A Delaware judge has dismissed a shareholder lawsuit against financial technology company Block Inc. over its 2021 acquisition of majority ownership in Tidal, the music streaming service partly owned by rapper Jay-Z.
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.”
Tidal, which presented itself as an artist-friendly alternative to other music streaming services, was formed when a group of recording artists led by Jay-Z, whose real name is Shawn Carter, acquired Norwegian streaming service Aspiro in 2015 for $56 million. Rebranded as Tidal, it struggled to attract subscribers, logging multimillion-dollar losses for 10 consecutive quarters by mid-2020. It also churned through five different CEOs by 2020, when Carter personally extended a $50 million loan to the struggling outfit. Meanwhile, Tidal became the target of a criminal investigation in Norway for artificially inflating its streaming numbers.
Nevertheless, Dorsey, who is also the co-founder and former CEO of Twitter, began thinking of acquiring Tidal after summering with his friend Carter in the Hamptons in 2020, according to court documents. By videoconference from the Hamptons, he raised the issue during a Block board meeting. The directors agreed to form a transaction committee while Dorsey drafted and submitted a nonbinding letter of intent to purchase Tidal for $554.8 million.
A management report to the transaction committee in October 2020 raised several red flags. They included Tidal's difficulties in attracting subscribers in a market dominated by Spotify, with most of the remaining market share captured by Apple and Amazon. The report also noted the Norwegian criminal probe and a federal lawsuit by performing artists who said Tidal was withholding royalties they were owed. A week later, the committee was presented with another report discussing Tidal’s history of quarterly losses, expiration of artist contracts, and $127 million in accrued liabilities. A slide presentation noted that Dorsey was the only person advocating strongly for the deal, which had received “substantial push back” from Block’s senior executives.
The committee nevertheless instructed management to continue pursuing the deal. In early 2021, after Tidal missed its financial forecasts for 2020 and Block’s management reduced its valuation of Tidal to $350 million, Dorsey proposed buying 88% of the company for $309 million. The deal closed on April 30, with Block paying $237.3 million after adjustments for an 86.23% stake.
“It is reasonably conceivable that Dorsey used corporate coffers to bolster his relationship with Carter,” wrote McCormick. The judge also noted that the defendants conceded that Carter, who joined Block’s board as part of the deal, could not be considered impartial.
McCormick concluded, however, that the plaintiffs had failed to demonstrate bad faith by members of the transaction committee in approving the deal.
“Plaintiff has alleged sufficient facts to make a reasonable person question the business wisdom of the Tidal acquisition, but plaintiff has failed to plead that the committee defendants acted in bad faith and thus faced a substantial likelihood of liability for that decision,” she wrote.
