Tooley test in Delaware

2022Derivative suits enable stockholders to sue on behalf of the corporation to redress harm done to the corporation. 198 As a result, in derivative suits, “any recovery must go to the corporation.”199 In contrast, “a stockholder who is directly injured retains the right to bring an individual action for injuries affecting his or her legal rights as a stockholder.” 200 Accordingly, our Supreme Court has articulated a two-part test to determine whether a claim is direct or derivative, the so-called Tooley test: [T]he determination of whether a stockholder’s claim is direct or derivative ‘must turn

2022Derivative suits enable stockholders to sue on behalf of the corporation to redress harm done to the corporation. 198 As a result, in derivative suits, “any recovery must go to the corporation.”199 In contrast, “a stockholder who is directly injured retains the right to bring an individual action for injuries affecting his or her legal rights as a stockholder.” 200 Accordingly, our Supreme Court has articulated a two-part test to determine whether a claim is direct or derivative, the so-called Tooley test: [T]he determination of whether a stockholder’s claim is direct or derivative ‘must turn

2024Accordingly, the Delaware Supreme Court cabined the holding of Gentile in El Paso Pipeline256 and ultimately overruled Gentile in Brookfield.257 Brookfield involved a private placement of stock to the controlling stockholder of TerraForm Power, Inc., which the stockholder plaintiffs alleged undervalued the stock and diluted both the financial and voting interests of the minority stockholders.258 After the plaintiffs filed their complaint, the controlling stockholder acquired TerraForm’s remaining shares in a merger.259 The defendants moved to dismiss the complaint for lack of standing, arguing

2024Accordingly, the Delaware Supreme Court cabined the holding of Gentile in El Paso Pipeline256 and ultimately overruled Gentile in Brookfield.257 Brookfield involved a private placement of stock to the controlling stockholder of TerraForm Power, Inc., which the stockholder plaintiffs alleged undervalued the stock and diluted both the financial and voting interests of the minority stockholders.258 After the plaintiffs filed their complaint, the controlling stockholder acquired TerraForm’s remaining shares in a merger.259 The defendants moved to dismiss the complaint for lack of standing, arguing

2024Morgan Chase & Co. S’holder Litig., 906 A.2d 766, 768, 771-73 (Del. 2006) (affirming the dismissal claims under Rule 12(b)(6) for failure to demonstrate “harm caused to the shareholders individually” separate from harm to the company by overpayment in a merger); cf. Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251 , 1274 (Del. 2021) (observing that “[t]he presence of a controller, absent more” does not change the fact that overpayment claims are “normally exclusively derivative because the Tooley test does not turn on the identity of the alleged wrongdoer”). 108 See, e.g., Paul Kiernan, S

2024Morgan Chase & Co. S’holder Litig., 906 A.2d 766, 768, 771-73 (Del. 2006) (affirming the dismissal claims under Rule 12(b)(6) for failure to demonstrate “harm caused to the shareholders individually” separate from harm to the company by overpayment in a merger); cf. Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251 , 1274 (Del. 2021) (observing that “[t]he presence of a controller, absent more” does not change the fact that overpayment claims are “normally exclusively derivative because the Tooley test does not turn on the identity of the alleged wrongdoer”). 108 See, e.g., Paul Kiernan, S

2016To do so would deviate from the Tooley framework and “largely swallow the rule that claims of corporate 77 Gentile, 906 A.2d at 100 (“[T]he 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.” (emphasis added)); id. (noting that “a separate harm” results, namely, 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” (emphasis added)

2016To do so would deviate from the Tooley framework and “largely swallow the rule that claims of corporate 77 Gentile, 906 A.2d at 100 (“[T]he 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.” (emphasis added)); id. (noting that “a separate harm” results, namely, 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” (emphasis added)

2016Indeed, any other interpretation would swallow the general rule that equity dilution claims are solely derivative, and would cast great doubt on the continuing vitality of the Tooley framework.‖). 40 Id.

2016Indeed, any other interpretation would swallow the general rule that equity dilution claims are solely derivative, and would cast great doubt on the continuing vitality of the Tooley framework.‖). 40 Id.

2023App. Div. 2012) (“[W]e adopt the test the Supreme Court of Delaware developed.”); Shenker v. Laureate Educ., Inc., 983 A.2d 408, 424-25 (Md. 2009) (adopting Tooley factors). 43 Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251 , 1262 (Del. 2021). 44 See, e.g., Citigroup, Inc. v. AHW Inv.

2023App. Div. 2012) (“[W]e adopt the test the Supreme Court of Delaware developed.”); Shenker v. Laureate Educ., Inc., 983 A.2d 408, 425 (Md. 2009) (adopting Tooley factors). 43 Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251 , 1262 (Del. 2021). 44 See, e.g., Citigroup, Inc. v. AHW Inv.

2023P’ship, 140 A.3d 1125, 1138-40 (Del. 2016). 45 Brookfield Asset Mgmt., Inc., 261 A.3d at 1263. 46 N. Am.

