In re The Trade Desk, Inc. Derivative Litigation concerns the application of the entire fairness standard to a corporation’s compensation decisions regarding a controlling stockholder. To be sure, this is a hot-button issue in Delaware and corporate law circles beyond, with the debate intensifying due to the Delaware Court of Chancery’s decision last year in Tornetta v. Musk, C.A. No. 2018-0408-KSJM (Del. Ch. Jan. 31, 2023) and the recently passed legislative actions addressing statutory safe harbors in controlling stockholder transactions. See Del. S.B. 21, 153rd Gen. Assem. (2025).

Trade Desk, for its part, wades into those controversial waters by discussing controller influence and director independence. But unlike its predecessors, In re Match Group Derivative Litigation, 315 A.3d 451 (Del. 2024) and Tornetta, the Trade Desk opinion hinges not on an entire fairness inquiry, but on demand futility. The Trade Desk defendants did not attempt to utilize the cleansing mechanisms of MFW. Instead, they argued that demand on the board was not excused. The court agreed and dismissed the stockholders’ complaint.

This case dealt with claims related to a substantial equity award granted to The Trade Desk, Inc.’s CEO and founder, Jeffrey Green. The company operates under a dual-class stock structure of Class A and Class B shares. The latter have 10 times the voting power of the former. Green’s holdings, which include a significant block of Class B stock, represent a 53% voting stake.

The litigation centers on an October 2021 performance-based stock option award approved by Trade Desk’s compensation committee valued at approximately $819 million with the potential to go as high as $5.2 billion, according to the plaintiffs. Stockholder plaintiffs filed a derivative suit against Green and other officer and director defendants alleging that neither the award nor the approval process were entirely fair to the corporation and its stockholders. The plaintiffs argued that Green’s dominant voting power, derived from his Class B shares, allowed him to wield enormous influence over the board’s decision-making. In light of this influence, plaintiffs argued that an independent and impartial decision-making process was not possible. Defendants moved to dismiss.

A derivative suit challenging a corporation’s decisions with respect to a controlling stockholder’s compensation can be dismissed in two ways. First, a defendant can satisfy the MFW framework, demonstrating that the transaction was negotiated by an independent and disinterested special committee and approved by a fully informed, uncoerced stockholder vote. Match, 315 A.3d at 451. Second, a defendant can obtain dismissal for failure to plead demand futility. Relying on the latter, the Court dismissed.

Under Delaware law, stockholders must generally make a demand on the board of directors before initiating a derivative lawsuit. This rule stems from Delaware’s board-centric model, which presumes that the directors are best equipped to make decisions in the corporation’s best interests and assures that the board is given the opportunity to address an alleged wrong before litigation. However, plaintiff stockholders may bypass the demand requirement if they can demonstrate that demand on the board would be futile.

Demand is futile if at least half of the members of the board are unable to consider a demand for one of three reasons:

• The director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand; 
• The director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; or 
• The director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.

See United Food & Commerical Workers Union v. Zuckerberg (Zuckerberg II), 262 A.3d 1034, 1047 (Del. 2021).

The Trade Desk plaintiffs argued that six directors of the eight-member board lack independence from Green, face a substantial likelihood of liability for approving Green’s award, or both. Due to a Section 102(b)(7) clause in the company’s certificate of incorporation, the plaintiffs had to adequately plead that the defendants breached their duty of loyalty, which requires a showing of bad faith since there was no allegation that the defendants were interested.

Because the plaintiffs alleged bad faith as the basis for demand futility, they had to “plead particularized facts that can support a reasonable inference about the directors’ state of mind.” The court held that the plaintiffs failed to plead facts that can support a reasonable inference that the directors acted in bad faith. The plaintiffs’ allegations only raise reasonable doubt as to the ability of two directors to consider a demand. Therefore, failing to call into doubt a majority of the board’s ability to consider a demand challenging the award, demand was not futile.

As a result, the court granted the defendants’ motion to dismiss the derivative suit. The court acknowledged Green’s influence over the board as the controller but found his influence alone was not enough for demand futility. This decision highlights the hurdles stockholders face when challenging decisions of the board—particularly when the majority of the board is comprised of disinterested directors.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.