This post was prepared by Frank Reynolds, who has been following Delaware law and writing about it in various publications for over 30 years.
Delaware’s Court of Chancery recently dismissed a shareholder challenge to The Trade Desk Inc. (TTD) charter amendment that extended the advertising software company’s dual stock class structure and its CEO’s control, finding TTD met all six qualifications of the Delaware high court’s seminal MFW ruling, entitling it to deferential business judgment review in City Fund for Firefighters and Police Officers in the City of Miami v. The Trade Desk Inc.,et al. opinion issued, (Del. Ch. July 29, 2022).
In his July 29 memorandum opinion, Vice Chancellor Paul Fioravanti threw out the breach of duty charges that the City Fund for Firefighters and Police Officers in the City of Miami had brought against TTD officers and directors for allegedly helping CEO and controlling shareholder Jeff Green trick common shareholders into approving Green’s self-interested stock scheme. He said the plaintiffs failed to show that investors were duped into voting for an amendment to delay the end of a dual stock class or were uninformed about Green’s supposed hidden urgency to dispose of his many Class B shares that carried ten votes per share.
The ruling called on the Chancery Court to apply the Delaware Supreme Court’s milestone MFW opinion, which set out the six conditions that could exempt a controller’s transaction from the heightened scrutiny of review under the exacting entire fairness standard announced in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (commonly referred to as MFW.) Since the TTD amendment fit the MFW framework, it only faced examination under the more lenient business judgment rule, the vice chancellor said.
According to the court record, Jeff Green co-founded TTD, a Ventura, California, technology company that markets “a software platform to provide data-driven digital advertising campaigns” and has served as its President, Chief Executive Officer, and as chairman of the Delaware-chartered company’s board of directors. Green controlled a majority of TTD’s stock through his ownership of most of its Class B stock but that was due to change when the number of those non-public shares shrank.
After lengthy negotiations and the creation of a three-director special review committee, the TTD board company endorsed an extension of the projected sunset of the Class B shares and their conversion into the common Class A stock and that continued Green’s control at a crucial juncture.
After the pension fund filed its complaint, defendants moved to dismiss based on failure to plead a claim and the case focused on whether the disputed transaction fit the MFW framework by complying with six elements:
- the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders;
- the Special Committee is independent;
- the Special Committee is empowered to freely select its own advisors and to say no definitively;
- the Special Committee meets its duty of care in negotiating a fair price;
- the vote of the minority is informed; and
- there is no coercion of the minority.
Plaintiffs focused on elements two and five, arguing that the independence of the special committee was tainted by director Lisa Buyer and the vote was uninformed because shareholders were kept in the dark about the scheduled end of the Class B stock and Green’s need to unload his shares.
The Special Committee’s independence
Plaintiff charged that the Chair of the committee, Buyer, had been a consultant for Green during TTD’s initial public offering and received a large compensation for her services that compromised her neutrality.
But the vice chancellor noted that the MFW opinion requires an inquiry before such a determination. “This court is hesitant to infer materiality of compensation absent well-pleaded facts. The determination of whether a director’s compensation from the Company is sufficient to raise a reason to doubt her independence is a fact intensive inquiry. See In re MFW S’holders Litig., 67 A.3d at 510–13.
Plaintiff contended that Buyer caused the other two independent directors to function under a “control mindset” that skewed the committee’s decisions.
The court determined that, “Even assuming that Buyer’s TTD compensation creates a reasonable inference that her director compensation was material to her and that she was, therefore, not independent, the Plaintiff has not alleged facts that create a reason to doubt that a majority of the committee lacked independence or that Buyer so dominated the committee process that it undermined its integrity as a whole.”
“Plaintiff has not pleaded sufficient facts alleging that Buyer’s conduct dominated or subverted the Special Committee process so as render the entire committee defective, even if she was determined to be lacking in independence,” Vice Chancellor Fioravanti added, noting that the controlled mindset theory is not part of the MFW analysis.
Was the vote uninformed?
The court concluded that none of six alleged material non-disclosures altered the “total mix of information” available to the investors who needed to consider whether to vote for the extension amendment.
- Green’s desire to sell Class B stock;
- the Company’s expectations as to when the Dilution Trigger would likely be tripped;
- advice that Centerview provided to the Special Committee;
- Green’s counsel’s acknowledgement that a business rationale would be needed to justify any amendment to the Dilution Trigger;
- the Special Committee’s efforts to obtain stockholder support for the Dilution Trigger Amendment; and
- the Compensation Committee’s consideration of an equity grant to Green in December 2020
The court concluded that as Defendants aptly put it, “anyone reading the Proxy would understand both that Green desired to retain control through the Trigger Amendment and that the amendment would enable him to continue his (disclosed) historical practice of selling shares without losing that control.”