City of Hialeah Employees' Retirement System v. Insight Venture Partners, LLC ( 2023 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CITY OF HIALEAH EMPLOYEES’ )
RETIREMENT SYSTEM, Derivatively )
on Behalf of Nominal Defendants )
nCINO, INC. (f/k/a Penny HoldCo, )
Inc.) and nCINO OpCo, Inc. (f/k/a )
nCino, Inc.), )
)
Plaintiff, )
)
v. ) C.A. No. 2022-0846-MTZ
)
INSIGHT VENTURE PARTNERS, )
LLC, INSIGHT HOLDINGS GROUP, )
LLC, JEFFREY L. HORING, PIERRE )
NAUDÉ, SPENCER G. LAKE, )
STEVEN A. COLLINS, JON DOYLE, )
PAM KILDAY, WILLIAM RUH, and )
GREG ORENSTEIN, )
)
Defendants, )
and )
)
nCINO, INC. (f/k/a Penny HoldCo, )
Inc.) and nCINO OpCo, Inc. (f/k/a )
nCino, Inc.), )
)
Nominal Defendants. )
MEMORANDUM OPINION
Date Submitted: July 25, 2023
Date Decided: December 28, 2023
Thomas Curry, Tayler D. Bolton, SAXENA WHITE P.A., Wilmington, Delaware;
David Wales, SAXENA WHITE P.A., White Plains, New York; Adam Warden,
SAXENA WHITE P.A., Boca Raton, Florida; Peter B. Andrews, Craig J. Springer,
David M. Sborz, Andrew J. Peach, Jackson E. Warren, Jacob D. Jeifa, Wilmington,
Delaware, ANDREWS & SPRINGER LLC, Attorneys for Plaintiff City of Hialeah
Employees’ Retirement System.
Garrett B. Moritz, S. Reiko Rogozen, ROSS ARONSTAM & MORITZ LLP,
Wilmington, Delaware; Steven M. Farina, George A. Borden, Brian T. Gilmore,
WILLIAMS & CONNOLLY LLP, Washington, DC, Attorneys for Defendants
Pierre Naudé, Spencer Lake, Steven Collins, Jon Doyle, Pam Kilday, William Ruh,
Greg Orenstein, nCino, Inc., and nCino OpCo., Inc.
William M. Lafferty, Ryan D. Stottmann, Rachel R. Tunney, MORRIS, NICHOLS,
ARSHT & TUNNELL LLP, Wilmington, Delaware; Tariq Mundiya, Jeffrey B.
Korn, Richard Li, Ciara A. Sisco, WILLKIE FARR & GALLAGHER LLP, New
York, New York, Attorneys for Defendants Insight Venture Partners, LLC, Insight
Holdings Group, LLC, and Jeffrey Horing.
ZURN, Vice Chancellor.
The venture capital fund Insight Partners invested in nCino Inc. (“nCino” or
the “Company”). Insight owned most of nCino’s stock until a 2020 IPO, and the
plaintiff in this case asserts Insight was nCino’s de facto controller thereafter.
Insight also invested in SimpleNexus, LLC. In November 2020, nCino and
SimpleNexus began partnership talks; as those talks progressed, Insight significantly
increased its investment in SimpleNexus. By August of 2021, nCino and
SimpleNexus changed course and began negotiating an acquisition. In November,
nCino’s board of directors approved the acquisition at a price of $1.2 billion.
The plaintiff brings six double-derivative claims concerning that acquisition.
The complaint frames the transaction as benefitting Insight at nCino’s expense, and
paints nCino’s directors as supine fiduciaries with their heads in the sand. Demand
was not excused, so the plaintiff must plead demand futility. It attempts to do so by
alleging nCino’s board approved the acquisition in bad faith and that a majority of
the directors lack independence from Insight.
But the plaintiff failed to establish bad faith or a lack of independence.
Because the plaintiff failed to plead demand futility, its claims are dismissed.
1
I. BACKGROUND1
Nominal defendant nCino provides cloud-based software to financial
institutions.2 It was cofounded by defendant Pierre Naudé in 2012. Naudé served
as nCino’s CEO and a director at all relevant times. The plaintiff, City of Hialeah
Employees’ Retirement System (“Plaintiff”), is a purported nCino stockholder.
A. Insight Invests In nCino
In 2015, Insight invested $29 million in nCino through its Series B financing
round. nCino and Insight entered into an investor rights agreement granting Insight
the right to appoint one Company director. Insight appointed its managing director
and cofounder Jeffrey Horing, who served as a director at all relevant times.
By 2018, Insight held more than 50% of the Company’s outstanding shares.
From there, Insight led nCino through its 2020 initial public offering at a nearly $3
1
The facts are drawn from the operative complaint, the documents integral to it, and those
incorporated by reference. See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312,
320 (Del. 2004). The plaintiff demanded and received books and records before filing its
original complaint in this action, and that production was made pursuant to an agreement
including an incorporation by reference provision. D.I. 26 at Aff. [hereinafter “Rogozen
Aff.”] Ex. 1 § 18. Those books and records are incorporated by reference. See
Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 796–98 (Del. Ch. 2016), abrogated on
other grounds by Tiger v. Boast Apparel, Inc., 214 A.3d 933 (Del. 2019).
2
D.I. 19 at Am. Compl. ¶ 22 [hereinafter “Am. Compl.”]. nCino, Inc. underwent a
corporate restructuring during the relevant time. Through the restructuring, a different
entity with the same name became nCino OpCo, Inc., and nCino OpCo became a
wholly-owned subsidiary of a newly formed entity called Penny HoldCo. Penny HoldCo
was later renamed nCino Inc. For purposes of clarity, I will refer to the pre- and
post-restructuring nCino OpCo, Inc. and nCino, Inc. entities both as “nCino” or the
“Company” regardless of their name at the time.
2
billion valuation. The IPO prospectus acknowledged Insight’s clout and the
possibility that it could “influence the outcome of corporate actions requiring
stockholder approval.”3 After the IPO, Insight held about 42% of nCino’s shares.
In late 2020, Insight reduced its holdings to about 36%. It has since held between
32% and 38% of nCino’s outstanding shares.
