On April 11, 2022, Vice Chancellor Paul A. Fiorvanti of the Delaware Court of Chancery dismissed a stockholder challenge to an amendment of the certificate of incorporation of The Trade Desk, Inc. (the “Company”). According to the complaint, the amendment effectively extended the voting control of the Company’s co-founder, Chairman, and CEO (the “CEO”) by extending the duration of a dual-class stock structure. Plaintiff asserted claims against the CEO and other directors for breach of fiduciary duties in approving the amendment. The Court dismissed the complaint because it found that the transaction process complied with the procedural protections necessary for application of the deferential business judgment rule pursuant to Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”).
Under the Company’s dual-class structure, the “high-vote” Class B stock was entitled to ten votes per share, while the publicly traded Class A stock was entitled to one vote per share. However, Class B shares were subject to conversion to Class A shares upon sale (with limited exceptions). Moreover, the dual-class structure had a “Dilution Trigger,” which provided that all Class B stock would be converted to Class A stock on a one-for-one basis if the number of Class B shares were to fall below 10% of the aggregate number of Class A shares.
By virtue of holding approximately 98% of the Class B stock, the CEO controlled approximately 55% of the Company’s voting power. According to the complaint, after the CEO learned that the Dilution Trigger was approaching — including because the CEO had been selling his Class B shares — the CEO informed the board that he would present an “MFW-compliant offer” to extend the dual-class structure. The board formed a special committee, which negotiated the terms of a suite of amendments that would remove the Dilution Trigger in exchange for a new sunset provision converting the Class B shares to Class A shares in five years and various governance measures, such as providing for the direct election of certain directors by holders of the Class A shares. The amendments were approved by 52% of the shares unaffiliated with the CEO.
As the Court explained, “to avoid entire fairness scrutiny through [the] doctrinal escape hatch” under MFW: (i) the controller must condition the transaction on approval of both a special committee and a majority of the minority stockholders; (ii) the special committee must be independent and empowered to freely select its own advisors and to reject the deal; (iii) the special committee must satisfy its duty of care in negotiating a fair price; and (iv) the vote of the minority must be informed and uncoerced. Plaintiff asserted that the special committee was not independent because the compensation received by the chair of the special committee as a director and previously as a consultant was material to her. Plaintiff further alleged that the special committee operated under a “controlled mindset.” Plaintiff also challenged the adequacy of the disclosures in the proxy for the shareholder vote.
The Court found that the complaint did not adequately plead that the special committee lacked independence. The Court explained that — even if the compensation was material to the special committee chair — the complaint did not allege facts demonstrating that a majority of the committee lacked independence or that the chair “so dominated the committee process that it undermined its integrity as a whole.” The Court also found that plaintiff’s “controlled mindset” assertion was “not supported by any well-pleaded allegations that the Special Committee members were beholden to [the CEO] or that they suffered from any disabling personal interest in the Dilution Trigger Amendment.”
The Court also held that the complaint did not adequately plead that the stockholder vote was uninformed because of material misstatements or omissions in the proxy. For instance, the Court found that it was not a material omission that the proxy did not disclose that the CEO allegedly had a “weak bargaining position” and a “desperate need for liquidity” because the allegations were “conclusory and immaterial.” As the Court explained, the purpose of the amendment was to maintain the existence of the high-vote Class B stock owned by the CEO, and the “obvious effect” was that he could dispose his shares without risk of the automatic conversion. The Court also found that the omission of information contained in a preliminary presentation by the special committee’s financial advisor mentioning that financial incentives (rather than governance measures) “provide the most value” did not “render the stockholder vote … uninformed.” Likewise, the Court determined that the CEO’s alleged acknowledgement during negotiations that a “business rationale” was needed to justify the amendment did not need to be disclosed because the minority stockholders were “fully capable of assessing the bona fides of [the CEO’s] and the Special Committee’s fully disclosed rationales and assessing whether the terms of the transaction were worthy of the stockholders’ support.”