Delaware Business Litigation Report

Court of Chancery Grants Defendants' Motion to Dismiss Where Plaintiffs Asserted Derivative, Not Direct, Claim and Failed to Make Demand or Establish Demand Was Excused

Gatz v. Ponsoldt, C.A. No. 174-N, 2006 WL 1510467 (Del. Ch. May 26, 2006). Plaintiffs asserted direct claim arising from recapitalization. Defendants moved to dismiss, arguing that Plaintiffs' claim was actually derivative, not direct, and Plaintiffs had failed to make demand or establish demand was excused. Plaintiffs were shareholders of Regency Affiliates, Inc. ("Regency"). Plaintiffs claimed that a transaction between two of Regency's subsidiaries was a sham. Although the transaction was unwound, Plaintiffs claimed that the defendants exploited the conditions of the sham transaction to orchestrate a recapitalization of Regency. Plaintiffs alleged that this recapitalization benefited Regency's CEO and Chairman at the expense of the minority shareholders. Plaintiffs did not make demand on the board or argue that demand was excused. Defendants moved to dismiss the complaint. The Court held that the Plaintiffs' claim was derivative under Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). If the plaintiffs succeeded at trial, the remedy would be to unwind the recapitalization and return some or all of the funds to Regency. This remedy would benefit Regency, not the shareholders individually. Accordingly, the Court granted the defendants' motion to dismiss. Share