Delaware Court of Chancery Addresses Fiduciary Duty Claims in the Direct Listing Context

Wilson Sonsini Goodrich & Rosati

Wilson Sonsini Goodrich & Rosati

On February 1, 2024, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery issued a decision refusing to dismiss stockholder claims against directors and officers of Coinbase Global, Inc. over their sales of stock in the company’s 2021 direct listing. The stockholder’s particular theory was that the director and officer defendants possessed material nonpublic information about the company, sold their stock for an aggregate $2.9 billion before the stock traded down, and potentially engaged in insider trading under Delaware law. Importantly, the decision was issued at the pleadings stage, when all factual inferences are drawn in the plaintiff’s favor, but is a noteworthy development for direct listings and potentially certain other types of capital markets transactions.

Certain facts were important to the court’s conclusions. In this case, the company’s initial reference price for the direct listing was $250 per share, the trading opened at $380 per share, and the stock sold up to $429 per share on the first day. There were no lockups restricting the trading of directors and officers, and nearly all of the director and officer defendants sold stock immediately, within the first two days of the direct listing. Nine days after trading began, and after the relevant sales of stock by the defendants occurred, the stock was trading down, between roughly $282 and $292 per share.

The plaintiff stockholder paired that trading backdrop with the assertion that the defendant directors and officers allegedly possessed material nonpublic information that was not fully disclosed to the public. This included purported knowledge on the part of the defendants that the company’s reliance on brokerage fees, which comprised 90 percent of the company’s revenue, was facing pressure in the competitive landscape. This also included a 409A valuation that had been performed for the company prior to the direct listing reflecting a value for the company’s stock that was worth significantly less than the stock price during the time that the directors and officers sold. The court specifically noted that of the three valuation approaches used in that analysis—a discounted cash flow analysis, a weighted expected return method, and a valuation based on the secondary trading of the company’s stock before the direct listing—the secondary trading program yielded the highest value but was, in the court’s view, potentially impacted by the material nonpublic information about the company’s brokerage fees and business.

Based on those factual allegations, the court refused to dismiss the stockholder’s claims. The court also rejected the defendants’ argument that the plaintiff, who bought stock after the company went public, lacked standing to sue because the decision to structure the direct listing was made while the company was private, reasoning instead that the sales at issue happened while the company was public.

As capital markets activity increases, the decision is likely to receive attention—both with regard to 1) anticipating potential fiduciary duty claims against directors and officers and guarding against them and 2) evaluating disclosures made to the market. We will continue to monitor developments in this area and any appeal activity in the case.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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