Posts in Derivative Claims

Chancery Denies Former Derivative Plaintiff Standing to Challenge Merger That Extinguished Derivative Claims

Morris v. Spectra Energy P’tners (DE) GP, LP, C.A. No. 2019-0097-SG (Del. Ch. Sept. 30, 2019).

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 ›

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Chancery Rejects Attempt to Allege Gentile v. Rossette Direct Claims for Dilutive Preferred Stock Issuances

Silverberg v. Padda, C.A. No. 2017-0250-KSJM (Del. Ch. Sept. 19, 2019).

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 ›

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Blue Bell Creameries: Chancery Finds Zapata Committee to Address Derivative Claims is not Available to Conflicted General Partner

Wenske v. Blue Bell Creameries, Inc., C. A. No. 2017-0699-JRS (Del. Ch. Aug. 28, 2019).

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 ›

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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 ›

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Chancery Declines to Stay or Dismiss Second-Filed Derivative Suit Against Google’s Parent Company

Irving Firemen’s Relief and Ret. Fund v. Page, C.A. No. 2019-0355-SG (Del. Ch. Jul. 1, 2019).

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.

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Chancery Declines to Dismiss Derivative Claim Challenging Compensation of Goldman Sachs Directors

Stein v. Blankfein, C.A. No. 2017-0354-SG (Del. Ch. May 31, 2019).

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 ›

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Chancery Addresses the Direct and Derivative Claim Distinction and Demand Futility in the LLC Context

Stone & Paper Investors LLC v. Blanch, C.A. No. 2018-0394-TMR (Del. Ch. May 31, 2019).

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.

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Chancery Ends Trip for Uber Derivative Lawsuit

McElrath v. Kalanick, C.A. No. 2017-0888-SG (Del. Ch. Apr. 1, 2019).

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.”

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Chancery Addresses Pre-Suit Demand Refusal Standard for Special Committees

City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, C.A. No. 2017-0341-KSJM (Del. Ch. Feb. 12, 2019).

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 ›

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Court of Chancery Declines to Expand Dual-Natured Direct and Derivative Claims Under Gentile

Klein v. H.I.G. Capital LLC, C.A. No. 2017-0862-AGB (Del. Ch. Dec. 19, 2018)

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 ›

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Court Of Chancery Limits Zapata Test To Properly Filed Complaint

Busch v. Richardson, C.A. 2017-0868-AGB (November 14, 2018)

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.

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Court Of Chancery Dismisses Complaint Alleging Aiding and Abetting Claim

Tilden v. Cunningham, C.A. 2017-0837-JRS (October 26, 2018)

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.

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Delaware District Court Applies Delaware Demand Standards

Butorin v. Blount, C.A. No. 15-283-LPS (D. Del. September 30, 2018)

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.

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Court Of Chancery Declines To Approve Derivative Settlement

Stein v. Blankfein, C.A. 2017-0354-SG (October 23, 2018)

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.

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Court Of Chancery Explains Limits On Duty To Know

Marchland v. Barnhill, C.A. 2017-0586-JRS (September 27, 2018)

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.

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