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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 180 posts in Derivative Claims.
Chancery Follows Recent Precedent Finding Pre-Suit Correspondence to be a Litigation Demand, Dismisses Derivative Complaint for Failure to Allege Wrongful Refusal
Incorporating the analysis set forth in Solak ex rel Ultragenyx Pharmaceutical, Inc. v. Welch, 2019 WL 5588877 (Del. Ch. Oct. 30, 2019), the Court of Chancery again dismissed a derivative complaint under Rule 23.1 after finding that the plaintiffs’ pre-suit correspondence was a litigation demand. More ›
This case exemplifies the Delaware courts’ approach to examining demand futility. In 2016, Uber Technologies, Inc. (“Uber”) acquired Ottomotto LLC (“Otto”), a company started by a contingent of employees from Google’s autonomous vehicles group, in order for Uber to gain expertise in developing autonomous vehicles. The shareholder-plaintiff brought a claim, on behalf of Uber, against some of Uber’s directors. The plaintiff alleged that Uber’s directors ignored the risks presented by Otto’s alleged theft of Google’s intellectual property, which eventually led to Uber paying a settlement of $245 million to Google and terminating its employment agreement with Otto’s founder. More ›
Uber Board Was Disinterested and Independent to Assess a Pre-Suit Demand for Acquisition of Google Program
Uber Technologies’ board approved the acquisition of Google’s more mature autonomous vehicle program. The transaction was high risk and flawed from its inception, ending in embarrassment after Uber learned that key employees hired from Google had misappropriated Google’s proprietary information in the autonomous vehicle program. Uber issued $245 million in its stock to settle Google’s misappropriation claims. An Uber stockholder brought derivative claims against the Uber directors who approved the acquisition of Google’s autonomous vehicle program. More ›
Chancery Addresses Discovery and Privilege Implications of Oracle Special Litigation Committee’s Decision to Defer to Stockholder-Plaintiff’s Prosecution of Derivative Claims
In this decision, the Delaware Court of Chancery considered the implications of a decision by a special litigation committee of Oracle Corporation to cede control of derivative claims to a stockholder-plaintiff – including whether that decision required the production of Oracle’s privileged documents that were provided to the committee and its counsel. More ›
Venture Capital Firms Did Not Constitute a Control Group Barring Stockholder Direct Claims for Dilution
To avoid demand futility and standing requirements for a derivative claim, the plaintiff stockholders in Sheldon v. Pinto Technology Ventures, No. 81, 2019 (Del. Oct. 4, 2019) attempted to plead a direct claim for dilution of their voting and economic interests by alleging that several venture capital firms constituted a “control group” of stockholders under Gentile.
Dilution claims are “classically derivative” under Delaware corporate law. In Gentile v. Rossette, 906 A.2d 91 (Del. 2006), the Delaware Supreme Court recognized an exception that dilution claims can be both derivative and direct in character when: “a stockholder having majority or effective control causes the corporation to issue ‘excessive’ shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and the exchange causes an increase in the percentage of the outstanding shares owned by the controlling stockholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders.” More ›
Chancery Finds Request for “Corrective Action” to be a Litigation Demand, Dismisses Derivative Claims for Failure to Plead Wrongful Refusal
Under the Delaware Supreme Court’s decision in Spiegel v. Buntrock, 571 A.2d 767 (Del. 1990), a stockholder who makes a demand upon the board to address potential wrongdoing concedes that the board may properly decide whether to cause the corporation to bring suit. That concession makes it more difficult to satisfy pleading standards in a later derivative suit. In this recent decision, the Court of Chancery reviewed the law in this area and concluded that – despite a disclaimer to the contrary – the plaintiff’s pre-suit letter was a litigation demand. More ›
Delaware Supreme Court Provides Additional Guidance on Pleading Direct Claims Against Controllers and Control Groups
The Delaware Supreme Court affirmed the Court of Chancery’s dismissal of an alleged direct claim for dilution of the voting and economic interests of plaintiff stockholders because they failed to adequately plead that several venture capital firms constituted a “control group.” The Court began its analysis with a review of the standard for a controller or control group under Delaware law. In Gentile v. Rossette, 906 A.2d 91 (Del. 2006), the Court ruled that multiple stockholders can constitute a control group if they are connected in some legally significant way, such as by contract or other agreement, or working together towards a shared goal. The Court noted the guideposts that define a “control group” established by In re Hansen Medical, Inc. Stockholders Litigation, 2018 WL 3025525 (Del. Ch. June 18, 2018) and van der Fluit v. Yates, 2017 WL 5953514 (Del. Ch. Nov. 30, 2017). More ›
