Posts in Derivative Claims

Court Of Chancery Explains Limits Of The Dual Claims Rule

Dietrichson v. Knott, C.A. 11965-VCMR (April 19, 2017)

Under the well-known Brinckerhoff decision, a claim may be both a direct claim and a derivative claim. When that occurs the complaint need not comply with Rule 32.1 demand requirements. This decision points out that Brinckerhoff is very limited and only claims that involve a dilution of voting rights may be considered dual claims.

Share

Court Of Chancery Rejects Vague Demand Excusal Allegations

LVI Group Investment LLC v. NCM Group Holdings LLC, C.A. 12067-VCG (March 29, 2017)

This is an interesting decision because it applies the rules for determining when a derivative plaintiff, in the LLC context, has sufficiently alleged that pre-suit demand on the board would have been futile.   More ›

Share

Court Of Chancery Limits Cost Recovery Following Successful Appeal

In Re: El Paso Pipeline Derivative Litigation, C.A. 7141-VCL (February 16, 2017)

This decision explains what “costs” are recoverable under Court of Chancery Rule 54 following a successful appeal. While the amounts involved normally do not merit much discussion, the cost of bond for an appeal can be significant when the court below awards a large judgment, like in this case.  As this decision points out, the circumstances surrounding the posting of the bond may determine whether or not it was a “necessary” and therefore recoverable cost.

Share

Delaware Supreme Court Signals Due Process Might Prevent Dismissal Based On Demand Futility Issue Preclusion

California State Teachers Retirement System v. Alvarez, No. 295, 2016 (January 18, 2017)

When a derivative suit is dismissed for the failure to plead demand futility, does that also mean that any other pending derivative suit based on the same facts must be dismissed because the shareholders are precluded from relitigating the issue of demand futility? This is a particularly important question because the Delaware Court of Chancery has held that that issue preclusion applies and dismissal is required. Hence, defense counsel may well seek to obtain a fast dismissal in a favorable jurisdiction when the plaintiffs’ bar rashly files suit outside of Delaware. This Order by the Delaware Supreme Court, which remands such a dismissal for consideration of a Due Process argument, signals that issue preclusion might be inappropriate at the motion to dismiss stage under the circumstances.

Share

Court Of Chancery Explains Pleading Rules For A Caremark Claim

Horman v. Abney, C.A. 12290-VCS (January 19, 2017)

At first look, this decision seems to involve just another unsuccessful failure of oversight Caremark claim against directors. But it is worth reading because it outlines the various theories of a Caremark case and then explains when inferences of utterly ignoring one’s fiduciary duty may be inferred from otherwise neutral facts. The decision makes it clear that the Court will not infer the directors were told of wrongdoing just because wrongdoing occurred, and that once proper safeguards are put in place to avoid illegal actions, there is usually no duty to monitor the monitors without reason to suspect they are not working.

Share

Court of Chancery Explains Role of Records Demand in Alleging Wrongful Pre-Suit Demand Refusal

Andersen v. Mattel, Inc., C.A. 11816-VCMR (January 19, 2017)

This decision examines when pre-suit demand may be excused because the board who refused the demand declines to disclose the report of its investigation when responding. In this case, the board’s unwillingness to disclose the report was not sufficient, standing alone, to show the necessary gross negligence or bad faith in the board’s demand refusal, particularly when the plaintiff has not made a formal request for the report using its books and records rights under Section 220.

The decision is also a good review of what circumstances otherwise might be sufficient to show a board’s demand refusal was in bad faith. In short, where the board’s justifications for refusing the demand falls within the bounds of reasonable judgment, the refusal is not in bad faith.

Share

Del. Supreme Court Finds Demand Excused and Revives 'Zynga' Derivative Claim

Background

The derivative complaint alleged that Zynga's CEO, Chairman and controlling stockholder Mark Pincus, along with certain other top managers and directors were given an exception from the company's standing rule preventing insider sales until three days after an earnings announcement. The exception permitted the insiders to sell 20.3 million shares of stock for $236 million as part of a secondary offering. The insiders sold their shares for $12/share. Following the earnings announcement the market price dropped to $8.52 and following more negative news three months later dropped to $3.18, a 75 percent decrease from the offering price. The complaint alleged wrongdoing by the directors who approved the exception and those who participated in the sales. Of the company's nine directors, the Court of Chancery found that only the two directors who participated in the sale, Pincus & Hoffman, were interested and therefore could not impartially consider a demand. The Chancery Court rejected the argument that the facts alleged in the complaint were sufficient to create a reasonable doubt about the independence of director Siminoff because of an allegation that she was a "close family friend" of Pincus and had a business relationship with Pincus as co-owners of a private plane. The Chancery Court also rejected the argument that directors Doerr and Gordon lacked independence because of investment relationships they had with Zynga and Hoffman and Pincus. More ›

Share

Supreme Court Chips Away at Concept of Direct And Derivative Claims

Just in time for Christmas, on December 20, 2016, the Delaware Supreme Court issued a Christmas present – or lump of coal, depending on your view – in its opinion in El Paso Pipeline GP Company LLC v. Brinckerhoff.  In this opinion, the Supreme Court reversed the Court of Chancery’s opinion holding that claims of a limited partner challenging a drop down transaction between the general partner’s parent and the partnership as a breach of the limited partnership agreement were direct, and therefore survived the merger of the limited partnership after trial with a third party.  The Court of Chancery had awarded $171 million in damages for the breach.  The general partner had argued that the merger extinguished the limited partners’ claims. More ›

