direct claim in Delaware

2025Plaintiffs rely on Parnes v. Bailey Entertainment Corp., 722 A.2d 1243 (Del. 1999), for the proposition that a complaint “challenging the fairness or validity of a merger” states a direct claim.60 In Parnes, the Delaware Supreme Court observed that stockholder actions attacking the fairness or validity of a merger can be maintained directly. 722 A.2d at 1245 .

2025Plaintiffs rely on Parnes v. Bailey Entertainment Corp., 722 A.2d 1243 (Del. 1999), for the proposition that a complaint “challenging the fairness or validity of a merger” states a direct claim.60 In Parnes, the Delaware Supreme Court observed that stockholder actions attacking the fairness or validity of a merger can be maintained directly. 722 A.2d at 1245 .

2026That concept is also inaccurate because a direct, individual claim of stockholders that does not depend on harm to the corporation can also fall on all stockholders equally, without the claim thereby becoming a derivative claim.74 As demonstrated by this passage, the Tooley decision sought to clarify Bokat by distinguishing between (i) an injury that fell indirectly on all stockholders equally, 71 Tooley, 845 A.2d at 1035 . 72 Bokat v. Getty Oil Co., 262 A.2d 246, 249 (Del. 1970). 73 Tooley, 845 A.2d at 1037 . 74 Id. (second emphasis added). 35 which supported a derivative claim, and (ii) an i

2026That concept is also inaccurate because a direct, individual claim of stockholders that does not depend on harm to the corporation can also fall on all stockholders equally, without the claim thereby becoming a derivative claim.74 As demonstrated by this passage, the Tooley decision sought to clarify Bokat by distinguishing between (i) an injury that fell indirectly on all stockholders equally, 71 Tooley, 845 A.2d at 1035 . 72 Bokat v. Getty Oil Co., 262 A.2d 246, 249 (Del. 1970). 73 Tooley, 845 A.2d at 1037 . 74 Id. (second emphasis added). 35 which supported a derivative claim, and (ii) an i

2023More recently, this court noted that “[t]he weight of Delaware authority has interpreted Parnes as recognizing that a stockholder can assert a direct claim challenging a merger based on 8 See Parnes, 722 A.2d at 1245 (explaining that Kramer v. Western Pacific Industries 546 A.2d 348 (Del. 1988), did not support a direct claim because “[t]he complaint did not question the fairness of the price offered in the merger or the manner in which the merger agreement was negotiated,” and “did not allege that the merger price was unfair or that the merger was obtained through unfair dealing” (emphasis ad

2023More recently, this court noted that “[t]he weight of Delaware authority has interpreted Parnes as recognizing that a stockholder can assert a direct claim challenging a merger based on 8 See Parnes, 722 A.2d at 1245 (explaining that Kramer v. Western Pacific Industries 546 A.2d 348 (Del. 1988), did not support a direct claim because “[t]he complaint did not question the fairness of the price offered in the merger or the manner in which the merger agreement was negotiated,” and “did not allege that the merger price was unfair or that the merger was obtained through unfair dealing” (emphasis ad

2026When a corporation “suffer[s] harm in the form of inadequate consideration for the sale of itself as a going concern,” any harm to equity holders “is only a natural and foreseeable consequence of the harm to the corporation.”109 CIBC’s losses as a creditor are likewise a natural consequence of the primary harm experienced by BERA. 106 See Brookfield, 261 A.3d at 1263. 107 See Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173 (Del. 1986). 108 See Brookfield, 261 A.3d at 1276 (noting that Revlon “provide[s] a basis for a direct claim for stockholders to address fiduciary duty violat

2025R. 12(b)(1). 75 El Paso Pipeline GP Co., L.L.C. v. Brinkerhoff, 152 A.3d 1248, 1256-57 (Del. 2016). 76 Id. at 1256 (citing Schoon v. Smith, 953 A.2d 196, 202 (Del. 2008)). 77 See Tooley v. Donaldson, Lufkin & Jenrette Inc., 845 A.2d 1031 (Del. 2004). 78 Id. at 1033 . 13 dispositive; rather, the court must look to the nature of the wrong alleged, taking into account all of the facts alleged in the complaint, and determine for itself whether a direct claim exists.”79 An asserts that the individual defendants breached their fiduciary duties by: (1) selling “substantially all of [Archblock’s] asse

