Judge Nixes Block Shareholder Suit Over 'Terrible Business Decision' To Acquire Tidal

A Delaware judge has dismissed a shareholder lawsuit against financial technology company Block over its 2021 acquisition of majority ownership in Tidal, the music streaming service partly owned by rapper Jay-Z. From a report: A pension fund shareholder alleged that Block founder and CEO Jack Dorsey and the company's board of directors breached their fiduciary duties in agreeing to pay roughly $300 million to take control of Tidal as it was failing financially and the target of an ongoing criminal investigation. Chancellor Kathaleen St. Judge McCormick ruled Tuesday that the pension fund had failed to demand that Block's board pursue legal action itself before filing a derivative lawsuit on behalf of the company. Under Delaware law, shareholders must make such a demand or demonstrate that doing so would be futile because a majority of directors were self-interested, lacked independence or faced a substantial likelihood of liability.

McCormick noted that the demand requirement is a manifestation of Delaware's business judgment rule, under which courts defer to the decision-making of corporate directors unless there is an indication they acted in bad faith. That deference remains even if a corporate decision turns out to be unwise. "It seemed, by all accounts, a terrible business decision," the judge said of Block's acquisition of Tidal. "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."

In other words, it's not a crime to be stupid

[iAmWaySmarterThanYou]

Jack can afford to make stupid decisions because they're the cool and hip thing to do. But the pension company can't afford to lose everyone's life savings/future benefits. They should have thought twice before investing with the cool kids who don't give a shit about anything.

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[vux984]

Given they can make business decisions that are obviously terrible on their face without any threat of legal liability, it's clear that they are in fact NOT required to maximize profits with every decision. Making an ethical or moral choice over a profit maximizing choice is clearly legal.

If I ever hear someone screech about how the board has to maximize profits or they're in violation of their legal obligations to the shareholders again I'm going to cite this case. :)

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[XanC]

The defense here is that the board was trying to maximize profits, they just weren't good at it. Very different from frittering money away on purpose.

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[vux984]

No. That's just it, the board didn't even need to mount a defence.

The board didn't have to argue that it was trying to maximize profits. It didn't have have to defend the decision, or its reasoning at all.

The suit was DISMISSED because the judge ruled that there was no case, because the shareholders didn't allege that anything illegal had been done.

If the board had a legal obligation to the shareholders to maximize profits, the case could have proceeded. But since there was no allegation that the board had

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[sjames]

All a board would need to do is claim that they firmly believe that moral or ethical correctness will lead to more customers willing to pay a little more to support that correctness. They don't even have to show their work or be in any way right.

OTOH, as vux984 points out, here they weren't even asked about any justification they might have had, the court was perfectly happy assuming they had one.

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[mysidia]

Given they can make business decisions that are obviously terrible on their face without any threat of legal liability, it's clear that they are in fact NOT required to maximize profits with every decision.

False.. When the court states "good faith": that means the managers' intentions matter. If they make a decision intended to sacrifice or lose some business in favor of some external entity or in the service of some personal cause, Then it's bad faith; That is, they're not carrying out their fiduci

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[vux984]

"They are still required to make decisions to maximize profits, And can be liable if they deliberately make a decision Not aimed to maximize profits."

False (right back at you).

Dealing in good faith has NOTHING to do with maximizing profit. Dealing in good faith has to do with deception, fraud, and conflict of interest. That's it.

The shareholders were attempting to argue that the board failed to do even the cursory due diligence that would reveal this was a stupid and terrible business decision, and the judg

Link to judgement

[ISayWeOnlyToBePolite]

Link to the judgment https://law.justia.com/cases/d... [justia.com] Bad faith reasoning begins at page 18.

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[Can'tNot]

In general, in most states anyway, majority shareholders have a fiduciary responsibility to minority shareholders. This means acting in the best interests of shareholder value, which is related to profits but not quite the same. The thing that causes some confusion is that hedge fund managers try to push the idea that this means maximizing value in the short term, which is not true at all.

