City of Coral Springs Police Officers' Pension Plan v. Jack Dorsey

      IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

CITY OF CORAL SPRINGS POLICE         )
OFFICERS’ PENSION PLAN, derivatively )
on behalf of BLOCK, INC.,            )
                                     )
              Plaintiff,             )
                                     )
      v.                             )       C.A. No. 2022-0091-KSJM
                                     )
JACK DORSEY, ROELOF BOTHA, AMY )
BROOKS, PAUL DEIGHTON, RANDY         )
GARUTTI, JIM MCKELVEY, MARY          )
MEEKER, ANNA PATTERSON,              )
LAWRENCE SUMMERS, DAVID              )
VINIAR, and DARREN WALKER,           )
                                     )
              Defendants,            )
                                     )
     and
                                     )
                                     )
BLOCK, INC.,
                                     )
              Nominal Defendant.     )

                           MEMORANDUM OPINION

                          Date Submitted: January 10, 2023
                            Date Decided: May 9, 2023

Thomas Curry, Tayler D. Bolton, SAXENA WHITE P.A., Wilmington, Delaware; David
Wales, Sara DiLeo, SAXENA WHITE P.A., White Plains, New York; Adam Warden,
Jonathan Lamet, SAXENA WHITE P.A., Boca Raton, Florida; Counsel for Plaintiff City
of Coral Springs Police Officers’ Pension Plan.

Raymond J. DiCamillo, Kevin M. Gallagher, RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware; Colin B. Davis, Katie Beaudin, GIBSON DUNN & CRUTCHER
LLP, Irvine, California; Brian M. Lutz, GIBSON DUNN & CRUTCHER LLP, San
Francisco, California; Lissa M. Percopo, GIBSON DUNN & CRUTCHER LLP,
Washington, D.C.; Counsel for Defendants Jack Dorsey, Roelof Botha, Amy Brooks, Paul
Deighton, Randy Garutti, Jim McKelvey, Mary Meeker, Anna Patterson, Lawrence
Summers, David Viniar, and Darren Walker, and Nominal Defendant Block, Inc.

McCORMICK, C.
       The plaintiff, a stockholder of Block, Inc., filed this derivative suit challenging

Block’s acquisition of TIDAL—a music streaming company associated with rapper,

producer, and entrepreneur Shawn Carter. Block facilitates payment processing and helps

individuals transfer money electronically; it had never ventured into the music streaming

industry and, at the time it acquired TIDAL, had no plans to do so. The idea for the

acquisition came to Jack Dorsey—Block’s founder, CEO, and Chairman—when he was

summering with Carter in the Hamptons. From his Hamptons retreat, Dorsey joined a

videoconference meeting of Block’s board and proposed that Block acquire TIDAL. The

board formed a transaction committee to consider the proposal.

       Over the ensuing months, the committee learned that TIDAL was failing financially,

losing its major contracts, and facing an ongoing criminal investigation. The committee

also learned that Carter personally loaned TIDAL $50 million to help the troubled company

through its difficulties and that Dorsey was the sole Block management member in support

of the acquisition. Despite the obvious problems with the deal, the committee approved

the transaction for $306 million. It seemed, by all accounts, a terrible business decision.

       Under Delaware law, however, a board comprised of a majority of disinterested and

independent directors is free to make a terrible business decision without any meaningful

threat of liability, so long as the directors approve the action in good faith.

       The defendants moved to dismiss the complaint for failure to plead demand futility.

That motion hinges on whether the plaintiff adequately alleges that the committee members

would face a substantial likelihood of liability for approving the transaction. The plaintiff

did not meet that pleading burden. The case is dismissed.
I.      FACTUAL BACKGROUND

        The facts are drawn from the Verified Stockholder Derivative Complaint (the

“Complaint”)1 and documents it incorporates by reference, including meeting minutes and

associated materials that were referenced or quoted in the Complaint.

        A.     Block And Its Board

        Block, a California-based company, offers products and services that help

businesses facilitate payment processing and help individuals transfer money

electronically. Block’s net income in 2019 and 2020 was $375.4 million and $213.1

million, respectively.

        Dorsey founded Block and took the Company public in 2015. He is Block’s

President and CEO, and he serves as Chairman of Block’s Board of Directors (the

“Board”). According to Block’s public filings, Dorsey held between 48.08% and 51.32%

of the Company’s total stockholder voting power at relevant times.

        At the time of the acquisition, the Board comprised eleven members: Dorsey and

Defendants Roelof Botha, Amy Brooks, Paul Deighton, Randy Garutti, Jim McKelvey,

Mary Meeker, Anna Patterson, Lawrence Summers, David Viniar, and Darren Walker

(collectively, “Defendants”).

        B.     Carter’s Acquisition And Attempted Revamp Of TIDAL

        Carter, known professionally as “Jay-Z,” is a rapper, record producer, and

entrepreneur. In 2015, a group of recording artists led by Carter acquired a Norwegian



1
    C.A. No. 2022-0091-KSJM, Docket (“Dkt.”) 1 (“Compl.”).

                                            2
music streaming company, formerly called Aspiro, for $56 million and rebranded it as

TIDAL. Carter spearheaded these efforts and served as the public face of TIDAL. He also

held a 27% stake in the company. Along with his partners, Carter launched a campaign for

TIDAL to break into the music streaming industry as an artist-friendly platform.