B. The SimpleNexus Acquisition
Around November of 2020, nCino began discussions to enter a partnership
with a company called SimpleNexus.4 SimpleNexus was a privately held financial
technology company that provided app- and browser-based software connecting
consumers to financial institutions; it was also an Insight portfolio company.5
Partnership talks between nCino and SimpleNexus continued through the end of
2020.
In January of 2021, Insight led SimpleNexus’s Series B financing round and
increased its stake in the company by $83 million. Insight’s total stake amounted to
3
Am. Compl. ¶ 107.
4
Id. ¶ 43. The defendants contend these discussions began in 2021. D.I. 24 at 7 & n.5. At
this stage, I accept as true Plaintiff’s well-pled allegation that the discussions began in
November 2020. IBEW Loc. Union 481 Defined Contribution Plan & Tr. ex rel. GoDaddy
v. Winborne, 301 A.3d 596, 632 (Del. Ch. 2023) (“At the pleading stage, the court does not
decide between competing inferences. The plaintiff receives the benefit of the inference
that favors its case.”).
5
Rogozen Aff., Ex. 2 at 1; Am. Compl. ¶ 29.
3
about 62% of SimpleNexus’s outstanding equity. By Plaintiff’s math, Insight’s two
investments implied a valuation of $169 million.
By August of 2021, the partnership discussions evolved into acquisition talks.
nCino was interested in acquiring SimpleNexus because it saw “an acceleration of
consumer preferences related to how they interact with financial products,” which
nCino attributed to the COVID-19 pandemic.6 An internal nCino document
concerning the potential acquisition explained that “Consumers now expect to
engage with their financial institution[s] . . . in a more convenient, digital, seamless
experience” and that this type of delivery “was a ‘nice to have’ two years ago but
today (and going forward) it has become / is becoming a ‘table-stakes’ element of
all market leading solutions in our space.”7 nCino believed SimpleNexus’s
6
See Rogozen Aff., Ex. 10 at 1. Plaintiff points out that many of the relevant board of
directors meeting minutes were approved months after the meeting dates. It also points out
that “[t]his Court has declined to give any presumptive weight to minutes finalized after
the litigation has commenced, viewing them as a summary of ‘Defendants’ litigation
position’ [sic] rather than ‘contemporaneous evidence.’” D.I. 42 at 20 [hereinafter “PAB”]
(quoting FrontFour Cap. Grp. LLC v. Taube, 2019 WL 1313408, at *10 (Del. Ch.
Mar. 11, 2019)). Of the five sets of relevant minutes, four were approved after Plaintiff
served its books and records demand. See Rogozen Aff., Ex. 2 at 6 (confidentiality
stipulation dated March 3, 2022). I agree the delay is unsettling, but at the pleading stage,
the minutes are being relied upon for context and to color the inferences that can be drawn,
not to dislodge any of Plaintiff’s affirmative allegations. I would treat the minutes with
skepticism at an evidentiary stage.
7
Rogozen Aff., Ex. 10 at 1–2.
4
technology would complement its existing offerings and allow nCino to meet those
emerging preferences.8
The Company’s board of directors (the “Board”) met on August 25, 2021, and
“approved the Company proceeding with further investigation of the SimpleNexus
acquisition opportunity.”9 The Board also discussed the prospect of retaining an
investment bank, asked questions, and discussed the information they received.10
Horing was not present.11 He did not attend any subsequent meetings or discussions
concerning the SimpleNexus acquisition.12
On September 8, the Company’s chief corporate development and strategy
officer Greg Orenstein scheduled a September 10 Board call to discuss the
acquisition. The next day he sent a financial analysis of the transaction, which
valued SimpleNexus at $1.2 billion. The supporting analysis consisted of
SimpleNexus’s management’s financial projections through 2022, “management
8
See id.; see also nCino Inc., Quarterly Report (Form 10-Q), at 12 (June 1, 2022). “The
court may take judicial notice of facts publicly available in filings with the SEC.”
Omnicare, Inc. v. NCS Healthcare, Inc., 809 A.2d 1163, 1168 (Del. Ch. 2002).
9
Rogozen Aff., Ex. 12 at 0937.
10
Id.11
Id.12
Rogozen Aff., Ex. 3 at 0927; Rogozen Aff., Ex. 13; Rogozen Aff., Ex. 14; Rogozen Aff.,
Ex. 17 at 0926.
5
current financial statements, and a one-page spreadsheet.”13 The materials did not
include any implied valuation based on Insight’s investments.
Fifty-three minutes before the September 10 Board call, Orenstein sent the
Board a draft indication of interest, or IOI. The IOI contemplated nCino acquiring
SimpleNexus for $1.2 billion, consisting of a mix of stock and cash.
At the meeting, Naudé and Orenstein explained that “‘following price
discussions with SimpleNexus’s co-founder . . . and CFO, it was their belief that
SimpleNexus would not sell for less than $1.2 billion’ and would require at least
25% of the deal consideration to be in cash.”14 Orenstein explained SimpleNexus
initially sought 50% cash and 50% stock, but “subsequently expressed a willingness
to accept” a lower ratio that would not require nCino to raise cash to complete the
deal.15 The Board discussed and asked questions before authorizing the Company
to enter into the IOI.16
On September 27, Orenstein informed the Board that the Company retained
advisors in connection with the acquisition talks. The Company retained Bank of
America Securities as its financial advisor; Sidley Austin as its legal advisor;
Accenture “to assist with ‘market, competition and product functionality diligence’”;
13
Am. Compl. ¶ 67.
14
Id. ¶ 70.
15
Rogozen Aff., Ex. 13 at 0923.
16
Id.
6
Ernst & Young to assist with financial and tax diligence; and Cornerstone Advisors
“to advise on the ‘market opportunity in the U.S. community bank and credit union
market.’”17
The Board met again on October 7.18 Accenture updated the Board “regarding
their engagement to conduct a market segmentation and functional capabilities
analysis of SimpleNexus to support nCino’s evaluation of SimpleNexus and their
position in the mortgage technology market.”19 Bank of America “provided a
transaction overview to the Board, including a review of the strategic rationale for
the transaction, certain relevant precedent transactions, a summary process timeline,
and near-term next steps.”20 It advised the transaction was “[h]ighly accretive to
growth and margin with [an] attractive[ ]valuation.”21 Sidley Austin reviewed the
proposed transaction structure.22 Finally, the Board reviewed “the Company’s
diligence activities and workstreams,” and “authorized the Company’s management
team to proceed with its due diligence investigation and efforts to negotiate the
acquisition of SimpleNexus.”23
17
Am. Compl. ¶ 75.
