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

Direct Listing

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 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, notes Wilson Sonsini Goodrich & Rosati.

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. Read more.

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