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Court Of Chancery Explains When Claim Is Direct And Survives A Merger

Posted In Fiduciary Duty

In re Straight Path Communications Inc. Consolidated Stockholder Litigation, C.A. No. 2017-0486-SG (Del. Ch. June 25, 2018)

When a merger closes, stockholders of the acquired company generally lose standing to pursue claims, other than direct claims attacking the validity or fairness of the merger itself. Derivative claims, as chose in actions, pass to the purchaser. This is an important decision because it reconciles prior case law regarding when a claim is direct and not derivative and thus survives a merger.

When a controlling stockholder uses its power to approve a merger while extracting special benefits for itself, it deprives the other stockholders of a benefit they would have received in the transaction. Hence, a claim arising out of this type of situation is one belonging directly to the minority stockholders and it survives closing. This principle is not always easy to apply, however. Delaware case law arguably has not always been consistent in deciding whether an alleged special benefit was or was not part of the merger consideration that would otherwise have gone to the stockholders as a group. This decision attempts to harmonize prior case law.