18
Rogozen Aff., Ex. 14 at 0924.
19
Id.
20
Id.
21
Rogozen Aff., Ex. 15 at 0232.
22
Rogozen Aff., Ex. 14 at 0924.
23
Id. at 0925.
7
Orenstein arranged for nCino’s directors to speak with SimpleNexus’s
founder and CFO as part of the diligence process.24 He set up two separate calls with
three directors each “so the interactions [could] be a little more personal.”25 The
calls took place on October 22 and 25.26 Orenstein prepared a briefing document
and delivered other materials to the directors before their calls.27
The Board met again on November 1.28 Orenstein updated the Board on the
merger negotiations and due diligence process.29 Other nCino employees reviewed
drafts of “the SimpleNexus financial models.”30 “Board members asked questions
and there was discussion of the information reviewed and presented.”31
Orenstein updated the Board via email on November 5.32 He explained nCino
was negotiating for an Insight stock lock-up agreement following the transaction.33
24
Rogozen Aff., Ex. 16 at 0158.
25
Id.
26
Id. at 0157.
27
Id.
28
Rogozen Aff., Ex. 17.
29
Id. at 0926.
30
Id.
31
Id.
32
Rogozen Aff., Ex. 19.
33
Id. at 0873.
8
Absent a lock-up agreement, Insight could freely sell its stock immediately upon
closing.34
On November 15, the Board met to approve the acquisition.35 Sidley Austin
reviewed the tax structure and the merger agreement.36 Sidley also “noted that . . .
Horing and other representatives of Insight . . . had not only been outside of the
Board meetings, but also completely ‘on the other side of the wall’, owing to
Insight’s ownership of a controlling stake in SimpleNexus.”37 Bank of America
presented a fairness opinion.38 After discussion, “the Board unanimously approved
the resolutions approving the transaction.”39
The acquisition closed on January 7, 2022.40 nCino paid $933.6 million worth
of consideration after price adjustments: 20% in cash and 80% in stock.41 Insight
entered into a lock-up agreement restricting it from selling two-thirds of its nCino
stock following closing.42 Per that agreement, a third of the restricted shares would
34
Id.
35
Rogozen Aff., Ex. 3.
36
Id. at 0927.
37
Id.
38
Id.
39
Id. at 0927–28.
40
Rogozen Aff., Ex. 2 at 19.
41
Id.
42
Id.
9
become unrestricted six, nine, and twelve months after closing.43 Insight and its
affiliates owned approximately 32.7% of nCino’s outstanding shares before
closing.44
nCino’s stock price dropped following the announcement. From the
November 16, 2021 announcement “until January 18, 2022 . . . nCino’s stock fell
from $70.89 to $42.29 per share.”45 While nCino experienced this nearly 30%
decline, the Russell 3000 and NASDAQ remained relatively flat.46
C. This Litigation
Plaintiff filed its original complaint in this action on September 21, 2022.47 It
filed its amended complaint on January 27, 2023 (the “Amended Complaint”).48 The
Amended Complaint asserts six double derivative causes of action49 against Insight
and nCino’s directors and officers. Count I is a breach of fiduciary duty claim
against Horing, Naudé, Spencer Lake, Steven Collins, Jon Doyle, Pam Kilday,
43
Id.
44
Id.
45
Am. Compl. ¶ 3.
46
Id.
47
D.I. 1.
48
D.I. 19.
49
“A ‘double derivative’ action refers to a lawsuit in which a stockholder of a parent
corporation brings a derivative suit to enforce the rights of a wholly-owned subsidiary.” 2
Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the
Delaware Court of Chancery § 11.06[a], at 11-183 (2023) [hereinafter “Wolfe &
Pittenger”].
10
William Ruh, and Orenstein relating to the SimpleNexus acquisition. Count II
claims Horing misused material nonpublic information to Insight’s benefit. Count
III claims Ruh traded nCino stock using material, nonpublic information regarding
the SimpleNexus acquisition. Count IV claims Insight, as a controlling stockholder,
breached its fiduciary duties for using its control over nCino to cause it to enter an
unfair transaction. Count V is a claim against Insight for aiding and abetting
Horing’s breaches of fiduciary duty. Count VI is an unjust enrichment claim against
Insight.
Naudé, Lake, Collins, Doyle, Kilday, Ruh, and Orenstein (the “nCino
Defendants” and together with Horing and Insight, “Defendants”) moved to dismiss
all claims under Court of Chancery Rule 23.1 for failure to plead demand futility.50
They also moved under Rule 12(b)(6) to dismiss Counts I and III. Insight and Horing
moved under Rule 12(b)(6) to dismiss Counts IV, V, and VI.51 I heard oral argument
on July 25.52 I conclude Plaintiff failed to plead demand futility. Plaintiff’s claims
are dismissed.
50
D.I. 26.
51
D.I. 23; D.I. 24.
52
D.I. 57; D.I. 58.
11
II. ANALYSIS
My analysis begins and ends with demand futility. Under Court of Chancery
Rule 23.1, a derivative complaint “must state with particularity any effort by the
derivative plaintiff to obtain the desired action from the entity; and the reasons for
not obtaining the action or not making the effort; and allege facts supporting a
reasonable inference that the derivative plaintiff has standing to sue.”53 To meet this
“heightened pleading standard,”54 a stockholder must allege “particularized factual
statements that are essential to the claim.”55 In this regard, Rule 23.1 “departs from
the imprecision generally permitted under modern rules of civil procedure.”56 “[A]s
is true in other contexts, the plaintiffs’ well-pleaded factual allegations must be taken
as true and the complaint has to be read in the light most favorable to the plaintiffs.”57
53
Ct. Ch. R. 23.1(a) (formatting altered). Rule 23.1 was amended on September 25, 2023.
