a whole had selected the (well qualified and independent) firm.

The plaintiff also contended that the committee members had acted with a “controlled mindset” given their desire to retain their board seats. The court concluded that there were no well-pleaded allegations that the committee members were beholden to the controller or had any disabling personal interest in the charter amendment’s adoption. The court rejected that plaintiff’s argument that no independent fiduciary acting in good faith would have taken affirmative action to perpetuate a dual class structure when the company and its minority stockholders had an imminent opportunity to eliminate a super-voting class of stock. The court noted that a director could in good faith believe that such a governance structure is value-maximizing; and, moreover, there were no allegations that the controller tried to interfere with or pressure the committee and, in fact, the committee obtained concessions (such as a final sunset provision for the structure) that a director could have viewed as favorable. The court emphasized that the plaintiff’s disagreement with the committee’s strategy and the result reached did not support a claim that the members lacked independence.

The court found that the stockholder vote was fully informed. The plaintiff alleged the following disclosure violations (among others):

  • Controller’s need for liquidity. The plaintiff argued that the disclosure did not reveal that the controller was in a weak bargaining position as he wanted to sell a significant amount of his Class B stock but could not do so without tripping the dilution trigger for expiration of the dual-class structure (in which case he would lose majority control of the company). This omission was material, the plaintiff asserted, because Green’s email indicating he wanted to sell shares but avoid tripping the dilution trigger, and his sale of shares just before learning of the imminent tripping of the trigger, as well as his resumption of sales of shares just after the amendment was approved, indicated that he had a “dire need” for liquidity, suggesting that the committee could have negotiated for terms that would have been much more favorable to the minority stockholders. The court found that none of these allegations supported an inference that the controller “had a desperate need for liquidity” (i.e., that he “required cash for any immediate investment or looming debt”). The court also observed that the stockholder vote was not held until six months after he learned about the dilution trigger issue; and there was no allegation that he pressured the committee to accelerate the process.
  • Exclusion of banker’s slide. The plaintiff argued that the disclosure failed to adequately summarize the banker’s views because a particular slide the banker presented to the board was not disclosed. The slide identified “potential [negotiating] levers,” including “Economic Considerations” (such as sunset provisions), which, the slide stated, provided the “Least Value,” and “Financial Incentives,” which, the slide stated, provided the “Most Value.” The plaintiff contended that the slide was particularly material given that the charter amendment did not provide the minority stockholders with any economic consideration. The court reasoned that one slide in the banker’s preliminary presentation, containing “generalized information regarding what stockholders might find more appealing in considering a proposal to extend a dual-class structure,” was not material information. The stockholders were aware from the disclosure that no economic incentives were provided to them and they could decide for themselves whether the deal struck by the committee was in their and the company’s best interests, the court stated.
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