Delaware Business Litigation Report

Supreme Court Explains Its Rossette Decision

Gatz v. Ponsoldt, C.A. No. 298 (Del. Supr., April 16, 2007).

The dividing line between what is a derivative suit and what claims may be filed directly on behalf of stockholders is undergoing a rapid development in Delaware. This decision is the latest in that recent line of decisions.

This decision makes it clear that under the recent Rossette decision, claims for dilution may be filed by a class of stockholders whose interest in the entity have been diluted by the issuance of stock to "a significant or controlling stockholder'" in a dilutive transaction.  Before Rossette, it was generally thought those claims belonged to the entity that did not get fair consideration for its stock and thus, were derivative claims only.

The decision is also noteworthy for its treatment of two transactions that the Court held should be treated as if they were just a single event. While the Court does not mention it, this is another case where the much revered doctrine of independent legal significance takes a beating. Under that doctrine, transactions that were permitted under a legal method approved by a specific section of the Delaware General Corporation Law were treated as valid even if they might have run afoul of other provisions of the Code.

While that doctrine had no direct application here, the decision does collapse two transactions on the basis that to hold them separate would be inequitable. That is a result that few would have predicted under prior law.

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