In re: Amendments to Rules 7, 10, 17–25, and 171 of the Court of Chancery Rules, Sections,
III, IV, and XVI (Del. Ch. Sept. 25, 2023) (ORDER). No substantive revisions were made
to the relevant portion of Rule 23.1. Id. at 29.
54
United Food & Com. Workers Union v. Zuckerberg (Zuckerberg I), 250 A.3d 862, 876
(Del. Ch. 2020), aff’d sub nom. United Food & Com. Workers Union & Participating Food
Indus. Emps. Tri-State Pension Fund v. Zuckerberg, 262 A.3d 1034 (Del. 2021).
55
Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000).
56
Good v. Getty Oil Co., 514 A.2d 1104, 1106–07 (Del. Ch. 1986).
57
Brehm, 746 A.2d at 268.
12
In Zuckerberg, our Supreme Court adopted a three-part demand futility test.58
It asks the following on a director-by-director basis:
(i) whether the director received a material personal benefit from the
alleged misconduct that is the subject of the litigation demand;
(ii) whether the director faces a substantial likelihood of liability on any
of the claims that would be the subject of the litigation demand; and
(iii) whether the director lacks independence from someone who
received a material personal benefit from the alleged misconduct that
would be the subject of the litigation demand or who would face a
substantial likelihood of liability on any of the claims that are the
subject of the litigation demand.59
“If the answer to any of the questions is ‘yes’ for at least half of the members of the
demand board, then demand is excused as futile.”60 Demand futility is analyzed on
a claim-by-claim basis.61
The demand board comprises seven directors: Horing, Naudé, Lake, Collins,
Ruh, Doyle, and Kilday (the “Demand Board”).62 The nCino Defendants do not
58
United Food & Com. Workers Union & Participating Food Indus. Emps. Tri-State
Pension Fund v. Zuckerberg (Zuckerberg II), 262 A.3d 1034, 1059 (Del. 2021).
59
Id.60
Id.61
In re Vaxart, Inc. S’holder Litig., 2021 WL 5858696, at *15 (Del. Ch. Dec. 1, 2021).
62
The Board included seven directors at the time the original complaint was filed but eight
at the time the amended complaint was filed—the eighth is indisputably independent and
capable of considering the demand. Whether the Board has seven or eight directors is not
dispositive. For purposes of this analysis, I consider the Demand Board as it existed at the
time the original complaint was filed. 1 Wolfe & Pittenger § 11.03[c][4][iii], at 11-112
(“Delaware courts have clearly stated that the qualification of the board to consider a
demand pursuant to the Aronson test is to be determined by referencing the composition of
13
dispute that Horing fails the Zuckerberg test. Thus, Plaintiff must plead demand
futility as to three of the remaining six directors.
A. Plaintiff Failed To Plead Demand Futility As To Count I.
Plaintiff argues demand is futile as to Count I’s claim for breach of fiduciary
duty against the members of the Demand Board. It takes three approaches: (1)
Naudé, Lake, Ruh, Collins, Doyle, and Kilday face a substantial likelihood of
liability because they approved the acquisition in bad faith; (2) every director owes
their current and future nCino directorship to Insight such that they lack
independence; and (3) Naudé, Lake, Ruh, Collins, Doyle, and Horing have ties to
Insight such that they are not independent.63 All three arguments fail.
1. Substantial Likelihood Of Liability
I begin with Plaintiff’s bad faith argument under Zuckerberg’s second prong,
which asks whether the directors face a substantial likelihood of liability. Because
nCino’s charter includes a Section 102(b)(7) exculpatory provision,64 any liability
the board as of the time of the filing of the original complaint.”); Rales v. Blasband, 634
A.2d 927, 935 (Del. 1993) (considering board composition at the time the original
complaint was filed); Harris v. Carter, 582 A.2d 222, 229 (Del. Ch. 1990) (same).
63
Plaintiff also argues Ruh financially benefitted from the SimpleNexus transaction such
that he fails Zuckerberg’s first prong, and that he faces a substantial likelihood of liability
for a Brophy claim. Because I conclude five of the remaining directors pass Zuckerberg, I
do not consider these arguments.
64
Rogozen Aff., Ex. 4 § 8.1. The Court may take judicial notice of nCino’s charter. In re
Carvana Co. S’holders Litig., 2022 WL 3923826, at *2 n.14 (Del. Ch. Aug. 31, 2022).
14
must be based on a nonexculpated claim.65 Plaintiffs argue that Naudé, Lake, Ruh,
Collins, Doyle, and Kilday face a substantial likelihood of liability because they
approved the SimpleNexus acquisition in bad faith. “Successfully pleading bad faith
. . . leads to a pleading-stage inference that a director could not consider a demand.”66
Plaintiff focuses on several aspects of the acquisition process: an alleged lack of
price negotiations, the Board’s reliance on Bank of America’s fairness opinion, and
the failure to consider SimpleNexus’s valuation based on Insight’s January 2021
investment.
Bad faith may be shown “where the fiduciary intentionally acts with a purpose
other than that of advancing the best interests of the corporation, . . . or where the
fiduciary intentionally fails to act in the face of a known duty to act, demonstrating
a conscious disregard for his duties.”67 “Pleading bad faith is a difficult task and
requires ‘that a director acted inconsistent with his fiduciary duties and, most
importantly, that the director knew he was so acting.’”68 To establish demand futility
65
See Zuckerberg II, 262 A.3d at 1060.
66
Winborne, 301 A.3d at 619 (citing Zuckerberg I, 250 A.3d at 890).
67
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006) (internal quotation
marks omitted) (quoting In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 755 (Del. Ch.
2005), aff’d, 906 A.2d 27 (Del. 2006)).
68
McElrath v. Kalanick, 224 A.3d 982, 991–92 (Del. 2020) (quoting City of Birmingham
Ret. & Relief Sys. v. Good, 177 A.3d 47, 55 (Del. 2017)); id. at 993 (“[A] showing of bad
faith in the context of demand excusal is a high hurdle, and essentially requires the plaintiff
to demonstrate intentional wrongdoing by the board.”).