       The campaign was unsuccessful. By mid-2020, TIDAL had amassed only 2.1

million paying subscribers, which compared poorly to competitors like Spotify (138

million paying subscribers), Apple Music (60 million), and Amazon Music (55 million).

TIDAL had logged multimillion-dollar losses for each of the preceding ten quarters. Carter

personally extended a $50 million loan to TIDAL in 2020.

       TIDAL’s operations also showed signs of distress. Between 2015 and 2020, TIDAL

had churned through five different CEOs. The Company’s contracts with music labels

were semi-formal at best; some had expired. TIDAL had incurred substantial unpaid

liabilities to music labels for streaming fees. In a public fallout, TIDAL lost its exclusive

streaming arrangement with recording artist Kanye West. To top it all off, the Company

was facing an ongoing criminal investigation in Norway for artificially inflating its

streaming numbers.

       C.     Dorsey Proposes That Block Acquire TIDAL.

       Dorsey and Carter are friends.       They share interests in cryptocurrency and

philanthropy. Dorsey publicly supported Carter’s acquisition of TIDAL in 2015, tweeting,

“I appreciate & respect people who depart from their strengths and take on new challenges.




                                             3
Been using Tidal & digging it!”2 In April 2020, they jointly issued grants for COVID-19

relief totaling $6.2 million. Dorsey donated $10 million to Carter’s nonprofit, Reform

Alliance, in May 2020.

         While their families were summering together in the Hamptons, Dorsey and Carter

began discussing a potential acquisition of TIDAL by Block. On August 25, 2020, Dorsey

joined the Board’s regularly scheduled meeting by videoconference from the Hamptons.

During the meeting, Dorsey raised the idea that Block acquire TIDAL. The meeting

minutes reflect the Board’s discussion of strategic rationales, proposed valuations, and the

Company’s potential integration strategies. The Board then “instructed management to

continue to evaluate such transactions including through additional due diligence and

negotiation of a letter of intent.”3 The Board resolved to establish a transaction committee

to review any potential acquisition of TIDAL by unanimous written consent (the

“Transaction Committee”).

         The proposed Transaction Committee members were four independent directors:

Botha, Brooks, Meeker, and Walker (the “Committee Defendants”). The resolution

authorized the Transaction Committee to retain advisers to evaluate a potential acquisition

and granted it the authority to approve a purchase. All directors excluding Dorsey signed

their written consents on August 26, 2020. Two days later, on August 28, Dorsey executed

his written consent, and the Transaction Committee was officially formed.



2
    Compl. ¶ 107.
3
    Dkt. 7 (“Smith Aff.”), Ex. 2 (Aug. 25, 2020 Board Minutes) at SQ220_000002.

                                             4
         Meanwhile, Dorsey drafted and submitted a non-binding letter of intent for Block

to purchase TIDAL for $554.8 million.

         D.    The Transaction Committee’s First Meeting

         The Transaction Committee convened by videoconference for its first meeting on

September 29, 2020. The meeting lasted 35 minutes. Dorsey and members of Block’s

legal team attended the meeting and were present for its duration. The Transaction

Committee discussed TIDAL’s competitive landscape and Block’s proposed product

development strategies. Dorsey then “provided his perspective on the transaction as well

as the interim management strategy should the transaction move forward.”4

         In advance of its first meeting, the Transaction Committee received three reports

from Block management analyzing a potential acquisition of TIDAL. The reports included

general background on the music industry, an outline of Block’s strategic goals in entering

the industry, and a preliminary analysis of the investments Block would need to make into

TIDAL to make it successful. None of the three reports contained management’s valuation

of the proposed acquisition. The third report, delivered the day before the Transaction

Committee’s first meeting, was the first time that management informed the Transaction

Committee that Dorsey and his team had submitted a letter of intent a month earlier.

         E.    The Transaction Committee’s Second Meeting

         Block management provided the Transaction Committee with its fourth written

report on October 14, 2020. Management reported that TIDAL had only amassed 2.1



4
    Smith Aff., Ex. 9 (Sept. 29, 2020 Transaction Committee Minutes) at SQ220_000011.

                                             5
million paying subscribers and that growing this number would prove difficult.

Management reasoned that “Spotify is synonymous with music streaming,” and Apple

Music and Amazon Music had largely captured the remaining market share.5 The report

also apprised the board that TIDAL had generated negative EBITDA of $39 million in

2019 and of Carter’s $50 million loan to the company.

         Management further revealed that TIDAL operated under semi-formal or expired

arrangements with these labels, capitalizing on the influence of the prominent artists who

were partial owners of TIDAL. The report warned that TIDAL’s relationships with these

labels could sour following an acquisition by Block.

         The report highlighted other potential risks in an acquisition, such as the ongoing

criminal probe by the Norwegian government and a federal lawsuit brought by artists

alleging that TIDAL had withheld their owed royalties. TIDAL’s relationships with its

artists were also faltering, and rapper Kanye West had withdrawn from his exclusive

streaming arrangement with TIDAL for one of his albums due to piracy issues.

         Management set an “[e]xpected purchase price” of $550–750 million.6 They

reached this conclusion based on: comparables analyses with Spotify, Apple Music, and

Amazon Music; comparables analyses with private precedent transactions; discounted cash

flows analysis derived from TIDAL’s management forecasts; and TIDAL’s representations




5
    Smith Aff., Ex. 10 (Oct. 14, 2020 Report).
6
    Id. at SQ220_000125.

                                                 6
that it was in discussions with an undisclosed third party for a loan that valued TIDAL at

$500–600 million.

