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Portions of Lawsuit Alleging Breach of Fiduciary Duty and Waste Dismissed Based Res Judicata, Laches, and Failure to State a Claim

Posted In Fiduciary Duty
Orloff v. Shulman, C.A. No. 852-N, 2005 WL 3272355 (Del. Ch. Nov. 23, 2005). Dissident shareholder group filed individual and derivative complaint alleging that director defendants violated their fiduciary duties and committed waste by mismanaging and misappropriating corporate assets and by disseminating misleading information to the corporation's minority shareholders. Complaint further alleged that Defendants self-interestedly adopted an advancement bylaw and exculpatory charter provision. Defendants moved to dismiss based on res judicata, laches, lack of standing, forum non conveniens, failure to state a claim, and failure to plead facts excusing demand under Court of Chancery Rule 23.1. The court dismissed outright Plaintiffs' claim challenging the amendments to the corporation's bylaws and certificate of incorporation for failure to state a claim. The court noted that bylaw amendments mandating litigation advances are a fundamental part of Delaware's policy to encourage qualified people to serve as corporate directors and that bylaw amendments are presumed valid unless they are unreasonable. The court further stated that there mere fact that a director is in immanent danger of being sued does is not sufficient to establish that he or she was interested. The court also dismissed several of Plaintiffs' claims alleging mismanagement and misappropriation of corporate assets. Specifically, the court found that an allegation that Defendants misappropriated the corporation's headquarters for their personal use was previously raised and adjudicated in a New York action litigated by two of the Plaintiffs and therefore barred by res judicata. The court further found that Plaintiffs' challenge to an approximately 20-year-old transaction between the corporation and one of its then-bankrupt subsidiaries both failed to state a claim based on its approval by the bankruptcy court and was also barred by laches. The court ultimately allowed a majority of Plaintiffs' mismanagement and misappropriation claims (and all of Plaintiffs' disclosure claims) to proceed on the grounds that Plaintiffs had pled sufficient facts to support those allegations. In doing so, the court rejected the argument that Plaintiffs lacked standing to bring any claims based on their divestiture of approximately 95% of their equity interest in the corporation just prior to filing the lawsuit. The court also summarily rejected Defendants' arguments relating to forum non conveniens and failure to plead facts excusing demand under Court of Chancery Rule 23.1. Share

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