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Last week, in Grabski v. Andreessen (Del. Ch.; 2/24), Chancellor McCormick denied a motion by directors and officers of Coinbase Global to dismiss claims that arose from Coinbase’s 2021 direct listing on Nasdaq. The plaintiff acquired stock in the direct listing and filed suit derivatively, alleging the defendants breached their fiduciary duties by selling $2.9 billion worth of stock in the direct listing based on MNPI and were unjustly enriched by the sales. A month after the listing, the company announced quarterly earnings and a capital raise through a notes offering and the stock price dropped.

Defendants sought to dismiss on the basis that the plaintiff failed to show the directors’ personal interest for demand futility purposes. Chancellor McCormick disagreed. After listing the amounts of sales by the director defendants, she states:

Plaintiff argues that it is reasonably conceivable that this amount of money was material to each Director Defendant such that none could impartially consider a pre-suit litigation demand attacking the sales. Plaintiff need not allege facts concerning each Director Defendant’s personal wealth to support this conclusion—$50 million is presumptively material. […] In the real world, the billions of dollars made by the Director Defendants constitutes a material personal benefit that would render a director incapable of impartially considering a demand attacking those sales. Demand is excused on this basis.

The opinion also found demand to be excused on the basis that the director defendants face a substantial likelihood of liability. The opinion only addresses one of the four categories of information plaintiff claims is MNPI — a 409A valuation approved by the board the same day as the direct listing. As to its materiality, the opinion declines to make any defendant-friendly inferences at the pleadings stage.

The defendants argued against the inference of scienter due to the proportion of their holdings represented by the sales and that they could have made more by selling more stock shortly after the initial sales but chose not to. To this, Chancellor McCormick said, “Plaintiff need not allege that Director Defendants maximized the value gained from their alleged impropriety” to infer scienter at the pleadings stage.

What does this mean for direct listings? The opinion says this:

Although the defendants’ briefs read like a philosophical apology for direct listings, the plaintiff’s claims do not place that relatively nascent transactional structure on the chopping block. Rather, this is yet another instance where a stockholder plaintiff calls on this court to deploy “well-worn fiduciary principles” to a new transactional setting.

– Meredith Ervine