15
through allegations of bad faith, a plaintiff must “plead particularized facts that can
support a reasonable inference about the directors’ state of mind.”69
First, Plaintiff argues the Board did not discuss the price or otherwise engage
on the issue of price, and infers nCino simply accepted SimpleNexus’s $1.2 billion
offer. The minutes Plaintiff quotes reflect the opposite. At the September 10
meeting, Naudé and Orenstein explained “‘it was their belief that SimpleNexus
would not sell for less than $1.2 billion’ and would require at least 25% of the deal
consideration to be in cash.”70 They would know: as Plaintiff alleges, the IOI
Orenstein sent the Board “appeared to reflect significant prior negotiations between
nCino management and SimpleNexus.”71 The Board reasonably relied on
management’s opinion, informed by negotiations, that $1.2 billion was the floor.
The fairness of that price was later supported by Bank of America’s fairness opinion.
Plaintiff also decries that fairness opinion as being “riddled with questionable
assumptions that should have raised red flags to the financially sophisticated
Board.”72 At bottom, Plaintiff disagrees with Bank of America’s analysis. It
complains that the financial projections extend too far into the future, that the beta
was too low, that the weighted average cost of capital was incorrect, and that the set
69
Winborne, 301 A.3d at 619.
70
Am. Compl. ¶ 70.
71
Id. ¶ 68.
72
PAB 60.
16
of comparable companies was flawed, among other things. “To support a bad faith
claim based on a board’s reliance on its advisors’ financial analyses, ‘the plaintiffs
must plead non-conclusory facts creating the reasonable inference that the board
purposely relied on analyses that were inaccurate for some improper reason.’”73
Allegations of bad faith cannot rest on mere disagreements with methodology “or a
belief that another financial advisor would have done a better job.”74 Even if
Plaintiff’s criticisms are well-founded, quibbling with or criticizing a financial
analysis falls far short of showing it was so facially flawed as to rebut the
presumption that the directors relied on it in good faith.75
Plaintiff also attacks the transaction process by claiming there is a significant
gap between the acquisition price and the valuation implied by Insight’s January
2021 investment. Plaintiff alleges the Board was unaware of that valuation. Without
more, a failure to become informed about a data point for valuing an acquisition
73
In re Paramount Gold & Silver Corp. S’holders Litig., 2017 WL 1372659, at *15 (Del.
Ch. Apr. 13, 2017) (quoting In re Morton’s Rest. Gp. Inc. S’holders Litig., 74 A.3d 656,
673–74 (Del. Ch. 2013)).
74
In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *25 (Del. Ch.
Oct. 24, 2014).
75
Paramount Gold & Silver, 2017 WL 1372659, at *15 (“The plaintiffs cannot simply
quibble with the inputs used in the fairness opinions.” (internal quotation marks omitted)
(quoting Morton’s Rest. Gp., 74 A.3d 656, 673–74 (Del. Ch. 2013))); Crimson Expl., 2014
WL 5449419, at *25 (declining to find bad faith based on reliance of a financial analysis
where the plaintiffs’ “allegations boil[ed] down to criticisms” of one methodology as
compared to another).
17
sounds in the duty of care; such a claim does not present a substantial likelihood of
liability for the exculpated Board.76 And while the Court can infer bad faith from a
business decision, “the decision must be so extreme that it could not be rationally
explained on another basis.”77
And Plaintiff’s implied valuation is insufficiently reliable to anchor a bad faith
claim. Plaintiff points to Insight and another investor making investments totaling
$128 million for 76.10% of SimpleNexus, which Plaintiff extrapolates to a $169
million implied valuation. One of those investments was a 2018 $20 million “growth
capital investment,” and another was a $83 million January 2021 Series B
investment.78 Plaintiff assumes SimpleNexus’s valuation was the same in 2018 and
2021. This assumption is unreasonable. In addition to general changes in the nature
of the investment opportunity, market conditions, and any growth SimpleNexus
experienced during that time, the record reveals the pandemic drove changes in how
consumers interacted with financial institutions, increasing the importance of
SimpleNexus’s technology.79
76
McElrath, 224 A.3d at 993 (“It is not enough to allege that the directors should have
been better informed—a due care violation [is] exculpated by the corporation’s charter
provision.”).
77
Winborne, 301 A.3d 596 at 622.
78
Am. Compl. ¶¶ 44, 48.
79
See Rogozen Aff., Ex. 10 at 1–2.
18
Turning to the process more generally, Plaintiff accuses the Board of taking
an “ostrich-like” approach to the transaction like the Walt Disney Co. board was
famously accused of taking in the hiring and resignation of Disney’s president.80 As
described in the motion to dismiss decision, Disney’s board delegated negotiations
over Michael Ovitz’s hiring to the company’s CEO, who was Ovitz’s long-time
friend. Despite the decision being “an issue of material importance to their
corporation,” the board failed to retain advisors or experts, ask questions, or
otherwise meaningfully oversee Ovitz throughout the process.81 It later approved
Ovitz’s hiring even though it had not seen the final employment agreement. When
Ovitz sought to terminate his employment agreement after a little over a year on the
job and poor performance, Disney consented to a non-fault termination entitling him
to a cash payment of $38 million in addition to stock options, even though he did
not qualify for that treatment under the terms of the agreement. Board approval was
Plaintiff also argues that the Board agreed to a tax structure that conferred on Insight
“millions in tax deferral benefits.” Am. Compl. ¶ 89. Plaintiff infers the Company
obtained no benefit from this structure because the November 15 minutes do not reflect
what the Company received in exchange. The fact that an identified benefit to a
counterparty is not specifically coupled to a benefit to the Company does not constitute a
particularized allegation of bad faith. Neither does the stock price drop after the transaction
was announced. See Winborne, 301 A.3d at 621 (“What actually happens down the road
is a different issue than whether the decision appears extreme when made. Inferring bad
faith because a decision turned out badly would impose liability by hindsight.”).
80
In re Walt Disney Co. Deriv. Litig., 825 A.2d 275, 288–89 (Del. Ch. 2003).
81
Id. at 289.
