By Anne Sherry, J.D.
An amendment to a company’s articles designed to prolong the CEO’s control under a dual-class share structure passed muster with the Delaware Court of Chancery. With no dispute that the amendment was an interested transaction involving a controlling stockholder, the parties argued whether the defendants satisfied the MFW framework. The court concluded that they had, earning the transaction deferential review under the business judgment standard (City Pension Fund for Firefighters and Police Officers in the City of Miami v. The Trade Desk, Inc., July 29, 2022, Fioravanti, P.).
Jeff Green co-founded The Trade Desk, Inc. (TTD), an advertising software company, and serves as its president, CEO, and board chairman. Green controls the company through his combined ownership of class A (one vote per share) and class B (10 votes per share) stock. Class B shares are converted into class A once transferred. Due to Green’s continuing sale of shares under a 10b-5 trading plan, the number of outstanding class B shares diminished, threatening to trip a dilution trigger in TTD’s certificate of incorporation. If tripped, each share of class B would automatically convert to class A, and Green would lose voting control.
To avoid this happening, the board formed a special committee of three members and empowered it to evaluate amending the certificate of incorporation to extend the company’s dual-class structure. The committee retained Morris Nichols as its counsel and Centerview Partners as its financial advisor. Following negotiations, Green and the committee came to an agreement-in-principle that dropped the idea of a new dilution trigger based on share percentage, instead sunsetting class B stock after five years or when Green is removed as CEO or president. The board voted to approve the amendment (which also included several governance concessions on Green’s part), and the company noticed a special meeting to solicit stockholder votes. Given insufficient stockholder support, the company adjourned the special meeting, but 52 percent of unaffiliated shares approved the amendment two weeks later.
The plaintiff pension fund filed suit asserting breach of fiduciary duty against Green and other officers and directors. On the defendants’ motion to dismiss, the parties agreed that the amendment was an interested transaction involving a controlling stockholder, which would usually invoke entire fairness review. However, the defendants had attempted to follow the Delaware Supreme Court’s framework from Kahn v. M & F Worldwide Corp. (2014), which, if successful, would subject the transaction to business judgment review. The plaintiff alleged that the defendants failed to satisfy two of the six MFW elements because the special committee was not independent and the stockholder vote was uninformed.
Special committee independence. First, the court examined the plaintiff’s claims that the special committee was not independent because the chair’s lack of independence undermined the committee as a whole and the committee labored under a “controlled mindset” that made it defer to Green’s wishes. The plaintiff’s challenge to the chair’s independence was limited to the compensation she derived as a consultant to TTD in 2016 and as a director in 2019 and 2020, but the complaint lacked well-pleaded facts as to the materiality of that compensation. Furthermore, even if her compensation was material and she was not independent, the complaint did not allege facts creating a reasonable inference that a majority of the committee lacked independence or that the chair so dominated the committee as to undermine its integrity as a whole.
The court likewise rejected the plaintiff’s argument that the special committee labored under a “controlled mindset” and acceded to Green’s wishes to ingratiate themselves to him and ensure their continued positions on the TTD board. The complaint lacked any well-pleaded allegations that the committee members were beholden to Green or had a disabling personal interest in the amendment. The plaintiff merely argued that no independent fiduciaries would in good faith perpetuate a dual-class structure, an ipse dixit that did not persuade the court. Unlike the cases the plaintiff cited, its complaint lacked allegations that Green sought to interfere or pressure the committee. “At bottom, Plaintiff’s challenge to the Special Committee is grounded in Plaintiff’s belief that maintaining the dual-class structure through the Dilution Trigger Amendment was a bad deal for TTD stockholders. Maybe it was. But the Delaware Supreme Court has clarified that this court’s role in applying the MFW framework is limited to a process analysis, not second guessing the ultimate ‘give’ and ‘get,’” the court concluded.
Stockholder vote. Finally, the court examined alleged disclosure deficiencies in the special proxy that rendered the stockholder vote uninformed. But as long as the proxy statement viewed in its entirety sufficiently discloses and explains the matter to be voted on, it is generally within management’s business judgment to leave out or include a particular fact. Whether individually or collectively, the six alleged omissions, concerning such matters as Green’s wish to sell class B stock and the expectations and efforts of the company and its professionals, did not result in an uninformed vote. Accordingly, MFW was satisfied, the business judgment rule applied, and only a well-pleaded claim for waste could overcome the rule.
The case is No. 2021-0560.