2022C. § 259(a)). 32 See Brookfield, 261 A.3d at 1263. 33 Tooley, 845 A.2d at 1033. 34 Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008). 14 pleads a direct claim if he “demonstrate[s] that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.”35 Plaintiffs invoke Parnes v. Bally Entertainment Corp. to argue that their breach of fiduciary duty claims are direct, rather than derivative, because their attack on the Amendments is at bottom an attack on the Merger and its fairness.36 Here, like the cases that have gone before, it is “

2019This is well pled as a direct claim and is addressed below. 68 845 A.2d 1031 (Del. 2004). 69 Id. at 1033 . 70 Id. at 1039 . 71 Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008). 29 breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.”72 Appropriately, Plaintiff does not argue his claims are direct under Tooley.

2018Fuchs v. Wren Holdings, LLC, 129 A.3d 882 (Del. 2015). 225 Id. at *2, *24-26. 61 does not necessarily require control over the day-to-day operations of a corporation; actual control with regard to the particular transaction that is being challenged may suffice.226 This court has applied this form of analysis to determine whether or not a group of stockholders, none of whom individually qualified as a controlling stockholder, constitutes a control group at least one other time for the purpose of determining whether a direct claim exists under the Gentile paradigm,227 and on many occasions for o

2018A. The Plaintiff’s Claims Are Solely Derivative “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)?’”104 To plead a direct claim, “[t]he stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.”105 By contrast, “[w]here all of a corporation’s stockholders

2020While the situation 140 Tooley, 845 A.2d at 1039 . 141 That is, claims that the corporation has overpaid for the asset received, and that the controller underpaid. 142 Gentile, 906 A.2d at 99 . 27 addressed in Gentile represents a “species of corporate overpayment claim,” as I discuss infra, a direct claim does not arise “wherever a controlling stockholder extracts economic value from an entity to its benefit and to the detriment of the minority stockholders.” 143 Consequently, a claim that the Private Placement injured stockholders simply because it diluted their ownership interest in TerraFo

2016In Feldman v. Cutaia, the Court of Chancery emphasized the limited reach of Gentile.39 The Court in Feldman stated that for a transaction between a corporation and a third party to give rise to a direct claim, the corporation must have a controlling stockholder that used its controlling position to orchestrate the transaction.40 The Court believed that limiting the reach of Gentile was necessary 38 Id. at 101 ; see also In re J.P.

2026A Section 271 claim based on the failure to seek and obtain stockholder approval of a transaction involving the sale, lease, or exchange of all or substantially all of the corporation’s assets133 is a direct claim because “[t]he alleged harm is the stockholders’ disenfranchisement by depriving them of their statutory right to approve or disapprove of a qualifying asset sale.” Id.

2023Aug. 19, 2019) (“If a seller wishes to retain a subset of the rights associated with the transferred shares, such as the right to assert a direct claim, then the parties to the transaction must provide specifically for that outcome.”), aff’d, 244 A.3d 668 (Del. 2020); In re Activision Blizzard, Inc. S’holder Litig., 124 A.3d 1025, 1050 (Del.

2015See Gatz v. Ponsoldt, 925 A.2d 1265, 1268 (Del. 2007); ("[T]he claims before us are not exclusively derivative and could be brought directly.”); Gentile v. Rossette, 906 A.2d 91, 99-100 (Del. 2006); Grimes, 673 A.2d at 1212 ("Courts have long recognized that the same set of facts can give rise both to a direct claim and a derivative claim.”); Sagarra Inversiones, S.L. v. Cementos Portland Valderrivas, S.A., 2011 WL 3371493 , at *5 n. 31 (Del.Ch.

