Delaware’s Court of Chancery has dismissed a suit filed against Block directors (including founder Jack Dorsey) over the publicly traded company’s multimillion-dollar Tidal buyout, determining that the plaintiffs had “alleged sufficient facts to make a reasonable person question the business wisdom of the” acquisition while nevertheless failing to prove bad faith.
Chancellor Kathaleen St. J. McCormick just recently granted the Block (NYSE: SQ) defendants’ motion to dismiss the straightforward action, which was levied by the City of Coral Springs Police Officers’ Pension Plan. As mentioned, the plaintiffs (and Block investors) spearheaded the suit over the Cash App owner’s alleged breach of fiduciary duty in deciding to buy Tidal from Jay-Z.
“The idea for the acquisition came to Jack Dorsey—Block’s founder, CEO, and Chairman—when he was summering with Carter [Jay-Z] in the Hamptons,” the presiding judge reiterated of the Twitter co-founder’s decision to pursue a Tidal purchase. “From his Hamptons retreat, Dorsey joined a videoconference meeting of Block’s board and proposed that Block acquire TIDAL.”
Said board then established “a transaction committee to consider the proposal,” according to the legal text. And during the following months, this committee learned about the “troubled” streaming platform’s precarious operational position, including the $50 million that Jay-Z (now a Block board member) had loaned Tidal to keep it afloat and the service’s “semi-formal at best” licensing pacts with labels.
(Pre-sale, Tidal had been “capitalizing on the influence of the prominent artists who were partial owners” to maintain its library, per the court, which likewise highlighted that the platform “had logged multimillion-dollar losses for each of the preceding ten quarters” and had approximately 2.1 million subscribers as of mid-2020.)
Notwithstanding these and other less-than-ideal factors surrounding the “terrible business decision,” Chancellor McCormick indicated that Delaware law enables boards “to make a terrible business decision without any meaningful threat of liability, so long as the directors approve the action in good faith.”
Regarding Dorsey’s role in pushing for the deal (he was per the document “the sole Block management member in support of the acquisition”), the court also acknowledged that he may have “used corporate coffers to bolster his relationship with” Jay-Z via the purchase.
“It is reasonably conceivable that Dorsey used corporate coffers to bolster his relationship with Carter,” the judge penned. “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.”
“Although the facts emphasized by Plaintiff do not generate tremendous confidence in the Transaction Committee’s process,” Chancellor McCormick drove home when dismissing the action, “they fall short of supporting an inference of bad faith.”
Block shares (NYSE: SQ) dipped by about three percent during trading today, finishing at $57.53 apiece. A little over one month ago, Tidal added a “Live” music-sharing feature amid a collaboration with Universal Music Group on a streaming-reform initiative.