Share

Court Of Chancery Examines Whether Derivative Demand Was Wrongfully Refused

Zucker v. Hassell, C.A. 11625-VCG (November 30, 2016) and Kops v. Hassell, C.A. 11982-VCG (November 30, 2016)

Even after a board rejects a plaintiff-stockholder’s demand to bring a derivative litigation, the plaintiff may proceed to bring that derivative action if the plaintiff can show the refusal was “wrongful.”  Having conceded that the directors were not “interested” in the subject of the demand by making the demand rather than suing and trying to allege demand futility, the plaintiff must show that the decision to refuse the demand was a bad faith breach of the duty of loyalty, or a grossly negligent breach of the duty of care.  These two related decisions examine whether plaintiffs met the high bar of sufficiently alleging wrongful refusal.  They illustrate, for instance, how it might not be enough that an investigation proved wrong, or that the company subsequently agreed to a large settlement arising out of the investigated events.

Share

Delaware Supreme Court Finds Pre-Suit Demand Was Excused

Sandys v. Pincus, No. 157, 2016 (December 5, 2016)

When a stockholder files a derivative suit she can avoid dismissal under Rule 23.1’s pre-suit demand-on-the-board requirement by showing that a majority of the directors were not independent enough to fairly consider her demand that the corporation itself file the suit.  This decision clarifies how to decide if a board member is sufficiently independent to fairly consider such a demand.  Briefly, at least two factors will be relevant: close social connections to the target of the suit, and disqualification under the NASDAQ tests for independence. There is no single test that controls, although either one of the aforementioned relationships may be disqualifying under the right circumstances, as the Court found them to be in this case.

Share

Court of Chancery Explains When Corporate Overpayment Claims Require Demand Futility

Chester County Employees’ Retirement Fund v. New Residential Investment Corp., C.A. 11058-VCMR (October 7, 2016)

The issuance of additional stock in exchange for less than fair value typically is a harm falling on the company, and hence gives rise to a derivative claim.  But, such a claim might be dual natured – partially direct and partially derivative – when a controlling stockholder has been benefited, or where the board is not independent.  The question for dual-natured claims is whether they remain subject to the usual Rule 23.1 test for derivative claims: is pre-suit demand on the board excused?  Here, Vice Chancellor Montgomery-Reeves adopts the view endorsed by Vice Chancellor Laster in In re El Paso Pipeline Partners, L.P. Derivative Litigation, 132 A.3d 67, 75, 105 (Del. Ch. 2015), and applies the Rule 23.1 test to dual-natured corporate overpayment claims.  Had the issue been whether the claims were extinguished by a merger, then the Court would have focused on the direct nature of the claims for standing purposes.

Share

Court Of Chancery Explains When Prior Dismissal Does Not Preclude Another Derivative Case

In Re Duke Energy Corp. Derivative Litigation, C.A. 7705-VCG (Del. Ch. Aug. 31, 2016)

This is an important decision because it explains when a prior dismissal of a derivative complaint does not preclude a second complaint alleging a wrong close to that alleged in the dismissed case. More ›

Share

Court Of Chancery Explains When Caremark Claim Exists Based On Illegal Conduct

Melbourne Municipal Firefighters’ Pension Trust Fund v. Jacobs, C.A. 10872-VCMR (August 1, 2016)

This decision explains when a Caremark claim exists based on illegal corporate conduct. The “substantial likelihood” of liability that justifies excusing a pre-suit demand on the board must involve a knowing violation of the duty to follow the law.  That occurred in the well-known Massey and Pyott cases. Here, however, the best the plaintiff could allege is that the board should have known its company was violating the antitrust laws and the Court held that was not good enough to excuse demand. The key is that the record showed the board was advised that the conduct involved was legal.  This highlights that the “should have known better” argument is not going to work in almost all  cases when the board has advice it has not crossed the line into illegal conduct.

Share

Court Of Chancery Dismisses Previously Dismissed Case

Laborers’ District Counsel Construction Industry Pension Fund v. Bensoussan, C.A. 11293-CB (June 14, 2016)

What happens when a derivative claim is filed outside of Delaware and then is dismissed by that other court?  Well even if the other complaint might have stood up in Delaware, the subsequently filed Delaware case will also be dismissed when the law of the state where the case was dismissed gives preclusive affect to such a dismissal.  This result again shows that Delaware is respectful of other jurisdictions and that Delaware litigation may be threatened by bad filings elsewhere.

Share

Court Of Chancery Lets New Board Review Complaint

Park Employees and Retirement Board Employees’ Annuity and Benefit Fund of Chicago v. Smith, C.A. 11000-VCG (May 31, 2016)

Normally it is the board in place at the time the derivative suit is filed that is evaluated to determine if demand is excused. However, when a plaintiff rushes to file knowing that the board is about to change so that its composition will not permit demand to be excused, the new board will be the board whose independence is considered. This prevents gun jumping.

Share