Chancery Denies Motion for Reargument, Finding No Change to Delaware Legal Principles for Existence of “Control Group” of Stockholders
Delaware courts recognize that a group of stockholders can constitute a “control group” when those stockholders “are connected in some legally significant way—such as by contract, common ownership, agreement, or other arrangement…” and work together toward a shared goal. Sheldon v. Pinto Tech. Ventures, L.P., 2019 WL 4892348, at *4 (Del. Oct. 4, 2019) (citing Dubroff v. Wren Hldgs., LLC, 2009 WL 1478697, at *3 (Del. Ch. May 22, 2009)). Under such circumstances, the control group stockholders may owe fiduciary duties to the corporation’s minority stockholders. Where a minority stockholder adequately pleads (1) the existence of a control group; and (2) a self-dealing breach of fiduciary duties by that control group, the minority stockholder’s claims may be both direct and derivative. Gentile v. Rossette, 906 A.2d 91, 99-100 (Del. 2006). In Silverberg v. Padda, Plaintiffs argued that they had alleged a direct claim by pleading that a control group of stockholders had breached fiduciary duties by approving alleged dilutive preferred stock issuances. After the Court dismissed this claim based on Plaintiffs’ failure adequately to allege a control group, as opposed to mere parallel action, Plaintiffs asserted in a motion for reargument that the Delaware Supreme Court’s recent Sheldon opinion had established a new legal principle to assess the existence of a control group. The Court disagreed, ruling that Sheldon had reaffirmed the Dubroff standard that the Court had applied in dismissing Plaintiffs’ claims. See Morris James blog post of October 14, 2019 (discussing the Court’s earlier decision). The Court re-affirmed its holding that Plaintiffs’ allegations did not suffice to allege a control group because the agreement between the allegedly controlling stockholders (1) did not relate to the challenged transaction; (2) included persons other than the purported control group members; and (3) did not bind the signatories with respect to their votes on the challenged transaction. Because the Court determined that Sheldon did not affect the Court’s holding that such allegations do not suffice to establish a control group, the Court denied Plaintiffs’ motion for reargument.
Chancery Denies Former Derivative Plaintiff Standing to Challenge Merger That Extinguished Derivative Claims
When a stockholder derivative claim is extinguished in a merger, the former derivative plaintiff may have standing to contest the merger directly on the ground that the entity’s fiduciaries permitted a material litigation asset to be extinguished in the merger process without value to the stockholders. In the well-known precedent In re Primedia Stockholders Litigation, 67 A. 3d 455 (Del. Ch. 2013), the Court of Chancery established a three part standing test: 1) Was the underlying claim viable? 2) Was its value material in light of the merger consideration? 3) Did the company fail to receive value for the claim in the merger because the buyer would not be willing to pursue it? Applying this test, here the Court ruled that the former unitholder and derivative plaintiff lacked standing to attack the merger and dismissed the claim. More ›
Chancery Rejects Attempt to Allege Gentile v. Rossette Direct Claims for Dilutive Preferred Stock Issuances
The Court of Chancery held that plaintiff common stockholders’ fiduciary duty claims challenging the company’s overpayment for dilutive preferred stock issuances were derivative in nature because plaintiffs failed to adequately plead the existence of a controller or control group that benefited at the expense of the minority stockholders. The Court evaluated the common stockholders’ arguments under the standard set forth by Gentile v. Rossette, 906 A.2d 91 (Del. 2006), which provides that minority stockholders may seek direct relief for dilution claims when a controller or control group benefits at the expense of the minority stockholders’ economic and voting rights. Gentile requires that a plaintiff plead facts sufficient to establish that a control group’s members are connected in some “legally significant way” and work together toward a shared goal, such as voting or other decision making. The Court also relied upon Dubroff v. Wren Holdings, which emphasized that the existence of a control group does not require a formal contract, but there must be some indicia of an actual agreement that amounts to more than mere parallel interests among the group members. More ›
Blue Bell Creameries: Chancery Finds Zapata Committee to Address Derivative Claims is not Available to Conflicted General Partner
In Zapata v. Maldonado, 430 A.2d 779 (Del. 1981), the Delaware Supreme Court established that, even where a derivative plaintiff adequately pleads demand futility, a corporation may retain control over derivative claims by delegating authority to a committee of independent directors. In this recent decision, the Court of Chancery applied principles of agency law to hold that, at least without prior authorization in a limited partnership agreement, a conflicted corporate general partner generally may not make a similar delegation, because the general partner is a “principal” who inherently retains control over its committee, the “agent.” More ›