          The Transaction Committee convened for its second meeting on October 20, 2020.

Dorsey and his management team presented on the October 14 report and additional

financial information from TIDAL. Among other things, management informed the

Transaction Committee that TIDAL had recorded multimillion-dollar losses in each of its

previous ten quarters. These losses, management reported, would dilute Block’s earnings

for at least three years and potentially create volatility in its stock price. Management’s

presentation acknowledged that TIDAL’s existing contracts with its artists had expired, yet

management valued TIDAL’s “intangible” artist relationships at $231 million.7

Management also presented on TIDAL’s accrued liabilities of $127 million, primarily from

amounts owed to record labels for streaming fees.

          In a section called “Committee Q&A,” the presentation addressed 18 multi-part,

complex questions from Transaction Committee members, and the answers to these

questions spanned 14 single-spaced slides in the presentation. One member asked, “Who

are internal advocates for transactions? Is there sufficient buy in?”8 The slide reported

that Dorsey was still “the primary sponsor of the deal” and that he was “the only one who

is strongly advocating to move forward.”9 The slide also stated that there was “substantial




7
    Dkt. 7 (“Smith Aff.”), Ex. 11 (Oct. 20, 2020 Presentation) at SQ220_000165.
8
    Id. at SQ220_000179.
9
    Id.

                                             7
push back from Core members,” i.e., Block’s senior executives, and that neither of Block’s

two business unit leaders, Alyssa Henry and Brian Grassadonia, were advocating for the

transaction.10

           Another Transaction Committee member asked whether TIDAL artists had any

legal commitment to maintain their relationship with the platform following a merger. The

presentation stated that “existing artists will have no legal obligation to [Block]; we are

counting on their economic incentives as owners to drive future contributions to the growth

and success of [TIDAL].”11 In response to a follow-up question requesting a “Drilldown”

on the specifics of artists’ commitment, the presentation again acknowledged that the

agreements “may be difficult to enforce legally, we will largely be relying on Jay-Z’s

influence with them” to secure performance.12 When asked about the value of these artist

relationships, management responded that “we do not have a concrete view on the value of

the artist shareholders.”13

           One Transaction Committee member asked for the one-month, six-month, and one-

to-three-year plans for assimilating and building the business. The response admitted that

“[w]e do not have this level of detail at this stage” and acknowledged that “the lack of a

clear operational/strategic lead here remains one of the greatest risks.”14 In the “Investor



10
     Id.
11
     Id. at SQ220_000172 (underline in original).
12
     Id. at SQ220_000173.
13
     Id. at SQ220_000183.
14
     Id. at SQ220_000174.

                                              8
Relations Plan” section, the presentation described the framing to investors as follows:

“While it is a big opportunity, the bet we are taking today is small relative to the size of

Square.”15

         Despite these concerns, management informed the Transaction Committee that they

intended to enter a deal term sheet in which Block would acquire approximately 90% of

TIDAL at an enterprise valuation of $490 million. Certain member artists would retain the

remaining 10% stake.

         The October 20 meeting lasted an hour, and Dorsey was present for the entirety of

the meeting. In closing, the Transaction Committee “instructed management to continue

pursuing the transaction and update the Committee as negotiations progress.”16

         The Transaction Committee updated the full Board at its regularly scheduled

meeting the next day, October 21.         According to the Board minutes, Transaction

Committee member Brooks provided an update on “the work that the deal team has

undertaken and the discussions that the Transaction Committee of the Board have had in

connection with the review of the target and the negotiation of a potential term sheet.”17

The Transaction Committee’s update was one of 14 items of business discussed at the

October 21 Board meeting.




15
     Id. at SQ220_000180.
16
     Smith Aff., Ex. 12 (Oct. 20, 2020 Transaction Committee Minutes) at SQ220_000023.
17
     Smith Aff., Ex. 13 (Oct. 21, 2020 Board Minutes).

                                             9
      F.     Block And TIDAL Agree On A Term Sheet.

      On November 10, 2020, Block entered a term sheet to purchase a majority interest

in TIDAL. A few days later, Dorsey and Carter were spotted vacationing together in

Hawaii.

      The Transaction Committee did not convene again until January 22, 2021. The

meeting lasted an hour, according to the minutes. Dorsey and his team presented to the

Transaction Committee members on the proposed transaction. Based on TIDAL’s failure

to meet its management’s forecasts for 2020, and the likely scenario that T-Mobile would

soon pull out of a significant partnership with TIDAL, Block’s management reduced its

valuation of TIDAL to $350 million.

      Block’s management estimated that TIDAL would generate its own negative

EBITDA of $15.8 million in 2021, $24.5 million in 2022, and $32.4 million in 2023. Based

on management’s projected capital infusions that Block would need to make into its

TIDAL investment, they predicted the acquisition would generate negative EBITDA for

Block of $35.6 million in 2021, $55 million in 2022, and $68.3 million in 2023.

      Management downplayed the bad news as minor within the greater scheme of

Block’s financial success. In another Committee Q&A in the January 22 presentation, the

Committee members posed at least ten new questions and reviewed answers spanning eight

slides.18 The Committee asked about the 8% to 10% drag on EBITDA. Management




18
  Questions and responses in the “Legal Questions” Q&A category were redacted on the
basis of attorney-client privilege.

