Delaware Ruling Provides Guidance In Derivative Litigation, Underscores Texas Procedural Differences

Last month, the Delaware Court of Chancery in Adam Grabski ex rel. Coinbase Global, Inc. v. Andreessen denied a motion by Coinbase Global, Inc.'s Special Litigation Committee ("SLC") to terminate a stockholder derivative action because the court determined that one of the members of the SLC was not independent. The decision provides guidance for boards and advisors regarding the formation, composition, and operation of special litigation committees, as well as the continued rigor with which courts scrutinize committee independence. It also offers a useful point of comparison with procedures available to companies incorporated in Texas.

At the time of the events underlying this action, Coinbase was a Delaware corporation. Nearly three years passed from the date the plaintiff-stockholder initiated the action until the date the Court of Chancery ruled the SLC was not independent. During that time, the parties engaged in extensive briefing on a motion to dismiss on demand futility grounds, after which the SLC was formed and engaged advisors and undertook a ten-month investigation resulting in a 332-page report concluding the claims lacked merit, followed by subsequent briefing on the SLC's motion to terminate the action. It was only in the context of that final step that the Court determined that the SLC was not independent.

Now a Texas corporation, were Coinbase to receive a similar litigation demand related to events post-reincorporation it would have the opportunity to avail itself of procedures to petition a court for a binding determination of the SLC's independence at the start of the process, before any other briefing and before the SLC undertook its lengthy investigation. The resulting independence determination may be the same, but the parties would know the court's ruling on this critical issue at the outset, providing the board with the opportunity to constitute a new SLC that the court finds is independent before all parties sink significant time and resources into other issues.

1. The Delaware Ruling

The plaintiff-stockholder filed his derivative action in April 2023, alleging that certain directors and officers breached fiduciary duties in connection with stock sales at the time of the company's direct listing. After the Court of Chancery denied the defendants' motion to dismiss on demand-futility grounds in February 2024, the board formed a two-member SLC to investigate the claims and determine whether continued prosecution of the litigation was in the company's best interests.

Following a lengthy investigation (which included the review of roughly 60,000 documents, the collection of materials from 31 custodians, and interviews of 21 witnesses), and the preparation of a detailed report, the SLC moved in February 2025 to terminate the derivative action. Delaware courts apply a two-step analysis when reviewing a motion by an SLC to dismiss or terminate derivative claims. First, the court examines whether the SLC members are independent, acted in good faith, and conducted a reasonable investigation. The burden is on the SLC to show the absence of a material issue of fact on those matters. Only if the SLC satisfies that first step does the court proceed to the second step, in which the court may in its discretion apply its own judgment to determine whether the suit should be dismissed (a court may decline to do so, for example, where it finds that the SLC met the criteria of step one but the result does not appear to satisfy its spirit).

The court here denied the SLC's motion at the first step. It concluded that there were material factual disputes concerning the independence of one of the two SLC members, based primarily on professional and financial ties between that director and one defendant and related investment entities. Because the court determined this SLC member's impartiality was subject to reasonable doubt, it did not reach the second step of the analysis.
Importantly, the court did not question the good faith of the SLC or the thoroughness of its investigation, and the court acknowledged that the SLC's report could support summary judgment at a later stage. The decision instead turned almost entirely on the perceived risk of bias arising from accumulated professional relationships, co-investment history, and repeated interactions with individuals and entities central to the underlying claims. The opinion emphasizes that Delaware courts will look beyond formal labels of "independence" and will assess the full context of personal, professional, and economic relationships when evaluating an SLC's composition.

2. Lessons for Delaware Corporations and Directors Regarding Special Litigation Committees

The ruling reinforces several practical considerations for Delaware boards contemplating the use of an SLC in response to derivative litigation or a litigation demand:

a. Independence Determinations Are Fact Specific and Depend on Context. Delaware courts apply independence standards that extend beyond direct financial ties or employment relationships. And unlike the demand-futility context, where directors benefit from a presumption of independence, an SLC bears the burden of affirmatively demonstrating that its members are independent. Even relationships that are not financially dominant or overtly controlling may, in the aggregate, create a sufficient fact issue to defeat a motion. Boards should therefore evaluate not only direct financial ties, but also patterns of co-investment, advisory roles, recurring business collaborations, and shared institutional affiliations.

b. Process Quality Alone Is Not Enough. The court expressly recognized the length and apparent rigor of the SLC's investigation. Nevertheless, those attributes could not cure perceived independence concerns. This underscores that even exemplary investigative procedures will not substitute for careful member selection at the outset.

c. Advisor Independence Should Be Evaluated Early. Although the court did not decide the stockholder's challenge to the SLC's outside counsel, it noted that simultaneous representation of entities closely tied to the subject of the investigation was "suboptimal." Boards should vet not only committee members but also counsel and financial advisors for conflicts that could invite scrutiny.

d. Documentation and Disclosure Are Critical. Comprehensive disclosures of relationships and potential conflicts—internally and, when appropriate, to the court—remain essential. Transparent documentation does not eliminate independence issues, but it can help shape the narrative and reduce the risk of later accusations that relevant ties were overlooked.

3. How the Process Might Have Differed Under Texas Law

Coinbase reincorporated in Texas in late 2025, and the procedural steps of a similar dispute could differ meaningfully under the Texas Business Organizations Code ("TBOC"). Two notable distinctions are found in TBOC Sections 21.553 and 21.554, which respectively (a) prohibit a stockholder from filing any derivative proceeding without first making a written demand to the corporation detailing the alleged claim and requesting the corporation take action, and (b) permit a corporation to petition a court for an early judicial determination regarding the independence and qualifications of the directors assessing the litigation demand. If the corporation makes such a request, the statute establishes an expedited timeline: the court must hold an evidentiary hearing within 45 days of the petition and render its determination within 75 days. If the court determines that those directors are independent and qualified to make the determination whether pursuit of the derivative claims is in the best interests of the corporation, that finding will be dispositive in subsequent proceedings absent the discovery of new facts sufficient to prove otherwise.

Under this Texas framework, a corporation may seek a threshold ruling on committee independence before or contemporaneously with the committee's substantive investigation. This can provide earlier clarity and reduce the risk that months of investigative effort will later be undermined by an adverse independence finding. In practical terms, the availability of this statutory petition process can promote greater procedural efficiency, front-load judicial review of committee composition, and potentially shorten the overall lifecycle of derivative litigation.

Had this matter arisen post-reincorporation in Texas, Coinbase could have sought such a determination at the outset. An early ruling might have validated the SLC's composition—thereby strengthening a later decision by the SLC on whether to proceed with the action—or permitted reconstitution of the SLC before significant resources were expended. While outcomes always depend on specific facts, the Texas approach offers a structured avenue for earlier judicial engagement that can be advantageous from a timing and cost-management perspective, to the benefit of all parties.

While both Delaware and Texas law maintain high standards for director independence, the Texas procedure's front-loaded judicial review of committee independence may offer a more efficient path that can give all parties early clarity on this critical issue.

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