2023P’ship, 140 A.3d 1125, 1138-40 (Del. 2016). 45 Brookfield Asset Mgmt., Inc., 261 A.3d at 1262. 46 N. Am.

2022A claim is considered “derivative in nature,” under the first element of the Tooley test, “[w]here all of a corporation’s stockholders are harmed and would recover pro rata in proportion with their ownership of the corporation’s stock solely because they are stockholders.” Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008).

2022A claim is considered “derivative in nature,” under the first element of the Tooley test, “[w]here all of a corporation’s stockholders are harmed and would recover pro rata in proportion with their ownership of the corporation’s stock solely because they are stockholders.” Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008).

2021Under the Tooley test, the determination of whether a stockholder’s claim is direct or derivative “must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?”44 In explaining its test further, the Tooley Court cited with approval the analysis set forth by Chancellor Chandler in Agostino v. Hicks,45 and adopted his suggestion that part 42 See, e.g., Agostino v. Hicks, 845 A.2d 1110 , 1117–1118 (Del.

2021Under the Tooley test, the determination of whether a stockholder’s claim is direct or derivative “must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?”44 In explaining its test further, the Tooley Court cited with approval the analysis set forth by Chancellor Chandler in Agostino v. Hicks,45 and adopted his suggestion that part 42 See, e.g., Agostino v. Hicks, 845 A.2d 1110 , 1117–1118 (Del.

2024Motors (Hughes) S'holder Litig., 897 A.2d 162, 168 (Del. 2006) (citing Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001)). 65 Compl. 66 Defs.’ OB 42–44. 67 Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004); see also In re MultiPlan Corp. S'holders Litig., 268 A.3d 784 , 801 (Del.

2024Motors (Hughes) S'holder Litig., 897 A.2d 162, 168 (Del. 2006) (citing Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001)). 65 Compl. 66 Defs.’ OB 42–44. 67 Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004); see also In re MultiPlan Corp. S'holders Litig., 268 A.3d 784 , 801 (Del.

2024Motors (Hughes) S'holder Litig., 897 A.2d 162, 168 (Del. 2006) (citing Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001)). 65 Compl. 66 Defs.’ OB 42–44. 67 Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004); see also In re MultiPlan Corp. S'holders Litig., 268 A.3d 784 , 801 (Del.

2024Motors (Hughes) S'holder Litig., 897 A.2d 162, 168 (Del. 2006) (citing Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001)). 65 Compl. 66 Defs.’ OB 42–44. 67 Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004); see also In re MultiPlan Corp. S'holders Litig., 268 A.3d 784 , 801 (Del.

2021Accordingly, Gentile should be, and hereby is, overruled. 152 Vasquez v. Hillery, 474 U.S. 254 , 265–66 (1986). 153 See Kimble, 576 U.S. at 455 . 154 Id. (“Respecting stare decisis means sticking to some wrong decisions.”). 155 See, e.g., Adarand Constructors, Inc., 515 U.S. at 234 (noting that “reliance on a case that has recently departed from precedent is likely to be minimal.”). 49 D.

2021As we recognized in Lewis v. Anderson, with limited exception, “[a] plaintiff who ceases to be a shareholder, whether by reason of a merger or for any other reason, loses standing to continue a derivative suit.” 477 A.2d at 1049 ; see also El Paso, 152 A.3d at 1265 (“This rule flows from the fact that, following a merger, ‘the derivative claim—originally belonging to the acquired corporation—is transferred to and becomes an asset of the acquiring corporation as a matter of statutory law.’”) (citation omitted). 36 El Paso, 152 A.3d at 1256–57. 37 845 A.2d 1031 (Del. 2004). 38 El Paso, 152 A.3d

2021As we recognized in Lewis v. Anderson, with limited exception, “[a] plaintiff who ceases to be a shareholder, whether by reason of a merger or for any other reason, loses standing to continue a derivative suit.” 477 A.2d at 1049 ; see also El Paso, 152 A.3d at 1265 (“This rule flows from the fact that, following a merger, ‘the derivative claim—originally belonging to the acquired corporation—is transferred to and becomes an asset of the acquiring corporation as a matter of statutory law.’”) (citation omitted). 36 El Paso, 152 A.3d at 1256–57. 37 845 A.2d 1031 (Del. 2004). 38 El Paso, 152 A.3d

2021To the extent the corporation’s issuance of equity does not result in a shift in control from a diversified group of public equity holders to a controlling interest, (a circumstance where our law, e.g., Revlon,66 already provides for a direct claim), holding 64 In such cases, the remedy could be cancelling the shares and allowing the corporation to sell them for fair value or requiring the acquirer to pay fair value for the shares. 65 152 A.3d at 1251 . 66 Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173, 182 (Del. 1986) (finding that once a corporate board decides to effectuate

2021To the extent the corporation’s issuance of equity does not result in a shift in control from a diversified group of public equity holders to a controlling interest, (a circumstance where our law, e.g., Revlon,66 already provides for a direct claim), holding 64 In such cases, the remedy could be cancelling the shares and allowing the corporation to sell them for fair value or requiring the acquirer to pay fair value for the shares. 65 152 A.3d at 1251 . 66 Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173, 182 (Del. 1986) (finding that once a corporate board decides to effectuate

2021Accordingly, Gentile should be, and hereby is, overruled. 152 Vasquez v. Hillery, 474 U.S. 254 , 265–66 (1986). 153 See Kimble, 576 U.S. at 455 . 154 Id. (“Respecting stare decisis means sticking to some wrong decisions.”). 155 See, e.g., Adarand Constructors, Inc., 515 U.S. at 234 (noting that “reliance on a case that has recently departed from precedent is likely to be minimal.”). 49 D.