                                           10
assuaged the Committee that the TIDAL acquisition “doesn’t move the needle on our gross

profit growth rate given [TIDAL’s] relative magnitude.”19 Management also responded to

questions about the acquisition’s scale, noting that a $350 million purchase price would

only constitute 0.35% of Block’s $100 billion market capitalization.

         Like in the October 20 meeting, the Transaction Committee pressed management

for more details on artists’ legal obligations to continue working with TIDAL post-

acquisition. Management responded that “whether an artist contributes to the platform or

not, there would be no recourse for [Block] to take.”20 When pressed on the basis for “how

we will win” in the market, the presentation stated plainly that the “[m]ost important driver

here will be Jack’s and Jay’s vision.”21

         Ultimately, Dorsey proposed a purchase price of $309 million to acquire an 88%

stake in TIDAL, implying a $350 million total enterprise valuation. Carter would retain

an 8% stake, and other artist partners would hold the remaining 4% interest.             The

presentation set forth the acquisition as more of an assumption than an open question: “We

will update the Committee once we have finalized terms we are comfortable with, and

unless there are additional remaining questions, we can circulate a UWC to the Committee

to approve the transaction.”22




19
     Smith Aff., Ex. 14 (Jan. 22, 2021 Presentation) at SQ220_000237.
20
     Id. at SQ220_000242.
21
     Id. at SQ220_000243.
22
     Id. at SQ220_000200.

                                             11
       The Transaction Committee concluded that management should continue pursuing

the transaction and update it as negotiations progressed. The Transaction Committee

provided the full Board with an update on the proposed transaction at its regularly

scheduled meeting on February 11.

       G.     The Transaction Committee Approves The Acquisition.

       Without any further meetings, the Transaction Committee approved the acquisition

by unanimous written consent on February 25, 2021. The Company announced the deal

on March 4, after which its stock price decreased by 7%. In an 8-K filed two days later,

the Company reported that it would pay consideration of approximately $306 million,

subject to adjustments, for an ownership stake of approximately 87.5%.

       Block closed the deal on April 30, 2021. In its 10-Q filed on November 4, 2021,

Block disclosed that, after adjustments, it ultimately paid $237.3 million for an ownership

interest of 86.23%. For accounting purposes, Block characterized $198 million of the

purchase price as “Goodwill.” After the transaction closed, Carter joined the Board as a

twelfth member.

       Also in February 2021, Dorsey and Carter continued to partner in their personal

lives, creating an endowment to fund bitcoin development in India and Africa. Their joint

contributions to this endowment totaled $23.6 million.

       H.     This Litigation

       Plaintiff City of Coral Springs Police Officers’ Pension Plan (“Plaintiff”) is a

beneficial owner of Block common stock. Before filing this action, Plaintiff made a



                                            12
demand for books and records pursuant to 8 Del. C. § 220, and Block produced documents

in response.

         Plaintiff filed this derivative action on January 27, 2022. The Complaint asserts

two causes of action challenging the TIDAL acquisition as a breach of fiduciary duty—

Count I against Dorsey as a controller and Count II against the directors on the Board at

the time the transaction was approved.23 Defendants moved to dismiss the Complaint. The

motion was fully briefed, and the court heard oral argument on January 10, 2023.24

II.      LEGAL ANALYSIS

         Defendants moved to dismiss the Amended Complaint pursuant to Court of

Chancery Rules 23.1 and 12(b)(6). Because the Rule 23.1 motion results in dismissal, the

court does not reach the Rule 12(b)(6) motion.

         “A cardinal precept of [Delaware law] is that directors, rather than shareholders,

manage the business and affairs of the corporation.”25 “In a derivative suit, a stockholder


23
     See Compl. ¶¶ 112–121.
24
  See Dkt. 6 (Defs.’ Opening Br.); Dkt. 13 (Pl.’s Answering Br.); Dkt. 19 (Defs.’ Reply
Br.); Dkt. 32 (Oral Arg. Tr.).
25
   Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (citing 8 Del. C. § 141(a)), overruled
on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). In Brehm, 746 A.2d at
253–54, the Delaware Supreme Court overruled seven precedents, including Aronson, to
the extent those precedents reviewed a Rule 23.1 decision by the Court of Chancery under
an abuse of discretion standard or otherwise suggested a deferential appellate review. See
id. at 253 & n.13 (overruling in part on this issue Scattered Corp. v. Chi. Stock Exch., Inc.,
701 A.2d 70, 72–73 (Del. 1997); Grimes v. Donald, 673 A.2d 1207, 1217 n.15 (Del. 1996);
Heineman v. Datapoint Corp., 611 A.2d 950, 952 (Del. 1992); Levine v. Smith, 591 A.2d
194, 207 (Del. 1991); Grobow v. Perot, 539 A.2d 180, 186 (Del. 1988); Pogostin v. Rice,
480 A.2d 619, 624–25 (Del. 1984); and Aronson, 473 A.2d at 814). The Brehm Court held
that going forward, appellate review of a Rule 23.1 determination would be de novo and


                                             13
seeks to displace the board’s authority over a litigation asset and assert the corporation’s

claim.”26 Because derivative litigation impinges on the managerial freedom of directors in

this way, “a stockholder only can pursue a cause of action belonging to the corporation if