19
required for the non-fault termination, but there was no indication the board ever
discussed the matter. The Court concluded that “the defendant directors consciously
and intentionally disregarded their responsibilities, adopting a ‘we don’t care about
the risks’ attitude concerning a material corporate decision.”82
Plaintiff has not painted a similar picture here. nCino’s Board met five times
between August 25 and November 15. At each meeting the Board asked questions
and discussed the information it received. The directors spoke with SimpleNexus’s
founder and CFO on October 22 and 25 as part of the due diligence process. They
received updates from management. The Board retained reputable advisors. Horing
was walled off from the acquisition process. The Board’s meeting minutes reflect
that nCino negotiated the cash portion of the deal down from 50% to 20%, which
meant nCino would not have to raise cash for the deal. nCino also obtained a lock-up
agreement with Insight.83 It is unreasonable to infer the directors on the Demand
Board had their heads in the sand.84
82
Id.83
Am. Compl. ¶ 93; Rogozen Aff., Ex. 2 at 19.
84
Plaintiff also likens this case to In re CBS Corp. Stockholder Class Action & Derivative
Litigation. 2021 WL 268779 (Del. Ch. Jan. 27, 2021). The facts of that case are even more
inapposite. There, the complaint pled an “extreme set of facts,” alleging with particularity
that CBS’s controller initiated acquisition talks less than a year after the CBS board rejected
the same merger and that the controller influenced and disabled the special committee
tasked with negotiating and recommending the merger. Id. at *37–43. The result was a
merger that was “patently unfair” and completed “in order to appease [the controller].” Id.
at *43. Here, the Amended Complaint is devoid of well-pled allegations that Insight was
20
Plaintiff has failed to plead demand futility based on a substantial likelihood
of liability.
2. Lack Of Independence
Plaintiff argues that all directors fail Zuckerberg’s third prong because they
lack independence from Insight, which received a material benefit from the
acquisition and faces a substantial likelihood of liability. It contends that because
Insight previously controlled most of the Company’s voting stock and is now a de
facto controller, every director “owes their current and future directorship to
Insight.”85 The nCino Defendants concede Insight received a material benefit but
deny the directors lack independence.
Delaware law presumes directors are independent.86 “[A] lack of
independence turns on ‘whether the plaintiffs have pled facts from which the
director’s ability to act impartially on a matter important to the interested party can
be doubted because that director may feel either subject to the interested party’s
dominion or beholden to that interested party.”87 “[I]t is important that the trial court
involved in the SimpleNexus acquisition beyond Horing’s involvement in the partnership
talks that preceded the acquisition negotiations.
85
PAB 22.
86
Friedman v. Dolan, 2015 WL 4040806, at *6 (Del. Ch. June 30, 2015) (citing In re MFW
S’holders Litig., 67 A.3d 496, 509 (Del. Ch. 2013)).
87
Marchand v. Barnhill, 212 A.3d 805, 818 (Del. 2019) (alteration in original) (internal
quotation marks omitted) (quoting Sandys v. Pincus, 152 A.3d 124, 128 (Del. 2016)).
21
consider all the particularized facts pled by the plaintiffs about the relationships
between the director and the interested party in their totality and not in isolation from
each other, and draw all reasonable inferences from the totality of those facts in favor
of the plaintiffs.”88 The prospect of gaining or losing a directorship can be
material.89 This Court has reasoned that a controller with a history of appointing a
director to boards, and the capability to appoint that director to more boards in the
future, can inspire a sense of owingness that casts reasonable doubt on the director’s
impartiality.90
Plaintiff argues that each director lacks independence from Insight because
Insight elected them to nCino’s Board and they depend on Insight for reelection.91
Assuming Insight is a controller, this argument has some superficial appeal:
directorships are generally material and Insight can remove any director at will, so
88
Del. Cnty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1019 (Del. 2015).
89
See Goldstein v. Denner, 2022 WL 1671006, at *47 (Del. Ch. May 26, 2022) (“Scholars
have shown that gaining or losing a directorship is generally material to an individual
director.”).
90
Id.; see also In re Trados Inc. S’holder Litig., 73 A.3d 17, 54–55 (Del. Ch. 2013)
(reasoning a director had a sense of owingness toward a venture capital fund where they
had a “long history” and the fund appointed the director to multiple boards and executive
officer positions).
91
Plaintiff has not attempted to reconcile Insight’s lack of majority voting power with this
position.
22
every director will appease Insight to retain their seats. But our Supreme Court
rejected this argument in Beam.92 There, the Supreme Court explained,
[The plaintiff] attempts to bolster her allegations regarding the
relationships between [the controller] and Seligman and Moore by
emphasizing [the controller’s] overwhelming voting control of [the
company]. That attempt also fails to create a reasonable doubt of
independence. A stockholder’s control of a corporation does not
excuse presuit demand on the board without particularized allegations
of relationships between the directors and the controlling stockholder
demonstrating that the directors are beholden to the stockholder. As
noted earlier, the relationships alleged by [the plaintiff] do not lead to
the inference that the directors were beholden to [the controller] and,
thus, unable independently to consider demand. Coupling those
relationships with [the controller]’s overwhelming voting control of
[the company] does not close that gap.93
Any power Insight had or has to appoint and elect directors does not, alone, render
nCino’s directors beholden to Insight.
I now turn to Plaintiff’s more specific director-by-director arguments.
Plaintiff makes no other argument as to Kilday, so I conclude she is independent for
purposes of demand futility as to Count I. The nCino Defendants concede Horing is
not independent. Plaintiff must plead that three of the remaining five directors lack
92
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1054
(Del. 2004); see also Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d
44, 67–68 (Del. Ch. 2015) (same).
93
Beam, 845 A.2d at 1054 (footnote omitted). The controller in Beam held 94% of the
company’s stock, dwarfing Insight’s “excess of 32%” at the time of the SimpleNexus
acquisition. Compare id. at 1044 n.3, with Am. Compl. ¶ 2.
23
independence. As explained below, Plaintiff has failed to do so for Naudé, Doyle,
Lake, and Collins. I do not reach the question of Ruh’s independence.