2015May 12, 2006) (“[C]laims for breach of fiduciary obligations and resultant unjust enrichment have been held to survive”). 16 See Gatz v. Ponsoldt, 925 A.2d 1265, 1268 (Del. 2007); (“[T]he claims before us are not exclusively derivative and could be brought directly.”); Gentile v. Rossette, 906 A.2d 91 , 99- 100 (Del. 2006); Grimes, 673 A.2d at 1212 (“Courts have long recognized that the same set of facts can give rise both to a direct claim and a derivative claim.”); Sagarra Inversiones, S.L. v. Cementos Portland Valderrivas, S.A., 2011 WL 3371493 , at *5 n.31 (Del.

2015Apr. 14, 2006) (characterizing claim alleging equity dilution following a preferred stock issuance as a derivative claim but noting that “[v]oting power dilution may constitute a direct claim, because it can directly harm the shareholders without affecting the corporation, and any remedy for the harm suffered under those circumstances would benefit the shareholders.”); In re IP Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 818 (Del.

2015Apr. 14, 2006) (characterizing claim alleging equity dilution following a preferred stock issuance as a derivative claim but noting that “[v]oting power dilution may constitute a direct claim, because it can directly harm the shareholders without affecting the corporation, and any remedy for the harm suffered under those circumstances would benefit the shareholders.”); In re JP Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 818 (Del.

2026That concept is also inaccurate because a direct, individual claim of stockholders that does not depend on harm to the corporation can also fall on all stockholders equally, without the claim thereby becoming a derivative claim.74 As demonstrated by this passage, the Tooley decision sought to clarify Bokat by distinguishing between (i) an injury that fell indirectly on all stockholders equally, 71 Tooley, 845 A.2d at 1035 . 72 Bokat v. Getty Oil Co., 262 A.2d 246, 249 (Del. 1970). 73 Tooley, 845 A.2d at 1037 . 74 Id. (second emphasis added). 35 which supported a derivative claim, and (ii) an i

2024That concept is also inaccurate because a direct, individual claim of stockholders that does not depend on harm to the corporation can also fall on all stockholders equally, without the claim thereby becoming a derivative claim.238 In this passage, Tooley reframed the analysis in a way intended to remedy the confusion caused by Bokat by distinguishing between (i) an injury that fell indirectly on all stockholders equally, which gave rise to a derivative claim, and (ii) an injury 236 Tooley II, 845 A.2d at 1035 . 237 262 A.2d 246, 249 (Del. 1970), abrogated by Tooley II, 845 A.2d at 1038–39. 23

2022See, e.g., NYMEX, 2009 WL 3206051 , at *10–11 (citing Dieterich, 857 A.2d at 1029 ). 80 Houseman, 2014 WL 1600724 , at *13. 81 Id. 82 Id. 83 Straight Path, 2018 WL 3120804 , at *12. 84 Id. at *13. 85 Id. at *7. 26 diverted merger consideration that otherwise would have gone to the stockholders” to the controller, effectively depriving the company’s stockholders of half a billion dollars of merger consideration in a $3.1 billion merger.86 The Court concluded plaintiffs stated a direct claim.87 Vice Chancellor Glasscock certified his conclusion for interlocutory appeal, noting the plaintiff’s cl

2021R. 23.1; Aronson v. Lewis, 473 A.2d 805 , 811–12 (Del. 1984). 269 See Compl. ¶¶ 240–57. 62 In determining at the pleading stage whether claims for breach of fiduciary duty are direct or derivative, as with other pleading stage determinations, the court must assume the truth of all well-pled allegations in the Complaint and draw all reasonable inferences in Plaintiffs’ favor.270 In doing so, however, the court does not accept “the form of words used in the complaint,” but instead “look[s] to all the facts of the complaint” to determine “whether a direct claim exists.”271 The inquiry is twofold:

2015See Gatz v. Ponsoldt, 925 A.2d 1265, 1268 (Del. 2007); ("[T]he claims before us are not exclusively derivative and could be brought directly.”); Gentile v. Rossette, 906 A.2d 91, 99-100 (Del. 2006); Grimes, 673 A.2d at 1212 ("Courts have long recognized that the same set of facts can give rise both to a direct claim and a derivative claim.”); Sagarra Inversiones, S.L. v. Cementos Portland Valderrivas, S.A., 2011 WL 3371493 , at *5 n. 31 (Del.Ch.

