August 1, 2022

Controllers: Del. Chancery Applies MFW to Dual Class Charter Amendment

Last week, in City Pension Fund for Firefighters & Police Officers v. The Trade Desk, (Del. Ch.; 7/22), held that the controlling stockholder of The Trade Desk, founder & CEO Jeff Green, and the company’s board of directors satisfied the MFW standard in connection with the adoption of a charter amendment.  That amendment repealed a “dilution trigger” that would have eliminated the company’s dual class capital structure if the high-vote shares – most of which were owned by Green – dipped below 10% of the shares of common stock outstanding. 

After rejecting allegations that the Special Committee appointed to negotiate the terms of the amendment with the controlling stockholder lacked independence, Vice Chancellor Fioravanti addressed claims that stockholder approval of the amendment wasn’t fully informed. In making these allegations, the plaintiff pointed to a variety of alleged disclosure shortcomings in the proxy statement.

Most of these allegations weren’t all that interesting and were disposed of pretty quickly by the Vice Chancellor. However, one of the allegations was a little more intriguing. It related to the company’s failure to disclose Compensation Committee discussions about a possible “mega equity award” to Jeff Green that were held while proxies for the charter amendment were being solicited.  That award – which amounted to 5% of the company’s outstanding equity (!) – was subsequently made 10 months later.

The plaintiff claimed that stockholders known that the board was “strongly considering the near-term bestowal of a windfall on Green, stockholders may have decided to vote against the perpetuation of control.” Vice Chancellor Fioravanti rejected the plaintiff’s claim that information about this potential award should have been disclosed.

The Contemplated Green Award was not one of the proposals presented to the stockholders for their vote in December 2020. In fact, the Contemplated Green Award was entirely speculative at the time the adjourned and reconvened stockholder meetings were held. “Delaware law does not require disclosure of inherently unreliable or speculative information which would tend to confuse stockholders.” Arnold, 650 A.2d at 1280; accord Crane, 2017 WL 7053964, at *13; see also In re Columbia Pipeline Gp., Inc., 2017 WL 898382, at *5 (Del. Ch. Mar. 7, 2017) (“As a matter of Delaware law, a board does not have a fiduciary obligation to disclose preliminary discussions, much less an analysis of preliminary discussions.”). Plaintiff’s argument that disclosure of a potential large equity grant was required because it was being considered as an “alternative to the then-uncertain Dilution Trigger Amendment” is equally unpersuasive.

The Vice Chancellor said that the plaintiff failed to explain how the Compensation Committee’s preliminary consideration of the option award would have been “important in deciding how to vote” on the charter amendment. Accordingly, he applied the business judgment rule to the board’s decision to endorse the charter amendment.

John Jenkins