(i) the stockholder demanded that the directors pursue the corporate claim and they

wrongfully refused to do so or (ii) demand is excused because the directors are incapable

of making an impartial decision regarding the litigation.”27 The demand requirement is a

substantive principle under Delaware law.28 Rule 23.1 is the “procedural embodiment of

this substantive principle.”29

           Under Rule 23.1, stockholder plaintiffs must “allege with particularity the efforts,

if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or

comparable authority and the reasons for the plaintiff’s failure to obtain the action or for

not making the effort.”30 Stockholders choosing to allege demand futility must meet the

“heightened pleading requirements,”31 alleging “particularized factual statements that are


plenary. 746 A.2d at 253–54. The seven partially overruled precedents otherwise remain
good law. This decision does not rely on any of them for the standard of appellate review.
Although the technical rules of legal citation would require noting that each was reversed
on other grounds by Brehm, this decision omits the subsequent history, which creates the
misimpression that Brehm rejected core elements of the Rule 23.1 canon.
26
  United Food & Com. Workers Union & Participating Food Indus. Empls. Tri-State
Pension Fund v. Zuckerberg, 250 A.3d 862, 876 (Del. Ch. 2020), aff’d, 262 A.3d 1034
(2021).
27
     Id.
28
     Id.; see Ct. Ch. R. 23.1(a).
29
     Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993).
30
     Ct. Ch. R. 23.1(a).
31
     Zuckerberg, 250 A.3d at 876.

                                                14
essential to the claim.”32 “Plaintiffs are entitled to all reasonable factual inferences that

logically flow from the particularized facts alleged, but conclusory allegations are not

considered as expressly pleaded facts or factual inferences.”33

          In Zuckerberg, the Delaware Supreme Court affirmed and thereby adopted Vice

Chancellor Laster’s “universal test” for demand futility that blends elements of the two

precursor tests: Aronson34 and Rales.35 When conducting a demand futility analysis under

Zuckerberg, Delaware courts ask, on a director-by-director basis:

                   (i) whether the director received a material personal benefit
                   from the alleged misconduct that is the subject of the litigation
                   demand;

                   (ii) whether the director faces a substantial likelihood of
                   liability on any of the claims that would be the subject of the
                   litigation demand; and

                   (iii) whether the director lacks independence from someone
                   who received a material personal benefit from the alleged
                   misconduct that would be the subject of the litigation demand
                   or who would face a substantial likelihood of liability on any
                   of the claims that are the subject of the litigation demand.36




32
     Brehm, 746 A.2d at 254.
33
     Id. at 255.
34
     473 A.2d 805 (Del. 1984).
35
     634 A.2d 927 (Del. 1993).
36
  United Food & Com. Workers Union & Participating Food Indus. Empls. Tri-State
Pension Fund v. Zuckerberg, 262 A.3d 1034, 1059 (Del. 2021) (quoting Zuckerberg, 250
A.3d at 890).

                                                  15
“If the answer to any of the questions is ‘yes’ for at least half of the members of the demand

board, then demand is excused as futile.”37 While the Zuckerberg test displaced the prior

tests from Aronson and Rales, cases properly applying Aronson and Rales remain good

law.38

           As of the date when Plaintiff filed their complaint, the Board comprised twelve

directors: Dorsey, Carter, the Committee Defendants, and the remaining six Defendants

(Deighton, Garutti, McKelvey, Patterson, Summers, and Viniar). To defeat Defendants’

Rule 23.1 motion, Plaintiff must impugn the impartiality of at least six directors under

Zuckerberg.

           Generally, demand futility is assessed on a claim-by-claim, or Count-by-Count,

basis.39 In this case, however, the two Counts are based on the same factual predicate—

the Board’s approval of the TIDAL acquisition.           The sole distinction is in named

defendants—Dorsey in Count I and the rest of the Board who approved the transaction in

Count II. Because the difference in defendants does not alter the outcome, this decision

consolidates the analysis of the two Counts.40



37
   Id. at 1041 (“The Court of Chancery’s refined articulation of the Aronson standard helps
to address these issues. Nonetheless, this refined standard is consisted with Aronson, Rales,
and their progeny. Thus, cases properly applying those holdings remain good law.”).
38
     Id.
39
  Sandys v. Pincus, 2016 WL 769999, at *6 (Del. Ch. Feb. 29, 2016), rev’d on other
grounds, 152 A.3d 124 (Del. 2016).
40
  See In re CBS Corp. S’holder Class Action and Deriv. Litig., 2021 WL 268779, at *47
(Del. Ch. Jan. 27, 2021) (“[W]here a member of the demand board’s interest extends
beyond derivative claims asserted against him to claims asserted against his co-defendants,


                                              16
         Plaintiff focuses its arguments on Carter, Dorsey, and the four Committee

Defendants. Plaintiff argues that: Carter is disqualified because he received a material

personal benefit from the TIDAL acquisition; Dorsey’s relationship with Carter made him

incapable of impartially considering a demand concerning the TIDAL acquisition; and the

Committee Defendants face a substantial likelihood of liability from claims challenging

the TIDAL acquisition.

