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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.

This decision declines to extend Gentile.  In it, the Court finds a preferred stock issuance does not satisfy Gentile’s economic dilution requirement, since the common stockholders retained their same percentage of ownership.  The decision also is a good example of how the Court examines a director’s self-interest in asking whether pre-suit demand is excused.  A continuing consulting contract may create a disqualifying interest.