Tag: Derivative Claim

Class Action Dismissed as Demand was Not Excused as Futile; Plaintiff Failed to Allege Facts Sufficient to Establish that a Majority of the Board Faced Substantial Likelihood of Liability for Non-Exculpated Claims

By: Annette Becker and Will Smith

In Lenois, et al. v. Lawal, et al., and Erin Energy Corporation, C.A. No. 11963-VCMR (Del. Ch. November 7, 2017), plaintiff Robert Lenois (“Plaintiff”) on behalf of himself and other stockholders brought a class action for breach of fiduciary duty against controllers and the board of directors of Erin Energy Corporation (“Erin”) for approving what was claimed to be an unfair transaction. The Delaware Court of Chancery dismissed the class action suit under Court of Chancery Rule 23.1, holding that the directors were protected by an exculpatory charter, and Plaintiff failed to meet the heightened pleading standard for demand futility set by the second prong of Aronson v. Lewis, 473 A.2d 805 (Del. 1984). Although Plaintiff pled with particularity that one director acted in bad faith, the complaint did not allege facts sufficient to establish that a majority of the board faced a substantial likelihood of liability for non-exculpated claims.

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COURT OF CHANCERY DISMISSES DERIVATIVE BREACH OF FIDUCIARY DUTY CLAIMS FOR FAILURE TO MAKE A PRE-SUIT DEMAND OR DEMONSTRATE DEMAND FUTILITY

By: Annette Becker and Caitlin Velasco

In Chester Cty. Emp. Ret. Fund v. New Residential Inv. Corp., C.A. No. 11058-VCMR (Del. Ch. Oct. 6, 2017), the Delaware Court of Chancery granted the defendants’ motion to dismiss the stockholder plaintiff’s direct and derivative claims for breach of fiduciary duties under the Court of Chancery Rules 23.1 and 12(b)(6), because the plaintiff failed to make a pre-suit demand or demonstrate that doing so would be futile.  The Court found that although the facts alleged gave rise to a derivative claim, the plaintiff failed to make a pre-suit demand or plead particularized facts sufficient to raise a reasonable doubt that a majority of the directors on the New Residential Corp. (“New Residential”) board could have exercised their independent and disinterested business judgment in responding to a demand.

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Chancery Court Dismisses Inseparable Fraud Claim Based on Derivative Claims That Former Shareholders Lacked Standing To Maintain

By Scott E. Waxman and Russell E. Deutsch

In In re Massey Energy Company Derivative And Class Action Litigation, C.A. No. 5430-CB (Del. Ch. May 4, 2017), the Chancery Court dismissed both the direct class action claim for “inseparable fraud” and the derivative claim brought by the former shareholders of Massey Energy (“Massey” or the “Corporation”) against the former directors and officers of Massey for breaching their fiduciary duties by causing Massey to operate in willful disregard of safety regulations. The court dismissed the derivative claim holding that the plaintiffs were not continuous shareholders, and therefore lacked standing to bring a derivative claim after Massey merged into Alpha Natural Resources, Inc. (Alpha) in June of 2011. The court dismissed the plaintiffs’ direct claim for “inseparable fraud” claim holding that, though pled as a direct claim, it was, in fact, also a derivative claim that the plaintiffs’ lacked the standing to maintain.

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Failure to Make Demand to the Board of Directors Dooms 50% Owner’s Breach of Fiduciary Duty Claims Against Co-Owner

By: Michelle McCreery Repp and Benjamin Kendall

In Dietrichson v. Knott, C.A. No. 11965-VCMR (Del. Ch. Apr. 19, 2017), the Chancery Court dismissed the entire complaint brought by  one member of a limited liability company against another member for paying himself an unauthorized salary and misappropriating the proceeds of a sale of the company’s assets, concluding that the claims made were derivative rather than direct stockholder claims.  The Court also held that plaintiff’s claims were not “dual-natured” (i.e., having both direct and derivative aspects), because the plaintiff failed to plead that the transaction resulted in both an improper transfer of economic value and voting power from the minority equity holders to the controlling equity holder.

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