         The analysis as to Carter and Dorsey goes Plaintiff’s way. Defendants concede that

Carter is interested in the transaction. And there are good arguments that Dorsey lacks

independence from Carter for the purpose of the TIDAL acquisition. When supported by

specific factual allegations, “professional or personal friendships, which may border on or

even exceed familial loyalty and closeness, may raise a reasonable doubt whether a director

can appropriately consider demand.”41 “[T]he heightened strength of relationship required

to” raise a reasonable doubt as to a director’s independence “renders allegations concerning

most ordinary relationships of limited value, at most.”42 Two recent Delaware Supreme

Court decisions addressing the independence analysis under Rule 23.1 urge the court to




he is deemed unfit to consider a demand to pursue those claims as well.”); Hughes v.
Xiaoming Hu, 2020 WL 1987029, at *17–18 (Del. Ch. Apr. 27, 2020) (demand excused as
to claims against officers even though demand board did not face liability); Teamsters
Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *26 (Del. Ch. Aug.
24, 2020) (same).
41
     Beam, 845 A.2d at 1050 (citation omitted).
42
     Khanna v. McMinn, 2006 WL 1388744, at *16 (Del. Ch. May 9, 2006).

                                             17
evaluate personal relationships in a commonsense manner.43 Applying this commonsense

approach to Dorsey and Carter’s relationship, Plaintiff has the better side of the argument.

It is reasonably conceivable that Dorsey used corporate coffers to bolster his relationship

with Carter. But the court need not delve too deeply into this issue, because Plaintiff has

failed to meet its burden as to the remaining ten directors.

         Plaintiff argues that demand is futile as to the Committee Defendants because they

face a substantial likelihood of liability from the subject matter of the litigation demand.

Where, as here, the corporation’s certificate of incorporation exculpates its directors from

liability to the fullest extent permitted by law, the substantial-likelihood standard requires

that a plaintiff “plead particularized facts providing a reason to believe that the individual

director was self-interested, beholden to an interested party, or acted in bad faith.”44 A




43
   See Sandys v. Pincus, 152 A.3d 124 (Del. 2016) (reversing the trial court’s determination
that plaintiff had failed to adequately allege that a director lacked independence from a
CEO with whom the director co-owned a private jet, holding that the co-ownership is
“suggestive of the type of very close personal relationship that, like family ties, one would
expect to heavily influence a human’s ability to exercise impartial judgment”); Marchand
v. Barnhill, 212 A.3d 805, 818–20 (Del. 2019) (reversing the trial court’s determination
that the plaintiff had failed to adequately allege that a director lacked independence from
the controller and Kruse family where the director started as the Kruse patriarch’s
administrative assistant and, over the course of a 28-year career with the company, rose to
the high managerial position of CFO, became a director due to the support of the Kruse
family, and was the honorary beneficiary of the Kruse family’s charitable efforts that led
to a $450,000 donation to a key local college, observing that “our law has recognized that
deep and longstanding friendships are meaningful to human beings and that any realistic
consideration of the question of independence must give weight to these important
relationships and their natural effect on the ability of the parties to act impartially toward
each other”).
44
     Zuckerberg, 2020 WL 6266162, at *15.

                                             18
stockholder need not show a probability of success to meet the substantial-likelihood

standard; the standard requires only a showing that “the claims have some merit.”45

          Plaintiff does not argue that the Committee Defendants acted in a self-interested

manner or that they were beholden to an interested party. Rather, Plaintiff argues that the

Committee Defendants failed to act in good faith when approving the TIDAL acquisition.

Although a keen mind can rightly perceive a distinction between acting “not in good faith”

and acting “in bad faith,” Delaware courts have used the phrases interchangeably in this

context, and this decision follows suit.46

          Delaware courts have declined to offer an exhaustive definition of bad faith. “To

engage in an effort to craft . . . ‘a definitive and categorical definition of the universe of

acts that would constitute bad faith’ would be unwise.”47 The Delaware Supreme Court

has described a non-exhaustive set of circumstances forming a failure to act in good faith:

                   A failure to act in good faith may be shown, for instance, where
                   the fiduciary intentionally acts with a purpose other than that
                   of advancing the best interests of the corporation, where the
                   fiduciary acts with the intent to violate applicable positive law,
                   or where the fiduciary intentionally fails to act in the face of a
                   known duty to act, demonstrating a conscious disregard for his



45
     Id. at *16.
46
   See, e.g., Liberty Prop. Ltd. P’ship v. 25 Mass. Ave. Prop. LLC, 2009 WL 224904, at *5
(Del. Ch. Jan. 22, 2009) (noting that “in our corporate law, this court has firmly rejected
the notion that the words ‘not in good faith’ mean something different than ‘bad faith,’ and
has done so on sensible policy, logical, and linguistic grounds”).
47
  In re The Walt Disney Co. Deriv. Litig., 906 A.2d 27, 103 (Del. 2006); see also, id. at 64
(noting that the “duty to act in good faith is, up to this point relatively uncharted”);
McPadden v. Sidhu, 964 A.2d 1262, 1263 & n.1 (Del. Ch. 2009) (“bad faith conduct has
not yet been completely defined” (citations omitted)).

                                                  19
                   duties. There may be other examples of bad faith yet to be
                   proven or alleged, but these three are the most salient.48

          Pleading a failure to act in good faith requires the plaintiff to “plead particularized

facts that demonstrate that the directors acted with scienter, i.e., that they had ‘actual or

constructive knowledge’ that their conduct was legally improper.”49 That is, to allege a

lack of good faith, a plaintiff must allege that the actor knew that he was acting

“inconsistent with his fiduciary duties.”50 “Gross negligence, without more, is insufficient

to get out from under an exculpated breach of the duty of care.”51

          Generally, this court is not in the business of second-guessing board decisions made

by disinterested and independent directors. Of course, there are some business decisions

that are so suspect that it is reasonably conceivable that the decision makers were not acting

to advance the best interest of the corporation. Two cases relied on by the parties in briefing

help delineate the boundaries of this principle—Disney, denying a motion to dismiss where

the plaintiff adequately alleged that the board acted in bad faith, and McElrath, granting a

motion to dismiss where the plaintiff failed to adequately allege that the board acted in bad

faith.

