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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 164 posts in Derivative Claims.
Under Delaware law, stockholders who wish to pursue a derivative claim on the corporation’s behalf face an important decision—whether to make a pre-suit demand on the board to handle the suit itself, or bring the suit oneself and plead that the board cannot disinterestedly and independently consider a pre-suit demand under the circumstances. Neither path is easy. More ›
Under the Delaware Supreme Court’s Gentile decision, a claim may be dual-natured, meaning partially derivative on behalf of the corporation and partially direct on behalf of the stockholder. One allure for plaintiffs of successfully pleading a dual-natured claim is avoiding the pre-suit demand-on-the-board requirements for purely derivative claims. So it is not uncommon for plaintiffs to try to plead and argue into Gentile. But Gentile has been limited to claims involving deals with a controlling stockholder that unfairly dilute the other stockholders of both economic and voting rights. The Delaware Supreme Court recently clarified that in its El Paso decision. And Delaware courts have been cautious in applying Gentile of late. More ›
A derivative complaint that meets the demand requirements of Rule 23.1 may be subject to later dismissal at the request of a properly formed and functioning special committee under the Zapata decision. Of course, such a request is subject to special scrutiny by the Court. This decision holds that Zapata does not apply in other contexts, such as when a plaintiff has been misled into making a pre-suit demand under the mistaken belief the Board was capable of making a Zapata-like decision.
This is an interesting decision for many reasons. It includes a comprehensive analysis of when demand on a board is not excused, when ignoring a forum selection clause constitutes prejudice sufficient to invoke a laches defense and why a named plaintiff cannot also be the attorney on the complaint. Perhaps its more lasting impact will be its holding that when directors are exculpated by a 102(b)(7) defense there cannot be an aiding and abetting claim against a third party who facilitated the actions alleged to be a breach of fiduciary duty.
In this decision, the Delaware Federal District Court applied the Delaware tests for deciding if demand is excused by the facts alleged in a derivative complaint. In dismissing the complaint, the Court held that simply pleading the Board should have known of business problems is not enough to excuse demand. The decision also notes several other defects in the complaint.
This is the rare decision that declines to approve the settlement of a derivative suit. The Court rejected the settlement because the proposed terms required the corporation, as a nominal defendant, to release breach of fiduciary duty claims against the director defendants in return for which those directors would agree to make disclosures already required by law. The Court viewed that agreeing to do what you had to do anyway as providing no real consideration for the release of the claims. This result illustrates the scrutiny the Court of Chancery applies to such settlements that affect corporate and stockholder rights.
When something bad occurs in a business, it now seems inevitable that the directors may be sued. The most popular form of suit now seems to be a securities claim based on a failure to have disclosed the danger the entity faced that has now come home to do it harm. This decision shows why securities claims are in fashion for those events. For as it points out, there is not liability under Delaware corporate law for simply failing to prevent harm to the corporation. Something more is needed to show the directors acted in bad faith, such as a red flag warning of the need to act to prevent the harm. Thus, the decision dismissed a complaint that only alleged the directors did not do as much as might have been done to prevent the bad events from harming their entity.
Court of Chancery Clarifies Nature of Dilution Claims in Charter-Liberty Broadband Equity Issuance and Allows Derivative Challenge to Proceed
This is the second notable decision arising out of litigation involving Charter Communication’s equity issuance to its largest stockholder, Liberty Broadband, in connection with other transactions. More ›
Several Court of Chancery decisions discuss the appropriateness of staying a derivative action pending a related securities laws action. Doing so relieves a company from the tension of having to defend against allegations of wrongdoing carried out by its directors or officers while at the same time a stockholder is seeking to prove those same claims against its directors and officers on its behalf. A stay also has the advantage of allowing the existence and size of any damages to be firmly established. This is another decision to add to that line of authority.
The pre-suit demand on the board requirement for derivative litigation usually is not excused solely by a sufficiently pled disclosure violation. Rather, as held in this decision and recently in Steinberg v. Bearden, 2018 WL 2434558 (Del. Ch. May 30, 2018), to excuse demand on an independent, disinterested, and duty-of-care-exculpated board on the basis that the directors face a substantial risk of liability for a disclosure violation, the complaint must sufficiently plead the disclosure violation was the product of bad faith. Absent sufficient non-conclusory facts on this point, the complaint will be dismissed.
This is an interesting decision for its discussion of when pre-suit demand on the board is not excused for a derivative complaint alleging the directors made improper disclosures to stockholders. Applying the well-known Rales test for demand futility, the Court’s focus here was on the absence of particularized allegations from which it was reasonable to infer that a majority of the directors deliberately caused the corporation to issue certain allegedly misleading statements. When that is the case in a suit relying on a bad faith claim, the board doesn’t face a substantial threat of personal liability capable of excusing demand.
Delaware law requires a derivative plaintiff to make a pre-suit demand on the board unless excused as futile. Because some level of social and business ties are common among the director-class and because such ties to an interested party is one potential path to successfully alleging a director lacks independence to impartially consider a pre-suit demand, such relationships are an oft litigated topic in the demand context. Frequently, such connections even when considered collectively are found not to rise to a level negating a director’s ability to consider a demand. But, as this decision explains, sometimes they are. While each director-by-director assessment is a highly-factual question, this case is a worthwhile read to understand the type and magnitude of relationships that might call into doubt one’s independence.
Demand on directors is not required when it is alleged that they have violated a statute or rule. But when the claim is only that they violated the "best practices” suggested by an agency, that is not enough to excuse demand on the board.
This is an important decision clarifying the rules regarding the preclusive effect a dismissal of a derivative suit may have on a similar suit pending or brought later in Delaware. This litigation saga involving a bribery scandal at Wal-Mart took some interesting turns, ping-ponging between the Delaware Court of Chancery and the Delaware Supreme Court. More ›
This decision explains again that actual or constructive knowledge of persistent corporate wrongdoing is needed before there is a substantial likelihood the directors may be liable and thus demand is excused. The Chief Justice's modest dissent points out that the facts are not fully developed at the motion to dismiss stage and he thought the complaint was good enough to warrant further discovery. This points out a potential problem in Delaware law. It will be a rare case where the board of director minutes provide clear notice of bad corporate conduct without some sort of corrective measure also promised. How sincere those promises are is hard to gauge just based on the minutes. Hence, pleading a case good enough to survive a motion to dismiss is getting harder.