Concessions and Particularity: How a Derivative Challenge to a Discounted Insider Financing Failed at the Pleading Stage

In the recent decision Marstrand Partners, L.P. v. Israel Biotech Fund I, L.P., C.A. No. 2024-0421-KSJM (Del. Ch. May 27, 2026), Chancellor McCormick dismissed a derivative challenge to a steeply discounted insider financing after holding that the plaintiff failed to plead demand futility under Court of Chancery Rule 23.1. Although the plaintiff disputed the ability of only two directors to consider a demand impartially, the plaintiff failed to plead particularized facts showing either director was conflicted.

Deal Background

Ayala Pharmaceuticals, Inc., a company focused on developing cancer treatments, had struggled financially for years. By November 2023, the board warned that without new financing, Ayala would need to consider bankruptcy and liquidation. At a board meeting that month, the directors considered a proposal from two significant Ayala venture backers, insiders Israel Biotech and Arkin, to lend (together with another Ayala stockholder) the company up to US$4 million through convertible notes exercisable at a 50% discount to the market price of Ayala shares, plus warrants for up to 15 million additional discounted shares. The insiders’ proposal was not the only option before the board that day; the directors also weighed a potential PIPE financing with third-party investors who had indicated interest in providing up to US$15 million at a 20% discount to market price, along with ongoing strategic discussions with several parties.

The board approved the insiders’ proposal. It also granted Israel Biotech warrants for an additional 7.5 million shares at the same discount and authorized approximately US$5.5 million in additional convertible notes on the same 50%-discount terms.

In the weeks after this transaction, Ayala continued to explore its strategic options. The company ultimately agreed to sell its assets to Immunome, Inc., and the parties signed an asset purchase agreement in February 2024. Two days after that deal was announced, Israel Biotech and Arkin exercised their conversion and warrant rights, raising their combined stake from roughly 36% to over 80%. When the asset sale closed, every director received a one-time payment, including the two at-issue directors, who each received a one-time payment of US$70,000.

A stockholder plaintiff sued derivatively, alleging, among other things, that Israel Biotech and Arkin acted as a control group and that the notes transaction was not entirely fair to Ayala’s stockholders. The plaintiff did not first make a demand on the board, so under the familiar provisions of Court of Chancery Rule 23.1, in order to proceed, plaintiff had to plead that demand would have been futile. The Court ultimately found it had not.

Concessions Narrowed Demand Futility to Two Directors

Under the Delaware Supreme Court’s Zuckerberg test, demand is excused only if at least half of the board of directors (here, five of nine directors) (i) received a material personal benefit from the alleged misconduct, (ii) faces a substantial likelihood of liability, or (iii) lacks independence from someone who did or does.

The setup here narrowed the controversy to just two directors. Defendants conceded that three directors could not impartially consider a demand, and plaintiff conceded that four others could. The three the defense gave up were the directors most closely tied to the funds, Israel Biotech’s two co-founders and an Arkin executive. The plaintiff’s concessions proved more consequential. With only two directors left in play, the plaintiff had to disqualify both, while the defense needed just one to survive.

The two challenged board members were “Venture Advisors” of Israel Biotech, industry veterans the fund appointed to its portfolio company boards and publicly touted as “changing the equation” through hands-on involvement. In its briefing, the plaintiff leaned heavily on that label, and on an interview in which an Israel Biotech co-founder said Venture Advisors had “skin in the game” as investors in the fund. Chancellor McCormick concluded those allegations failed to satisfy any of Zuckerberg’s three categories:

• No material personal benefit. Plaintiff alleged that a 2019 news article suggested that the board members, as Venture Advisors, were limited partners in one of the Israel Biotech funds and therefore had a material financial interest. However, the Court found that (1) the vague “skin in the game” quote from that article did not establish whether the touted “skin” comprised interests in Israel Biotech itself (which could suggest a personal financial interest) or in its portfolio companies (which would not), (2) the plaintiff failed to allege the volume of their investments, and (3) even if it did, a vague 2019 press statement about Venture Advisors generally was not sufficiently particularized to demonstrate that these two directors had material interests. The Court also found that the US$70,000 closing payments did not change the analysis. Absent allegations that director compensation was excessive or material to the recipient, such fees do not create a conflict of interest; “Delaware law recognizes that directors will be paid a fair and reasonable amount.” Notably, three of the four directors whom the plaintiff conceded could impartially consider a demand received the same US$70,000 payment.
• No substantial likelihood of liability. The complaint contained no allegations specific to the two board members concerning the notes transaction, failing even to allege whether either director actually voted on it. The Court therefore found that, without particularized allegations about what either director actually did, “it is difficult to understand what liability either director faces.”
• No lack of independence. The plaintiff’s theory boiled down to the fact that the fund appointed the directors to the Ayala board and might appoint them to others. But the Court noted that Delaware has long held that appointment by an interested stockholder, standing alone, does not compromise a director’s independence.

Because the complaint failed to disqualify either director, the plaintiff could not show that at least half of the demand board was disabled. Demand therefore was not excused, and the Court dismissed the action.

Takeaways

A few practical points emerge from the decision:

• Sponsor marketing material disclosures are fair game. Though the complaint was dismissed, it is notable that nearly every allegation against the two directors came from the fund’s own materials: its marketing presentation describing Venture Advisors as “chang[ing] the equation” through hands-on involvement, and a co-founder’s 2019 press interview describing their “skin in the game.” Those allegations failed because the language was vague. However, a fund whose marketing or disclosures quantified its advisors’ fund economics could provide plaintiffs with more particularized allegations than were available here. Sponsors should assume that program descriptions, marketing decks, and executive interviews will be quoted back to them in demand-futility fights, and should describe advisor programs with that audience in mind.
• Particularized facts are important, not labels. Titles like “Venture Advisor,” marketing superlatives, and old press quotes are no substitute for particularized allegations about a specific director’s financial interests or conduct. Even an apparent limited partnership interest was not enough, where the complaint never alleged its size or materiality. If a complaint cannot say what a director owns, or even (as here) how the director voted, it is unlikely to survive.
• Board designees retain the presumption of independence. Appointment by a sponsor does not itself create a disabling conflict, and fund-appointed directors are not conflicted merely because their sponsor sits on the other side of a transaction and stands to benefit from it. Plaintiffs must instead plead concrete financial or personal ties showing the director is actually beholden to the interested party.
• Reasonable compensation does not raise a conflict. Ordinary director fees, even ones tied to a deal at issue, do not establish a conflict absent particularized allegations of excessiveness or materiality to the recipient.
• Conceding impartiality can affect outcomes. Demand futility is director-by-director arithmetic. Every director a party declines to contest changes what the other side must prove. The defense conceded the three directors most closely tied to the funds and still held the stronger position. A party deciding which directors to concede is also deciding how many must-win arguments it keeps.

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