          In Disney, a stockholder sued Disney’s departing CEO, Eisner, and its board for

breach of fiduciary duty in connection with the hiring and firing of Eisner’s longtime friend


48
  Stone v. Ritter, 911 A.2d 364, 369 (Del. 2006) (quoting Disney, 906 A.26 27 (Del.
2006)).
49
     In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 125 (Del. Ch. 2009).
50
     McElrath v. Kalanick, 224 A.3d 982, 991 (Del. 2020).
51
     Id. at 991.

                                                20
Ovitz as President. The narrative set out in the Disney complaint was quite stark. As

alleged, Eisner “unilaterally” made the hiring decision.52 The board did not receive any

presentations on the terms of the employment contract, did not ask questions about the

proposed agreement, received only a summary of the employment agreement’s terms,

approved the hire while the employment agreement was still a “work in progress,” did not

engage in further review once it had authorized the hire, and did not retain any outside

experts to consult on the agreement.53 Negotiation of the unresolved employment terms

took place solely between Eisner, Ovitz, and their attorneys. The compensation committee

followed up with meetings to receive updates on the negotiations but did not otherwise

engage in the process. The final agreement differed vastly from the initial summary that

the board had approved. And when Eisner terminated Ovitz a year later, the employment

agreement allowed Ovitz to reap substantial exit benefits, which the board permitted

without further investigation.

           On these facts, then-Chancellor Chandler denied the defendants’ motion to dismiss

for failure to plead demand futility, holding that the plaintiff had adequately pled that the

directors failed to act in good faith. The well-pled allegations portrayed more than mere

negligent or grossly negligent conduct, and instead suggested “that the defendant directors

consciously and intentionally disregarded their responsibilities, adopting a ‘we don’t care




52
     Disney, 825 A.2d at 287.
53
     Id.

                                              21
about the risks’ attitude concerning a material corporate decision.”54 Put differently, the

facts as alleged gave rise to the inference that the directors “knew that they were making

material decisions without adequate information and without adequate deliberation, and

that they simply did not care if the decisions caused the corporation and its stockholders to

suffer injury or loss.”55 The Chancellor weighed the board’s “ostrich-like” approach and

concluded that the plaintiff had adequately alleged that “the defendant directors’ conduct

fell outside the protection of the business judgment rule,”56 and that conclusion was

sufficient to render demand futile under the second prong of Aronson.

           Distinguishable allegations resulted in a different outcome in McElrath.57 There, a

stockholder challenged Uber’s acquisition of a self-driving car project from Google.

Uber’s CEO, Travis Kalanick, negotiated the acquisition. Uber’s diligence materials

included a report from a computer forensic investigation firm finding that some of the

target’s employees had retained confidential information from Google following their

departure. When the misuse of confidential information was later revealed, Uber suffered

financially and reputationally. The plaintiff brought derivative claims against Kalanick

and the directors who approved the transaction. To plead bad faith as to a majority of the

board, the plaintiff constructed a narrative that the board was on notice that Kalanick might

ignore intellectual property issues because Kalanick’s prior business had been sued for


54
     Id. at 289 (emphasis in original).
55
     Id. (emphasis in original).
56
     Id.
57
     McElrath, 224 A.3d at 995.

                                               22
copyright violations, Uber had a practice of hiring employees from competitors to steal

trade secrets, and the merger agreement contained an abnormal indemnification clause that

prevented Uber from seeking indemnification from the target’s employees for non-compete

and infringement claims.

          The defendants moved to dismiss the complaint for failure to plead demand futility,

and Vice Chancellor Glasscock granted the motion.            The Delaware Supreme Court

affirmed on appeal, identifying a number of factors that made it unreasonable to infer that

Uber’s board acted in bad faith. The high court observed that “[b]y any reasonable

measure, the Uber board of directors approved a flawed transaction,” but that did not give

rise to a “real threat of personal liability” sufficient to disqualify a majority of the board

for Rule 23.1 purposes.58 In reaching this conclusion, the court observed that the board did

more than just rubberstamp the deal: they heard a presentation summarizing the transaction,

reviewed the risk of litigation with Google, discussed due diligence, and asked questions.

When the board asked questions about diligence and litigation risk, they received answers

indicating that the risk was present, but not necessarily prevalent enough to kill the deal,

and the board concluded that the diligence was “okay.” 59 The high court rejected the

appellant’s appeal to Disney by noting important distinctions—unlike the board in Disney,

the Uber directors heard a presentation from the CEO on the transaction, met to consider

the acquisition, and enlisted the assistance of outside counsel and an investigative firm to



58
     Id. at 987.
59
     Id. at 993.

                                              23
help with due diligence. The high court affirmed this court’s dismissal based on the

plaintiff’s failure to show that the directors faced a substantial likelihood of liability.60

          Here, as in McErath, it is clear that the TIDAL acquisition was a “flawed” business

decision “[b]y any reasonable measure.”61 The question is whether, as in Disney, Plaintiff

adequately alleged that the majority of the board acted in bad faith when approving it.