2015May 12, 2006) (“[C]laims for breach of fiduciary obligations and resultant unjust enrichment have been held to survive”). 16 See Gatz v. Ponsoldt, 925 A.2d 1265, 1268 (Del. 2007); (“[T]he claims before us are not exclusively derivative and could be brought directly.”); Gentile v. Rossette, 906 A.2d 91 , 99- 100 (Del. 2006); Grimes, 673 A.2d at 1212 (“Courts have long recognized that the same set of facts can give rise both to a direct claim and a derivative claim.”); Sagarra Inversiones, S.L. v. Cementos Portland Valderrivas, S.A., 2011 WL 3371493 , at *5 n.31 (Del.

2016Morgan Chase & Co. S’holder Litig., 906 A.2d 766 , 774–75 (Del. 2006) (quoting In re Paxon Commc’n Corp. S’holder Litig., 2001 WL 812028 , at *5 (Del.

2016Morgan Chase & Co. S’holder Litig., 906 A.2d 766, 774-75 (2006). 3 Gentile, 906 A.2d at 99. 1 overruled, to the extent that it allows for a direct claim in the dilution context when the issuance of stock does not involve subjecting an entity whose voting power was held by a diversified group of public equity holders to the control of a particular interest.

2015They argue instead that by expanding the Wayzata Term Loan, Defendants expropriated equity from the Company: “the exorbitant PIK interest on the Wayzata Term Loan accrued to the exclusive benefit of Wayzata, it effectively 21 See, e.g., Gatz v. Ponsoldt, 925 A.2d 1265, 1274 (Del. 2007) (observing that Gentile recognized a direct claim “where a significant or controlling stockholder causes the corporation to engage in a transaction wherein shares having more value than what the corporation received in exchange are issued to the controller, thereby increasing the controller’s percentage of stock

2004For the same reason, the plaintiff cannot make out a claim under Tri-Star, 634 A.2d 319 , because there is no allegation of actual vote dilution and, under the reasoning of Berlcshire, contingent vote dilution does not form the basis of a direct claim. 66 .

2018Motors (Hughes) S’holder Litig., 897 A.2d at 168 . 48 Id. 49 Id. 14 direct.50 The distinction is always consequential; it is particularly so here because Akrout did not make a demand upon the Board to bring the claim and has made no effort in his Complaint to plead that demand would have been futile. 51 The court will deem a claim derivative “[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.”52 “The mere fact that the alleged harm is ultimately suffered by, or the

2018Motors (Hughes) S’holder Litig., 897 A.2d at 168 . 48 Id. 49 Id. 14 direct.50 The distinction is always consequential; it is particularly so here because Akrout did not make a demand upon the Board to bring the claim and has made no effort in his Complaint to plead that demand would have been futile. 51 The court will deem a claim derivative “[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.”52 “The mere fact that the alleged harm is ultimately suffered by, or the

2015See Gheewalla, 930 A.2d at 102-103 (affirming dismissal because the creditor “only asserted a direct claim against the director [defendants for alleged breaches of fiduciary duty,” and “creditors of an insolvent corporation have no right to assert direct claims for breach of fiduciary duty against corporate directors”).

2013See Gheewalla, 930 A.2d at 101 ("When a corporation is insolvent, however, its creditors take the place of the shareholders as the residual beneficiaries of any increase in value.

2026But Jones seems to plead it as a derivative claim, asking the court to “unwind all fraudulent transfers and restore [Roots’] rightful assets.”119 As a direct claim, Count VI would fail to 116 Id. ¶¶ 33–34.

2014Id. at 797 ; see id. at 800 (“I am not prepared to rule out the possibility that [the creditor plaintiff] can prove that the [insolvent company’s] board has engaged in conduct towards [the creditor plaintiff] that might support a direct claim for breach of fiduciary duty by it as a particular creditor.”).

