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Court of Chancery Limits Dilution Claims

Feldman v. Cutaia, C.A. No. 1656-VCL (August 1, 2007), affrimed, Del Supr. (May 30, 2008).

Classifying a claim as derivative has big consequences. Among those is that the claim is then subject to the continuous ownership rule that requires the plaintiff to hold his shares throughout the litigation to maintain his standing. A merger that eliminates the plaintiff's ownership thus also eliminates his ability to proceed with a derivative suit.

In an effort to avoid this problem, plaintiffs that bring dilution claims asserting their interests have been wrongfully diminished need to fit into an exception to the general rule that dilution claims are derivative. This decision illustrates the limits on such claims. Basically, a dilution claim is derivative unless the claim is that a controlling stockholder has wrongly diluted the interests of the minority stockholders. For this purpose, "control" means having a greater than 50% interest or active domination of a board. Moreover, it is not possible to aggregate the stock holdings of a group of stockholders to get over the 50% threshold.

This opinion also discusses the exceptions to the general rule that a merger deprives a stockholder of standing, such as when the merger itself is an attempt to fraudulently end the derivative suit. It also notes that aiding and abetting claims based on derivative claims are themselves also derivative and subject to the same standing rules.



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