1. Naudé
Plaintiff argues Naudé is beholden to Insight because he relies on his position
as nCino’s CEO for a material portion of his income. Plaintiff has failed to plead
this reliance with particularity. It is true that a blocholder as significant as Insight
can have influence over a company’s executives, especially when the blocholder
holds other influential positions at the company.94 And “[t]he court . . . has explained
‘compensation from one’s full-time employment is typically of great consequence
to the recipient’ and thus is generally material.”95 But Plaintiff has not pled with
particularity that Naudé is dependent on his CEO salary; to the contrary, Plaintiff
pled Naudé has made $49 million in stock sales since the IPO.96
Plaintiff also argues that $49 million gain created a sense of owingness to
Insight. Again, Plaintiff failed to plead this position with particularity. The
Amended Complaint pleads only that Insight invested heavily in nCino before its
IPO, that Insight took nCino public, and that Naudé later sold nCino stock for $49
million. Rule 23.1 requires more for the Court to infer that he attributes his nCino
94
See In re Ltd., Inc., 2002 WL 537692, at *5 (Del. Ch. Mar. 27, 2002).
95
Goldstein, 2022 WL 1671006, at *42 (quoting In re Primedia Inc. Deriv. Litig., 910
A.2d 248, 261 n.45 (Del. Ch. 2006)).
96
Am. Compl. ¶ 106.
24
wealth to Insight with such singularity and gratitude that the relationship between
founder and investor is no longer arms-length, and that he would benefit Insight at
the Company’s expense and in contravention of his fiduciary duties. Plaintiff has
failed to disturb the presumption that Naudé is independent.97
2. Doyle
Plaintiff argues Doyle’s service at the investment bank Piper Sandler supports
a finding that he is beholden to Insight. From 2002 to 2020, Doyle served as senior
managing principal of Sandler O’Neil + Partners. In 2020, that firm merged with
Piper Jaffray and became Piper Sandler. After the merger, Doyle served on Piper
Sandler’s board of directors and became vice chairman of the board, senior
managing principal, and head of the financial service group.
Plaintiff argues Doyle is beholden to Insight to protect Piper Sandler’s
relationship with its longstanding client. It also argues that the fees Insight paid
Piper Sandler were material to Doyle personally. It alleges Piper Sandler underwrote
nCino’s IPO at a time when Insight held most of the Company’s equity. Plaintiff
also identifies six IPOs Piper Jaffray underwrote for Insight portfolio companies
between 2004 and 2017.
97
Plaintiff devotes one sentence of its brief to the argument that Naudé faces a substantial
likelihood of liability for “his involvement in the unfair Transaction.” PAB 53. Plaintiff
“invested so little in [this] argument[] that [it] can be regarded as waived.” Voigt v. Metcalf,
2020 WL 614999, at *8 n.3 (Del. Ch. Feb. 10, 2020).
25
Plaintiff did not allege that Insight had any role in selecting Piper Jaffray as
the underwriter for the six IPOs. The Amended Complaint specifies Insight’s
ownership in only four of the six companies: 10%, 13%, 20%, and 30%.98 Plaintiff
pleads no ownership percentage for the other two. And there are no allegations
concerning Insight’s influence at any of the six companies. It is not reasonable to
infer from its relatively small holdings that Insight selected the underwriter for each
IPO. These allegations fail to establish a long-running relationship between Piper
Sandler and Insight.
Even assuming Insight selected Piper Jaffray as nCino’s 2020 underwriter,
Plaintiff failed to show that Insight’s business was so important to Doyle as to
establish a lack of independence. As Plaintiff emphasizes, “The issue is not the
importance of the fees to Piper Sandler generally, but to Doyle in particular.”99 The
six transactions Plaintiff identifies occurred while Doyle was employed by Sandler
O’Neil, before it merged with Piper Jaffray. It is illogical to impute Insight’s
business and relationship with Piper Jaffray to Doyle. Plaintiff has failed to show
any basis to infer Doyle is beholden to Insight.
98
Am. Compl. ¶ 150.
99
PAB 52.
26
3. Lake
Plaintiff argues Lake is beholden to Insight because Lake obtained material
compensation both as a consultant to nCino and as a director, and because Lake has
previously served on Insight portfolio company boards. This argument fails.
Lake was appointed as a director in April 2017.100 He entered a consulting
agreement with nCino in May 2017.101 Plaintiff alleges Insight became a controller
through two tender offers, the latter of which closed in July of 2018.102 Plaintiff did
not allege, even in conclusory fashion, that Insight was a controller at the time Lake
was appointed to the Board or when he entered into his consulting agreement. There
are no other well-pled allegations that Insight was responsible for Lake’s consulting
agreement. And Plaintiff has not alleged Lake’s director compensation is material
at all or in light of his economic circumstances.103 Plaintiff has failed to establish
Lake’s nCino compensation is material or attributable to Insight.
100
Am. Compl. ¶ 16.
101
Id. ¶ 114.
102
Id. ¶ 33.
103
Simons v. Brookfield Asset Mgmt. Inc., 2022 WL 223464, at *15 (Del. Ch. Jan. 21, 2022)
(“[W]hen director fees are not excessive, mere allegations of payment of director fees are
insufficient to create a reasonable doubt as to the director’s independence.” (citing In re
Walt Disney Co. Deriv. Litig., 731 A.2d 342, 360 (Del. Ch. 1998)); see also Grobow v.
Perot, 539 A.2d 180, 188 (Del. 1988) (“Plaintiffs plead no facts demonstrating a financial
interest on the part of GM’s directors. The only averment permitting such an inference is
the allegation that all GM’s directors are paid for their services as directors. However,
such allegations, without more, do not establish any financial interest.”), overruled on other
grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
27
Plaintiff also argues Lake’s directorships for two other Insight portfolio
companies overcome the presumption of independence. In July of 2016, Lake was
appointed to the board of an Insight-controlled company called Fenergo alongside
Insight managing directors. Insight exited its Fenergo investment in 2021, and Lake
left the board “shortly thereafter.”104 Lake remained a Fenergo investor and advisor.
Plaintiff also alleges that in January of 2018, Insight invested in a company called
Duco, and Lake joined Duco’s board in September of 2018. But Plaintiff failed to
plead any particularized facts attributing Lake’s appointment to Duco’s board to
Insight.105 At most, Plaintiff has pled Insight appointed Lake to the Fenergo board
in 2016, and that Lake served alongside Insight affiliates at Fenergo and Duco: that
is not enough to disturb the presumption that he is independent today.
