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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 177 posts in Derivative Claims.
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.
This derivative action arose out of Uber’s acquisition of a self-driving vehicle firm named Otto, which involved former Google employees. Google sued Otto and Uber for alleged intellectual property infringement, resulting in Uber settling the dispute for $245 million. The plaintiff sued Uber’s directors for the acquisition, claiming they should have known better than to rely on their CEO’s promotions of the deal and his representations regarding the company’s due diligence findings under the circumstances.
This decision grants the defendants’ motion to dismiss under Court of Chancery Rule 23.1 pre-suit demand-on-the-board grounds. Applying recognized legal principles for that analysis, the Court held that the complaint lacked the necessary particularized allegations showing that pre-suit demand on the board would have been futile. In this regard, the plaintiffs’ allegations and argument had focused on the directors’ failure to inform themselves of specific due diligence findings rather than relying on management’s discussions of those issues, citing management’s alleged history of causing the company to engage in other misconduct as a supposed “red flag.” According to the Court, however, plaintiff alleged at most an exculpated duty of care claim, not a breach of the duty of loyalty. Central to the Court’s reasoning was the absence of other known misconduct involving the type of misconduct at-issue in the acquisition—the misappropriation of intellectual property. According to the Court, a board’s alleged awareness of an executive’s supposed bad character “is not a sufficient red flag … to convert a plain vanilla duty of care allegation into a persuasive pleading of bad faith on the part of the directors.” Under Delaware law, “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.”
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 ›