A board of directors can, for example, donate to a charity or forgo doing some unethical thing if they believe that t

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[vux984]

I generally agree with your post.

"majority shareholders have a fiduciary responsibility to minority shareholders. This means acting in the best interests of shareholder value, which is related to profits but not quite the same."

Except that I'd go as far as to say that the two are orthogonal concepts entirely. Certainly there is a relationship between them, but they are NOT remotely the same the.

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[ArchieBunker]

Perhaps basing someone's pension on market investments isn't a great idea?

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[mysidia]

Depending what it is; that seems quite reckless. Proper investment strategy would be to utilize a balanced (diversified) portfolio - not putting all the cash on one high risk asset.

Dropping a high percentage of pension funds into 1 market asset would be quite reckless -- I'd say that goes beyond what could reasonably be argued as a good faith decision by management. Management does have a duty to take care of the assets under their control and ensure that they are managing risks appropriately.

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[timeOday]

Still the line isn't always very clear, that's what the Sam Bankman-Fried case is all about.

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[sjames]

SBF went WAY beyond making stupid business decisions. For one, their accounting was so shoddy they can't even say where the money went. For another, he risked one business's assets to boost another business he had a substantial interest in, so the decision was NOT free of conflicts of interest.

Then there's the way that somehow, a good chunk of those business assets SOMEHOW turned into personal assets that he 'gifted' to his parents.

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[timeOday]

I think it's pretty clear he went way over the line many times. But now the courts have to figure out at which times, specifically.

For example, there are quite a few legal means by which company assets are transferred to employees, particularly high-ranking corporate officers. Not just a paycheck like for regular schmucks, but loans, perks, stock options, side deals, use of company assets...

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[sjames]

There is a need to determine how many times he went over the line and how far, also he is entitled to a fair trial. But honestly it's more a question of what a fair punishment would be and what restitution should be ordered than it is guilt or innocence.

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[aldousd666]

Salty investors sued the board for a bad decision that lost them money. Whiny whiners, whining. (And thankfully, losing)

Seems like a reasonable dismissal

[Petersko]

If I read this right, the pension fund buggered up on legal procedure. They skipped a step and got screwed by it. Turn the attention inward then, and ask their counsel how they screwed that up.

Great title

[Chris Mattern]

Took me a while to parse it until I realized "Block" wasn't a verb.

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[cstacy]

Took me a while to parse it until I realized "Block" wasn't a verb.

Block are Square.
Like cornbread.

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[aaarrrgggh]

A painful reality is that headlines (here) are done in Title Text which makes many things completely impossible to parse without getting a lot more context in the body.

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[MikeKD]

Proper nouns are capitalized, not verbs.

Then what the hell is a "Nixes" and an "Over"?

Nope

[argStyopa]

If you're an investor, the shitty decisions that business makes are a "you" problem.

What it shows is that you didn't do your research (you know, to make an INFORMED choice) and got burned.

Maybe...

[HBI]

But some judge is on record calling Jack Dorsey essentially an idiot, and saying the reason the suit failed to get a judgement was that they failed to prove he was corrupt. Should guide future business decisions pretty well. Lots of insiders were complaining about this deal being a bad idea and he steamrolled them. Ergo, investing in a company led by Dorsey would be not very smart, as I would expect his behavior to be unchanged in the future.

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[alvinrod]

It wasn't that they failed to prove he was corrupt, it was that they didn't take the appropriate course of action under the law before jumping to a lawsuit. Most judges love finding any excuse they can not to deal with shit they don't have to.

TFS even spells out the reasoning. They needed to ask the board to take legal action first. If the board refused there are remedies for that, but they didn't even make the effort. Go through the proper steps or even if you do win in a lower court the whole thing can

Imagine if this had went the other way

[aldousd666]

The courts would grind to a standstill for decades over every losing trade a big firm makes.