Plaintiff’s allegations concerning more recent ties do not disturb that
presumption either. In 2019, Lake co-founded Element Ventures, which “operates
in the same technology space as Insight,” “co-invested” alongside Insight in
Fenergo, nCino, and Duco, and touts its relationships with executives of those
companies.106 From there, Plaintiff pleads, “Lake leverages his relationships with
Insight and other Insight portfolio companies to attract new investment opportunities
104
Am. Compl. ¶ 120.
105
See Flannery v. Genomic Health, Inc., 2021 WL 3615540, at *16 (Del. Ch.
Aug. 16, 2021).
106
Am. Compl. ¶¶ 16, 115–17.
28
for his firm.”107 Plaintiff offers no facts to support this extension from “co-investing”
alongside Insight to being dependent upon Insight. Plaintiff has failed to plead that
Lake lacks independence from Insight.
4. Collins
Plaintiff argues Collins lacks independence from Insight because of his
service on the boards of other Insight portfolio companies, and because Collins’s
nCino director compensation is material. These arguments fail.
In 2004, Insight invested in a company called ExactTarget, and in 2009 it
increased its holdings to 35%. Collins served as ExactTarget’s executive vice
president and CFO beginning in 2011. Insight exited its ExactTarget investment in
2013, but Collins continued to serve through his retirement in early 2014. Collins
received over $10 million in compensation for his service. But Plaintiff does not tie
Collins’s position at ExactTarget to Insight. Plaintiff has not pled any other facts
concerning Insight’s control over ExactTarget. It is unreasonable to infer that
Insight selected Collins for his roles absent allegations of control or other
particularized facts.108
Plaintiff also alleges Insight placed Collins on the board of a company called
Cherwell. In 2012, Insight invested $25 million in Cherwell and received a majority
107
Id. ¶ 115.
108
See Flannery, 2021 WL 3615540, at *16.
29
interest.109 Three years later, Collins accepted a position on Cherwell’s advisory
board, where he remained until 2018.110 Plaintiff does not plead Collins’s
compensation for his service on the advisory board. While it is reasonable to infer
Insight had some role in appointing Collins given its majority stake, there are no
facts from which I can infer Collins has a sense of owingness—indeed, Plaintiff did
not plead that Collins was paid for his role at all.
Plaintiff also alleges Collins joined the board of a company called Instructure,
Inc. in 2014, and that Insight invested in Instructure later that year. Plaintiff failed
to plead with particularity that Collins’s appointment was tied to Insight, or that
Insight invested because Collins was on the board.
Finally, Plaintiff also argues that Collins receives a material portion of his
income from his nCino directorship. It contends that Collins’s director fees
“represented about 35.8% of his annual income,” and that such a percentage is
material under our law.111 Even accepting this as true, Plaintiff has not pled Insight
has the power to remove Collins or substantially affect his role as a director, so
109
Am. Compl. ¶ 134.
110
Id.111
PAB 34.
30
Collins is not beholden to Insight by virtue of that income.112 I conclude Collins is
independent of Insight.113
***
Having concluded Kilday, Lake, Naudé, Doyle, and Collins are independent
of Insight, Plaintiff has failed to allege a majority of the seven-director Demand
Board fails the Zuckerberg test. Plaintiff failed to plead demand futility as to Count
I.114
B. The Remaining Counts
I now turn to whether demand is futile as to the remaining counts. Count II
asserts a claim for misuse of confidential information against Horing. It alleges
Horing used confidential information about the SimpleNexus acquisition to increase
Insight’s investment in SimpleNexus. For the above reasons, a majority of the
Demand Board is independent of Insight. There are no allegations that the Demand
112
Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150, 177 (Del. Ch. 2005) (“This
Court will not find a director beholden unless the purported controlling person has
‘unilateral’ power to substantially affect the director.” (quoting Telxon Corp. v. Meyerson,
802 A.2d 257, 264 (Del. 2002)), aff’d, 906 A.2d 114 (Del. 2006). In addition, in 2022,
Collins’s $225,037 in director compensation comprised $171,037 in nCino stock and only
$54,000 in cash. Rogozen Aff., Ex. 2 at 21.
113
Plaintiff also points out that Collins served alongside an Insight affiliate on another
board. This does not change my conclusion.
114
Plaintiff has identified no separate reason the Demand Board could not consider Count
I as asserted against Orenstein or Naudé in their officer capacities. Plaintiff has failed to
plead demand futility as to Count I.
31
Board received a material personal benefit from Horing’s activities, that they face a
substantial likelihood of liability in connection with this claim, or that they lack
independence from Horing. Plaintiff failed to plead demand futility as to Count II.
Count III is a Brophy claim against Ruh.115 It alleges Ruh knew the
SimpleNexus acquisition would harm nCino’s stock price and traded on that
information before the acquisition was announced in November 2021. Plaintiff
argues that Count III is properly considered part of the SimpleNexus acquisition for
demand futility purposes, such that most directors face a substantial likelihood of
liability in connection with it or are otherwise incapable of considering the demand.
As explained above, the Demand Board was capable of considering a demand for a
claim arising out of the SimpleNexus acquisition. Plaintiff did not plead these
directors otherwise received a material personal benefit in connection with Ruh’s
trading or that they lack independence from Ruh. Plaintiff failed to plead demand
futility as to Count III.
Finally, I turn to the remaining three claims against Insight. Count IV asserts
a claim for breach of fiduciary duty against Insight as a controlling stockholder in
connection with the SimpleNexus acquisition. Count V asserts a claim against
Insight for aiding and abetting Horing’s breaches of fiduciary duty in connection
115
See Brophy v. Cities Serv. Co., 70 A.2d 5 (Del. Ch. 1949).
32
with the SimpleNexus acquisition. Count VI is a claim for unjust enrichment, also
relating to the SimpleNexus acquisition. For the reasons explained, most of the
Demand Board is independent of Insight. Plaintiff failed to plead demand futility as
to Counts IV, V, and VI.
III. CONCLUSION
The motion to dismiss is GRANTED.
33