          Plaintiff’s counsel took an admirable stab at packaging the facts of this case into the

mold of Disney. As Plaintiff tells it, Dorsey pulled some Eisner-level moves by pushing

the deal forward singlehandedly, with the Transaction Committee playing an “ostrich-like”

role.62 Plaintiff alleges that Dorsey caused Block to submit a letter of intent to purchase

TIDAL before the Transaction Committee was even formed. The Transaction Committee

then allowed Dorsey to handle negotiations. After discussing the opportunity for only

thirty-five minutes during their first meeting in September, the Transaction Committee

encouraged Dorsey to move forward. In advance of its second meeting in October,

management provided a report that showed just how dire TIDAL’s market position looked.

          To be sure, the Transaction Committee asked many questions throughout the

process, and Plaintiff concedes this much. Plaintiff argues, however, that the court should

not credit the Transaction Committee for asking questions given the answers it received.




60
     Id. at 995.
61
     Id. at 987.
62
     Disney, 907 A.2d at 765.

                                                24
As Plaintiff sees it, the problem was not that the Transaction Committee failed to ask

questions—it is that the answers did not seem to matter.

       Before its October meeting, the Transaction Committee asked whether any other

members of senior management supported the acquisition; in response, the committee

learned that there were none, aside from Dorsey. The Transaction Committee asked

whether the artist commitments, which formed the basis for at least half of management’s

valuation of TIDAL, were legally enforceable; in response, the committee learned that

Block would have “no recourse” if the artists decided to walk away. The Transaction

Committee asked for near- and long-term plans for integrating TIDAL into Block’s

business; in response, the committee learned that management had not created these plans

and that this remained “one of the biggest risks.”

       After the October meeting, the Transaction Committee went dark for three months

while Dorsey negotiated the purchase price. Ultimately, without any further meetings, the

Transaction Committee approved the acquisition by unanimous written consent.

       Although the facts emphasized by Plaintiff do not generate tremendous confidence

in the Transaction Committee’s process, they fall short of supporting an inference of bad

faith. Effectively, Plaintiff asks the court to presume bad faith based on the merits of the

deal alone. Plaintiff does not allege that the Transaction Committee lacked a business

reason for wanting to acquire TIDAL—the presentation materials show management’s




                                            25
strategic goals for expanding Block into the music industry.63 Plaintiff does not attempt

allege that any of the Committee Defendants were in any way beholden to Dorsey. Plaintiff

acknowledge that the Committee Defendants did not sit idly by while Dorsey presented.

They asked many appropriate questions before the October 20 meeting, and they asked

many appropriate follow-up questions in advance of the next meeting on January 22. The

Transaction Committee were presented with over twenty single-spaced slides providing

management’s detailed answers to each of these questions. Over the course of negotiations,

and even inexplicably after the deal was publicly announced, the purchase price dropped

considerably.

       On these facts, the Transaction Committee’s actions more closely resemble those in

McElrath than Disney. Plaintiff has alleged sufficient facts to make a reasonable person

question the business wisdom of the TIDAL acquisition, but Plaintiff has failed to plead




63
   The existence of a business rationale for the TIDAL acquisition distinguishes this case
from a case recently dismissed by Vice Chancellor Cook, Harris v. Junger, C.A. No. 2022-
0254-NAC (Del. Ch. Apr. 5, 2023) (TRANSCRIPT). In Harris, a corporation’s board
approved a recapitalization that effectively granted the controller perpetual control, while
receiving no consideration in return. Id. at 33:20–34:1. The defendant directors had
struggled to provide a consistent rationale for the benefit to the corporation of this
recapitalization over the course of two rounds of oral argument. Id. at 29:9–30:10. The
Vice Chancellor concluded that the plaintiff adequately pled that the board acted in bad
faith, noting that “as a sort of base line proposition, identifying benefits to the company
accorded by a board-approved transaction should not be particularly difficult, let alone an
enterprise years in the making.” Id. at 30:14–18. This subjected the board to a substantial
likelihood of liability and satisfied the demand futility test. Id. at 33:3–10. By contrast,
here, documents incorporated by reference into the Complaint reflect that the Board
identified the expansion into the music industry as a benefit to Block.

                                            26
that the Committee Defendants acted in bad faith and thus faced a substantial likelihood of

liability for that decision.

         Plaintiff’s allegations as to the remaining six non-Committee Defendant directors

are even more attenuated. Plaintiff’s only allegations as to those defendants are that they

failed to meaningfully supervise the Transaction Committee’s process. According to

Plaintiff, the rest of the Board should have intervened to stop the TIDAL acquisition.

Because Plaintiff has not adequately alleged that the Transaction Committee’s approval of

the TIDAL acquisition rose to the level of bad faith, it is difficult to imagine how the

Board’s lack of “supervision” of that process did so. Plaintiff’s allegations as to the

remaining directors fail.

III.     CONCLUSION

         Ultimately, the demand requirement is a manifestation of the business judgment

rule, which exists in part to “free fiduciaries making risky business decisions in good faith

from the worry that if those decisions do not pan out in the manner they had hoped, they

will put their personal net worths at risk.”64 In this case, the demand requirement operates

as intended. Because Plaintiff failed to adequately allege with particularity facts giving

rise to a reasonable doubt that a majority of the Board was disinterested or lacked

independence with respect to the TIDAL acquisition, Plaintiff failed to plead that demand

was futile. Defendants’ motion to dismiss pursuant to Rule 23.1 is granted.




64
     In re Massey Energy Co., 2011 WL 2176479, at *22 (Del. Ch. May 31, 2011).

                                             27