Delaware Business Litigation Report

Court of Chancery Explains the "Parnex Exception"

In re NYMEX Shareholders Litigation, C.A. 3621-VCN (September 30, 2009).

When is a claim that the merger was unfair a derivative and not a direct claim? This is a perplexing question under Delaware law. Generally, a claim that the merger price is too low because management manipulated the process to drive down value is derivative, because the claim asserts it is the company that was hurt by the actions taken. When, however, the price was unfairly reduced by the actions of a corporate fiduciary, then the so-called "Parnex exception" may apply, and a direct stockholder class action may be brought.

This decision explains the Parnex Exception. In general, a direct claim may be brought when the alleged breach of fiduciary duty was intended to benefit a particular fiduciary at the expense of all the other stockholders. The breach of duty must be directly connected to the reduced price, however, and any large gap in time may be fatal to the direct claim.

Keep in mind that all claims challenging a merger are not derivative, and it is only because this was an entrenchment claim that the court held it was derivative. This points out the importance of picking your legal theory wisely. A mistake can cost you the case in this complicated area.

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