DealLawyers.com Blog

Last week, the Chancery Court issued a magistrate’s report granting a plaintiff’s request to inspect books and records of The Trade Desk relating to its November 2024 reincorporation from Delaware to Nevada. Trade Desk produced 19 documents and 521 pages in response to the demand, but the plaintiff filed suit claiming that the production was insufficient. Trade Desk argued that the plaintiff lacked a proper purpose, and the parties disagreed on the appropriate scope of the documents to be produced.

With respect to whether plaintiff presented a proper purpose, Trade Desk claimed that Plaintiff was attempting to use the Delaware Supreme Court’s TripAdvisor decision to argue that “reincorporation presumptively established a credible basis for wrongdoing.” The court thought this was a “minimization” of TripAdvisor’s application.

This Court is tasked at the books and records stage to determine whether the Plaintiff has “a credible basis from which this Court may infer possible mismanagement, waste, or wrongdoing may have occurred.” The footnote Plaintiff cites to in TripAdvisor explains that the Supreme Court of Delaware applied the business judgment rule because there “the record [] suggest[ed] the existence of a clear day and the absence of any material, non-ratable benefits flowing to the controller or directors as a result of the Conversions” but indicates that this conclusion may have been different had the Defendants “taken any articulable, material steps in connection with any postconversion transaction” in furtherance of breaching their fiduciary duties.

The court pointed to circumstances surrounding Trade Desk’s decision to reincorporate and found they were sufficient to warrant further investigation. Trade Desk has a dual class capital structure with one class of super voting common. Its charter provided that each share of supervoting Class B shares would convert into Class A shares once the Class B represented less than 10% of the total shares outstanding. The Class B shares were approaching 10% in 2020, and the board had negotiated an MFW-structured transaction to delay that trigger and maintain the dual class common until certain events or December 22, 2025. Earlier this month and just before trial, Trade Desk filed a preliminary proxy for a special meeting to approve extending the date that the Class B stock will convert to Class A.

Here, considering Trade Desk’s prior decisions to delay the dilution trigger, the most recent proxy proposing the removal of the sunset provision filed soon after their reincorporation to Nevada, and the benefit flowing to Mr. Green as primary owner of Class B stock, it is reasonable to have concern that the decision to reincorporate was not made on a clear day. The evidence does not need to ultimately be enough to succeed in the underlying claim, it only need be sufficient to meet the credible basis standard, and here I find it does.

The court also agreed that plaintiff was entitled to board materials relating to Class B ownership and the sunsetting of the dual-class structure. It pointed to the fact that the proper purpose was not to investigate the reincorporation alone but whether the reincorporation was partly to perpetuate one shareholder’s control.

– Meredith Ervine