2021Accordingly, Gentile should be, and hereby is, overruled. 152 Vasquez v. Hillery, 474 U.S. 254 , 265–66 (1986). 153 See Kimble, 576 U.S. at 455 . 154 Id. (“Respecting stare decisis means sticking to some wrong decisions.”). 155 See, e.g., Adarand Constructors, Inc., 515 U.S. at 234 (noting that “reliance on a case that has recently departed from precedent is likely to be minimal.”). 49 D.

2020Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 817 (Del.

2020Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 817 (Del.

2019LLC, 27 A.3d 531, 536 (Del. 2011). 93 845 A.2d 1031 (Del. 2004). 94 Id. at 1033 . 95 Id. at 1039 . 21 and that he or she can prevail without showing an injury to the corporation.”96 Dilution claims, like the ones Plaintiffs advance here, are classically derivative.97 Plaintiffs do not argue that a Tooley analysis leads to a different conclusion here.

2019LLC, 27 A.3d 531, 536 (Del. 2011). 93 845 A.2d 1031 (Del. 2004). 94 Id. at 1033 . 95 Id. at 1039 . 21 and that he or she can prevail without showing an injury to the corporation.”96 Dilution claims, like the ones Plaintiffs advance here, are classically derivative.97 Plaintiffs do not argue that a Tooley analysis leads to a different conclusion here.

2016To do so would deviate from the Tooley framework and “largely swallow the rule that claims of corporate 77 Gentile, 906 A.2d at 100 (“[T]he 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.” (emphasis added)); id. (noting that “a separate harm” results, namely, 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” (emphasis added)

2016To do so would deviate from the Tooley framework and “largely swallow the rule that claims of corporate 77 Gentile, 906 A.2d at 100 (“[T]he 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.” (emphasis added)); id. (noting that “a separate harm” results, namely, 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” (emphasis added)

2015See Allen, 90 A.3d at 1109 ; Brinckerhoff v. Tex. E.

2015See Allen, 90 A.3d at 1109 ; Brinckerhoff v. Tex. E.

2014Rather, Lee contends that Count I asserts a direct claim because the harm “relates to the transferability of [her] shares, not any injury, direct or indirect, to Zynga itself.” 23 Specifically, she submits that “the injury flows from being deprived of the same opportunity to sell as the Director Defendants provided to themselves.” 24 The Delaware Supreme Court articulated the test for determining whether a stockholder plaintiff’s claim is direct or derivative in Tooley v. Donaldson, Lufkin & Jenrette, Inc. 25 The analysis turns “solely” on two questions: “(1) who suffered the alleged harm (the

2014Rather, Lee contends that Count I asserts a direct claim because the harm “relates to the transferability of [her] shares, not any injury, direct or indirect, to Zynga itself.” 23 Specifically, she submits that “the injury flows from being deprived of the same opportunity to sell as the Director Defendants provided to themselves.” 24 The Delaware Supreme Court articulated the test for determining whether a stockholder plaintiff’s claim is direct or derivative in Tooley v. Donaldson, Lufkin & Jenrette, Inc. 25 The analysis turns “solely” on two questions: “(1) who suffered the alleged harm (the

2014Rather, Lee contends that Count I asserts a direct claim because the harm “relates to the transferability of [her] shares, not any injury, direct or indirect, to Zynga itself.” 23 Specifically, she submits that “the injury flows from being deprived of the same opportunity to sell as the Director Defendants provided to themselves.” 24 The Delaware Supreme Court articulated the test for determining whether a stockholder plaintiff’s claim is direct or derivative in Tooley v. Donaldson, Lufkin & Jenrette, Inc. 25 The analysis turns “solely” on two questions: “(1) who suffered the alleged harm (the

2014Rather, Lee contends that Count I asserts a direct claim because the harm “relates to the transferability of [her] shares, not any injury, direct or indirect, to Zynga itself.” 23 Specifically, she submits that “the injury flows from being deprived of the same opportunity to sell as the Director Defendants provided to themselves.” 24 The Delaware Supreme Court articulated the test for determining whether a stockholder plaintiff’s claim is direct or derivative in Tooley v. Donaldson, Lufkin & Jenrette, Inc. 25 The analysis turns “solely” on two questions: “(1) who suffered the alleged harm (the