Gail Weinstein is Senior Counsel, and Philip Richter, and Steven Epstein are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. Weinstein, Mr. Richter, Mr. Epstein, Brian T. Mangino, Andrew J. Colosimo and Randi Lally 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 Independent Directors and Controlling Shareholders (discussed on the Forum here) by Lucian Bebchuk and Assaf Hamdani.
In City of Coral Springs Police Officers’ Pension Plan v. Jack Dorsey, Block, Inc., et al (May 9, 2023), the Delaware Court of Chancery dismissed a lawsuit against the directors of Block, Inc. (a tech company, originally called Square, Inc., led by former Twitter CEO Jack Dorsey) challenging Block’s $237.3 million acquisition in 2021 of an 86.23% stake in TIDAL, a music streaming company 27% owned by Shawn Carter (who is professionally known as Jay-Z). The court dismissed the case after finding that the plaintiffs did not establish that the independent directors of Block acted with bad faith (and that, therefore, the plaintiffs did not establish demand futility).
Key Points
- The decision serves as a reminder of the very high bar for a finding that an independent board acted in bad faith. Even in the context of a decision to approve what was “by all accounts, a terrible deal” following a minimal and flawed process, an independent and disinterested board will not have liability unless it acted in bad faith. This decision indicates that, generally, the court will not find bad faith unless the board essentially did almost nothing to evaluate the transaction before approving it. In this case, where the directors received a presentation about the transaction, had three short meetings, and asked management questions, they had not acted in bad faith, the court found—even though, apparently, the answers to the questions they asked all strongly indicated that the deal should not be done.
- The court continues its trend in recent years of criticizing a flawed process even when reaching a holding for the defendants. This is another case in which, although the court held that the director defendants had no liability, the court’s recitation of the background facts and other commentary made clear the court’s view that Dorsey may have been motivated by his friendship with Carter and that the directors had not done a good job and had made what was obviously a “terrible business decision.”
