Square CEO Jack Dorsey at the New York Stock Exchange, Nov. 19, 2015. (AP/Richard Drew) / Jay-Z at Roc Nation headquarters, July 23, 2019. (Greg Allen/Invision/AP)
A Delaware judge has dismissed a shareholder lawsuit against Jack Dorsey’s digital payments company Block Inc. over its 2021 acquisition of hip-hop artist Jay-Z’s majority ownership in the music streaming service Tidal, saying it seemed a “terrible business decision” but was “made in good faith.”
A pension fund shareholder alleged that Block founder and CEO Dorsey and the company’s board of directors breached their fiduciary duties by agreeing to pay $306 million to take control of Tidal because it was failing financially and under an ongoing criminal investigation, AP reported.
The judge’s decision revealed that Dorsey was the main proponent of the deal internally while senior Block management opposed it. Management told Block’s board that Tidal was operating under “semi formal or expired arrangements” with music labels and was under a criminal investigation by the Norwegian government and a federal lawsuit brought by artists who alleged Tidal had withheld their royalties. Tidal had also lost money for 10 consecutive quarters.
The decision also noted that Dorsey was friends with Jay-Z, who owned 27 percent of Tidal. They got the idea for the deal while on vacation together in the Hamptons in August 2020. Block agreed to buy a majority stake in Tidal in November 2020, the two were “spotted vacationing together in Hawaii,” the judge noted.
Courts defer to the decision-making of corporate directors unless there is an indication they acted in bad faith. That deference stays in effect even if a corporate decision turns out to be unwise, Judge Kathaleen Saint Jude McCormick ruled.
“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.”
Venture capitalist Sheel Mohnot tweeted, “Block acquiring Tidal made no sense to me; turns out nobody at Block other than @jack wanted it; He was doing his buddy Jay-Z a favor (at Stockholder expense).”
Mohnot included in his tweet a copy of the judge’s ruling and urged his 89,000 followers to read it. “memo is FANTASTIC and worth a read to see how an ‘all-star company’ REALLY operates”, Mehnot wrote.
