Chancery Limits Review on Motion to Dismiss to Only Section 220 Documents Cited in Complaint and Dismisses Complaint Under MFW Doctrine
City Pension Fund for Firefighters and Police Officers in the City of Miami, v. The Trade Desk, Inc., et al., C.A. No. 2021-0560-PAF (Del. Ch. July 29, 2022)
This decision addresses certain points of interest concerning (i) the use of books and records produced pursuant to Section 220 of the DGCL in subsequent litigation, and (ii) structuring controlling stockholder transactions to facilitate business judgment review.
In response to the plaintiff’s Section 220 demand, the plaintiff and the defendant corporation entered into an agreement whereby the plaintiff stipulated that any documents produced in response to the Section 220 demand would be incorporated by reference into any future related complaint filed. After the Section 220 production, the plaintiff filed a derivative action against the corporation and certain directors alleging breaches of fiduciary duty related to a charter amendment that prolonged the controlling shareholder’s voting power. The complaint cited some but not all of the Section 220 documents produced. In moving to dismiss, the defendants relied on other Section 220 documents arguing they were incorporated by reference, pursuant to the confidentiality agreement. The Court declined to consider any documents beyond those attached to the complaint, however, reasoning that the parties’ agreement could not displace the Rule 12(b)(6) standard that the Court’s review is limited to the facts in the complaint. While the Court may also consider documents incorporated by reference pursuant to the parties’ agreement, that generally is for the limited purpose of confirming that plaintiff had not misrepresented facts. In the Court’s view, the defendant's use of additional documents required the Court to weigh them as evidence. The Court exercised its discretion to exclude the extraneous materials from consideration, rather than converting the motion to summary judgment.
In addition, the Court considered and rejected the plaintiff’s argument that the special committee was not sufficiently independent to allow business judgment review under Kahn v. M&F Worldwide Corporation and its progeny. The plaintiff argued that the committee’s chair was not independent because of alleged mid-six-figure annual compensation as a member of the board. The Court reasoned, however, that arguments that a director lacks independence due to receipt of directors’ fees generally require allegations showing the amounts are material to the director. But, even assuming the plaintiff had sufficiently pleaded facts that the chair’s board compensation was material to her, the plaintiff did not sufficiently challenge the independence of other committee members or show that the chair unfairly influenced their deliberations.
The plaintiff otherwise argued that the special committee as a whole suffered from a “controlled mindset” because the charter amendment was so one-sidedly beneficial to the controller, that no independent committee could ever approve it. The Court rejected this argument because it was result-oriented, rather than process-oriented. That is, the challenge was based solely on the plaintiff’s opinion that the transaction was too one-sided to be fair, rather than being supported by flaws in the special committee’s deliberative process. Accordingly, the Court dismissed the complaint.