2026When a corporation “suffer[s] harm in the form of inadequate consideration for the sale of itself as a going concern,” any harm to equity holders “is only a natural and foreseeable consequence of the harm to the corporation.”109 CIBC’s losses as a creditor are likewise a natural consequence of the primary harm experienced by BERA. 106 See Brookfield, 261 A.3d at 1263. 107 See Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173 (Del. 1986). 108 See Brookfield, 261 A.3d at 1276 (noting that Revlon “provide[s] a basis for a direct claim for stockholders to address fiduciary duty violat

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

2015For illustrative non-Delaware cases involving mergers, see Watson v. Button, 235 F.2d 235 (9th Cir.1956) (affirming award of pro rata recovery when defendant had embezzled funds in connection with a sale of all the company’s stock); Kirk v. First Nat’l Bank of Columbus, 439 F.Supp. 1141 (M.D.Ga.1977) (permitting stockholders of merged corporation to bring post-closing suit based on undiscovered pre-transaction breach of fiduciary by corporate president as a direct claim); De-Haas v. Empire Petroleum Co., 300 F.Supp. 834 (D.Colo.1969) (ordering equitable lien on post-merger corporation for bene

2015For illustrative non-Delaware cases involving mergers, see Watson v. Button, 235 F.2d 235 (9th Cir.1956) (affirming award of pro rata recovery when defendant had embezzled funds in connection with a sale of all the company’s stock); Kirk v. First Nat’l Bank of Columbus, 439 F.Supp. 1141 (M.D.Ga.1977) (permitting stockholders of merged corporation to bring post-closing suit based on undiscovered pre-transaction breach of fiduciary by corporate president as a direct claim); De-Haas v. Empire Petroleum Co., 300 F.Supp. 834 (D.Colo.1969) (ordering equitable lien on post-merger corporation for bene

2021Ch. 2004). 271 In re Syncor Int’l Corp. S’holders Litig., 857 A.2d 994, 997 (Del.

2006Aug. 26, 2005) (holding that a well-pleaded disclosure claim is a direct claim under Tooley, while claims for gross negligence, and failure to provide competent and active management are "clearly derivative”); In re Syncor Int’l Corp. S'holders Litig., 857 A.2d 994 (Del.Ch.2004) (holding that injuries comprising the reduction of consideration paid to shareholders in a merger caused by disclosures of purported misconduct are derivative claims). 42 . 863 A.2d 772 (Del.Ch.2004). 43 .

2021R. 23.1; Aronson v. Lewis, 473 A.2d 805 , 811–12 (Del. 1984). 269 See Compl. ¶¶ 240–57. 62 In determining at the pleading stage whether claims for breach of fiduciary duty are direct or derivative, as with other pleading stage determinations, the court must assume the truth of all well-pled allegations in the Complaint and draw all reasonable inferences in Plaintiffs’ favor.270 In doing so, however, the court does not accept “the form of words used in the complaint,” but instead “look[s] to all the facts of the complaint” to determine “whether a direct claim exists.”271 The inquiry is twofold:

2015Cantor v. Sachs, 162 A. 73, 76 (Del.Ch. 1932) (citations omitted); accord Harff v. Kerkorian, 324 A.2d 215, 218 (Del.Ch. 1974), aff’d in part, rev'd in part on other grounds, 347 A.2d 133 (Del.1975). 24 . 473 A.2d 805, 811 (Del.1984).

2016Because our holding terminates the litigation, we do not reach the other issues raised by the parties. 4 See Parnes v. Bally Entm’t Corp., 722 A.2d 1243, 1245 (Del. 1999) (“In order to state a direct claim with respect to a merger, a stockholder must challenge the validity of the merger itself, usually by charging the directors with breaches of fiduciary duty resulting in unfair dealing and/or unfair price.” (citing Lewis, 477 A.2d at 1046 n.10; Kramer v. W.

2016See Parnes v. Bally Entm't Corp., 722 A.2d 1243, 1245 (Del. 1999) (“In order to state a direct claim with respect to a merger, a stockholder must challenge the validity of the merger itself, usually by charging the directors with breaches of fiduciary duty resulting in unfair dealing and/or unfair price.” (citing Lewis, 477 A.2d at 1046 n.10; Kramer v. W.