Jay-Z and Jack Dorsey might have been an unlikely duo, but a Delaware judge didn’t find their collaboration too absurd to dismiss a class-action lawsuit led by the City of Coral Springs Police Officers’ Pension Plan and other shareholders according to Reuters.
The group aimed to hold Dorsey and the board members of Block Inc accountable for their “terrible” decision to acquire Jay-Z’s Tidal streaming service.
The lawsuit argued that Block’s directors, formerly Square, demonstrated bad faith in approving the acquisition, which many considered a poor business venture.
Once known as Square, Block agreed to pay $237 million for an 86.2% stake in the struggling streaming service.
Tidal had only 2.1 million paying subscribers and faced numerous challenges, including losing major contracts, dealing with an ongoing criminal investigation in Norway, and losing its exclusive streaming arrangement with Kanye West in a public fallout.
Tidal had also incurred substantial unpaid liabilities to music labels for streaming fees.
The pension fund alleged that Dorsey, co-founder of Block and Twitter, was the only top executive who supported the purchase, buying Tidal primarily because he wanted to be friends with Jay-Z.
During the proceedings, the court learned that Tidal had been losing money, faced ongoing legal problems, and was propped up by a $50 million loan from Jay-Z himself.
It was also revealed that Dorsey and Jay-Z were vacationing together in Hawaii shortly after Block entered a term sheet to purchase a majority interest in Tidal.
The purchase of Tidal was a contentious issue, with some board members arguing that Block was overpaying for a struggling streaming service that would generate negative earnings before interest, taxes, depreciation (EBITDA), and amortization for Block.
The projected negative EBITDA for Block was $35.6 million in 2021, $55 million in 2022, and $68.3 million in 2023, according to Block’s management.
Despite the controversy surrounding the acquisition, Block closed the deal on April 30, 2021, shelled out $237.3 million, and Jay-Z joined the Board as the twelfth member.
The purchase infuriated the managers of the City of Coral Springs Police Officers’ Pension Plan and triggered the lawsuit.
However, Chancellor Kathaleen McCormick in Delaware Chancery Court found that there wasn’t sufficient evidence to show that Block’s directors acted in bad faith.
The judge stated that she could not “presume bad faith based on the merits of the deal alone” and dismissed the case.
While the outcome may not have been what the City of Coral Springs Police Officers’ Pension Plan and other shareholders hoped for, dismissing the class-action lawsuit is a reminder that the court will not second-guess business decisions made by independent directors of a company.