Carsanaro v. Bloodhound Technologies, Inc., 65 A.3d 618 (Del. Ch. 2013)


[*655] To determine whether a claim is derivative or direct, this Court must consider ‘‘(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?’’ Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del.2004). Although each question is framed in terms of exclusive alternatives (either the corporation or the stockholders), some injuries affect both the corporation and the stockholders. If this dual aspect is present, a plaintiff can choose to sue individually.

[*657] In Gentile, the Delaware Supreme Court acknowledged the dual character of dilutive issuances and held that ‘‘[t]here is TTT at least one transactional paradigm―a species of corporate overpayment claim― that Delaware case law recognizes as being both derivative and direct in character.’’ 906 A.2d at 99 (footnote omitted). A breach of fiduciary duty claim having this dual character arises where: (1) a stockholder having majority or effective control causes the corporation to issue ‘‘excessive’’ shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and (2) the exchange causes an increase in the percentage of the outstanding shares owned by the controlling stockholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders. Because the means used to achieve that result is an overpayment (or ‘‘over-issuance’’) of shares to the controlling stockholder, the corporation is harmed and has a claim to compel the restoration of the value of the overpayment. That claim, by definition, is derivative. But, the public (or minority) stockholders also have a separate, and direct, claim arising out of that same transaction. Because the shares representing the ‘‘overpayment’’ embody both economic value and voting power, the end result of this type of transaction is an improper transfer―or expropriation―of economic value and voting power from the public shareholders to the majority or controlling stockholder. For that reason, the harm resulting from the overpayment is not confined to an equal dilution of the economic value and voting power of each of the corporation’s outstanding shares. A separate harm also results: an extraction from the public shareholders, and a redistribution to the controlling shareholder, of a portion of the economic value and voting power embodied in the minority interest. As a consequence, the public shareholders are harmed, uniquely and individually, to the same extent that the controlling shareholder is (correspondingly) benefited. In such circumstances, the public shareholders are entitled to recover the value represented by that overpayment―an entitlement that may be claimed by the public shareholders directly and without regard to any claim the corporation may have. Id. at 99–100 (footnotes omitted).

This Court has struggled with how to interpret Gentile and its potential to undercut the traditional characterization of stock dilution claims as derivative. …

In my view, the Delaware Supreme Court’s decisions preserve stockholder standing to pursue individual challenges to self-interested stock issuances when the facts alleged support an actionable claim for breach of the duty of loyalty. Standing will exist if a controlling stockholder stood on both sides of the transaction. Standing will also exist if the board that effectuated the transaction lacked a disinterested and independent majority. Standing will not exist if there is no reason to infer disloyal expropriation, such as when stock is issued to an unaffiliated third party, as part of an employee compensation plan, or when a majority of disinterested and independent directors approves the terms. The expropriation principle operates only when defendant fiduciaries (i) had the ability to use the levers of corporate control to benefit themselves and (ii) took advantage of the opportunity.

With this understanding, the complaint pleads a direct claim.

Applying Gentile in this fashion does not undermine the distinction between (i) controllers under Kahn v. Lynch Communication Systems, Inc., 638 A.2d 1110 (Del.1994) (‘‘Lynch ’’), and (ii) directors who collectively hold a significant block of common stock and vote in favor of a transaction. ‘‘[T]he Lynch line of jurisprudence [ ] has been premised on the notion that when a controller wants the rest of the shares, the controller’s power is so potent that independent directors and minority stockholders cannot freely exercise their judgment, fearing retribution from the controller.’’ In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006). Because of the controller’s influence, entire fairness has been held to apply ab initio, and the use of a single procedurally protective mechanism, such as a special committee or majority of the minority vote, does not restore the business judgment rule.

Although in a case challenging a dilutive stock issuance the Tooley questions can be answered with ‘‘either’’ or ‘‘both,’’ here the case focuses primarily on injury at the stockholder level and seeks a remedy that will operate at the stockholder level. The claims against the Series D and E Financings are therefore direct.

  • 志谷匡史「株主訴訟とspecial injury概念—Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004)」商事1753号64–67頁(2005)

  • 宮崎裕介「少数派株主から支配株主への不当な利益移転と直接訴訟提起の可否(米国会社・証取法判例研究No. 243)—Gentile v. Rossette, 906 A.2d 91 (Del.2006)」商事1820号44–49頁(2007)

  • 宮崎裕介「不公正な事業譲渡についての支配株主の責任と直接訴訟提起の可否(米国会社・証取法判例研究No. 251)」商事1841号53–58頁(2008)

  • 村上康司「企業買収における取締役の賠償責任(2)」立命2009年1号45頁,78–84頁(2009)

  • 宮崎裕介「ストック・オプションの発行により生じた既存株主の損害と直接訴訟による救済の可否(米国会社・証取法判例研究No. 291)—Feldman v. Cutaia, 951 A.2d 727 (Del. 2008).」商事1953号58–62頁(2011)

via Delaware Business Litigation Report, Fares v. Lankau, No. 12-1381-SLR (August 15, 2013)