In its May 9, 2023 decision in City of Coral Springs Police Officers’ Pension Plan v. Jack Dorsey et al., C.A. No. 2022-0091-KSJM (Del. Ch. May 9, 2023), the Delaware Court of Chancery dismissed a stockholder suit brought on behalf of Block, Inc., finding that the plaintiff failed to adequately plead bad faith with regard to Block’s board of directors’ decision to engage in an acquisition with questionable business wisdom. The court emphasized that, when approved by a board in good faith, even a terrible business decision is protected under Delaware law.
In City of Coral Springs, a stockholder sued Block’s board of directors, challenging the acquisition by Block of music streaming company TIDAL. The deal was driven by Jack Dorsey, Block’s president and CEO, and chairman of its board of directors, who is close friends with Shawn Carter, known as Jay-Z and associated with TIDAL. According to the complaint, Dorsey proposed the deal during a vacation with Carter in the Hamptons. While the board worked on forming a committee of independent directors to consider the transaction, Dorsey drafted and submitted a nonbinding letter of intent for Block to purchase TIDAL for $554.8 million.
Over the following months, the committee held multiple meetings to consider the transaction and learned that TIDAL was failing financially and Carter had personally loaned funds to the streaming company. During those meetings, the committee received several reports from Block management and sent extensive lists with questions to management. Management responded to these questions with detailed answers, including a statement that reported that Dorsey was the primary supporter of the deal and the only one who was strongly advocating to move forward. On November 10, 2020, Block entered a term sheet to purchase a majority interest in TIDAL. Following additional questions from the committee and continued advice from management to proceed, the committee approved the transaction by written consent on February 25, 2021. The deal closed on April 30, 2021, at a price of $237.3 million.
The plaintiff in City of Coral Springs brought suit on behalf of Block, alleging that a demand to the board to bring litigation on behalf of Block would have been futile because the majority of the Block board faced a substantial likelihood of liability from the approval of the TIDAL deal. The plaintiff’s challenges to the board’s ability to consider a demand focused on the merits of the transaction and the fact that, despite the very unfavorable answers received by the committee in response to its questions to management, the committee still approved the transaction.
After acknowledging that the Block-TIDAL transaction looks from the outside like a “terrible business decision,” the court found that the plaintiff failed to show that the committee defendants faced sufficient liability. The court explained that the plaintiff was essentially asking the court to presume bad faith based on the merits of the transaction but did not allege facts sufficient to question the good faith of the directors, considering the active role the directors took throughout the process. Thus, the court dismissed the litigation for failure to plead demand futility. The court’s decision in City of Coral Springs is a stark reminder to plaintiffs of the powerful protection Delaware law affords the boards of directors of Delaware corporations in their pursuit of litigation on behalf of those corporations and the strong pleading necessary to overcome that protection.