City of Hialeah Emps. Ret. Sys. v. Insight Venture Partners, C.A. No. 2022-0846-MTZ (Del. Ch. Dec. 28, 2023)

A venture capital fund invested in two different entities. One of the entities then acquired the other. In the two months following the deal announcement, the acquirer’s stock fell by thirty percent, as markets remained relatively flat. The plaintiff brought six double-derivative claims, alleging that the acquirer’s directors had breached their fiduciary duty by overpaying for the target, and that the venture capital fund was the acquirer’s de facto controller and had benefitted itself via the acquisition at the acquirer’s expense.

The Court of Chancery dismissed all claims for the plaintiff’s failure to plead demand futility. The acquirer’s charter contained a Section 102(b)(7) exculpatory provision, and the Court determined the plaintiff had failed to plead the bad faith required for a majority of the directors to face the substantial likelihood of liability that would establish demand futility. Meeting minutes indicated the board had engaged on the issue of deal price, and the financial advisor’s opinion was not so facially flawed as to support a determination that the board’s reliance on it constituted bad faith. Meeting minutes also indicated the board had walled off the conflicted director, was actively engaged in reviewing the transaction over multiple months, had retained reputable advisors and negotiated the deal terms, and had obtained a lock-up agreement with the venture capital fund. Likewise, the plaintiff failed to plead with particularity that the directors lacked independence from the alleged controller. Following precedent, the Court rejected the presumption that the fund’s power to appoint and elect all the directors automatically rendered the directors beholden. As to the directors individually, the plaintiff failed to plead that the board seats were sufficiently material to them to question their independence or that their previous business relationships or interactions with the venture capital fund overcame the presumption of independence.