Supreme Court Clarifies Tooley
Gentile v. Rossette
, C.A. No. 573, 2005 (Del. Supr. August 17, 2006).
This Delaware Supreme Court decision significantly clarifies the Court's Tooley
decision that governs when a claim is a derivative claim. Because a derivative claim must meet significant pleading requirements under Court of Chancery Rule 23.1, this decision affects much of the corporate litigation in the Delaware Court of Chancery and merits careful reading.
Generally, under the Tooley
decision it was thought that all claims asserting that the issue of stock was for unfair consideration would be considered derivative because these "dilution" claims only hurt the corporation by reducing what it had received for its stock. That general wisdom is now wrong under this new decision.
involved the purchase of the company's debt to the majority stockholder and CEO for what the plaintiff alleged was too much company stock. The company then merged into another entity that subsequently went bankrupt. Holding that this claim only hurt the company who allegedly paid too much to retire its debt, the Court of Chancery dismissed the claim as derivative.
The Supreme Court disagreed. Instead, that Court held: (1) because other stockholders besides the CEO lost an unfair percentage stake in the entity, they were uniquely harmed in an economic sense and (2) the minority stockholders' voting power was reduced when the CEO received too many shares.
Further, the Court also noted that even under the Tooley
rules, only the former minority stockholder could collect on any damage award. The company had been liquidated already.