Chancery Dismisses Derivative and Direct Claims Claims Upon Finding Shareholder Plaintiffs Sold Shares Without Preserving Rights to Continue to Assert Direct Claims
It is well-settled in Delaware that a stockholder seeking to pursue derivative claims must own shares at the time of the wrong and continuously through the life of any litigation. Similarly, direct claims based on injury to the shares generally pass to a buyer. These principles, in combination with the public policy against issuing advisory opinions, mean that stockholders who sell all their shares and any right, title and interest in those shares after initiation of litigation generally will lose their standing to assert claims based on injury sustained as a shareholder or to those shares. The Delaware Court of Chancery applied those principles in Urdan v. WR Capital, C. A. No. 2018-0343-JTL (Del. Ch. August 19, 2019) and dismissed claims of breach of fiduciary duty and self-dealing because the stockholder-plaintiffs sold all of their shares after initiation of the litigation and thus lost standing to pursue their claims both derivatively and directly. What makes this case particularly interesting was how the court determined that plaintiffs’ effort through a settlement agreement to preserve at least the direct claims by contract was ineffective due to the failure to incorporate by reference that preservation of rights in a companion Repurchase Agreement by which plaintiffs in fact sold their shares. More ›
Delaware courts typically apply the McWane first-filed doctrine to stay a later-filed Delaware case in favor of a case already pending in another jurisdiction involving substantially the same parties and issues. In this instance, Alphabet, Inc., a Delaware corporation, and the director defendants, relying on McWane and forum non conveniens, sought to stay or dismiss a second-filed Delaware stockholder derivative action in favor of a first-filed action in California raising similar breach of fiduciary duty and failure of oversight claims. Both litigations arose from alleged workplace harassment at Google by officers and similar allegations against executives and directors of its parent, Alphabet. At oral argument, Vice Chancellor Glasscock, from the bench, rejected the forum non conveniens argument, and explained in this opinion “it is difficult to imagine a derivative litigation involving a Delaware corporation, and alleging breaches of fiduciary duty by corporate directors or officers of that Delaware corporation, that is nonetheless subject to dismissal on forum non conveniens grounds; if such an animal exists, it is absent from the menagerie before me here.” The Court also exercised its discretion to deny the stay motion because (i) the McWane first-filed rationale carries less weight in the context of derivative actions, where Delaware’s interest in promoting well-crafted derivative complaints is more important than filing speed; (ii) the proceedings to date in California were limited to disputes over consolidating related actions and appointing lead counsel; and (iii) Delaware has a higher interest than California in applying Delaware’s common law of corporations and fiduciary duty to the novel issues of corporate law involved in the litigation.
Recently, the Delaware Supreme Court held in In re Investors Bancorp, Inc. Stockholder Litigation, 177 A.3d 1208 (Del. 2017) that stockholder approval of director self-compensation plans will shift the standard of review from entire fairness to business judgment only where the stockholders approve a plan that does not involve future director discretion in setting the compensation amounts. In Stein, the Court of Chancery applies Investors Bancorp and declines to dismiss a disloyal compensation claim, notwithstanding that the terms of the challenged compensation plans sought to absolve the directors of self-dealing claims and even though the plaintiff attacked only the compensation amount, not the process by which it was determined. More ›
Chancery Addresses the Direct and Derivative Claim Distinction and Demand Futility in the LLC Context
Plaintiff sued Defendants, who were supposed to manage the parties’ limited liability company, directly and derivatively for breaching the LLC agreement, and derivatively for breaching their fiduciary duties. In this decision, the Court of Chancery denies Defendants’ motion to dismiss and addresses, among other things, the direct versus derivative claim distinction under the Tooley test and demand futility under the Aronson v. Lewis test in the LLC context. Here, the LLC managers were deemed interested because they stood on both sides of the challenged transactions—i.e., the allegations that they stole millions from the LLC for themselves, for their other companies, for one of their spouses, and for one of their spouses’ companies. Thus, demand was futile as to the derivative claims, which also adequately stated viable causes of action under less stringent Rule 12(b)(6) standards.