In Jones v. Martinez, 230 Cal. App. 4th 1248 (2014), the California Court of Appeal, Second Division, held that a plaintiff asserting a shareholder derivative action against directors of a Delaware corporation in a California state court may not obtain discovery before the plaintiff establishes legal standing to sue derivatively as required under Delaware law.  Under Delaware law, a stockholder-plaintiff may not prosecute a derivative suit unless he alleges that he demanded that the directors pursue the claim and the directors have wrongfully refused to do so, or that such demand is excused because it would have been futile.  In order for pre-suit demand to be excused as futile, the stockholder-plaintiff must plead particularized facts creating reasonable doubt that the directors were unlikely to act in good faith in considering the demand.  Delaware courts hold routinely that a derivative plaintiff is not entitled to discovery unless and until he has met the threshold standard for pleading demand futility.  The decision in Jones marks the first time that a California appellate court has applied this rule to a derivative plaintiff suing in California state court under Delaware law.
Continue Reading California Court of Appeal Applies Delaware Law to Deny Discovery in Shareholder Derivative Action

In Quadrant Structured Products Co. v. Vertin, C.A. No. 6990-VCL, 2014 Del. Ch. LEXIS 193 (Del. Ch. Oct. 1, 2014), the Delaware Court of Chancery held that when creditors of insolvent firms assert derivative claims, they need not meet the contemporaneous ownership requirement applied to stockholder-plaintiffs.  Section 327 of the Delaware General Corporation Law requires that in any derivative suit brought by a stockholder of a corporation, the plaintiff must be a stockholder at the time that the fiduciary wrong allegedly occurred.  The Court held that Section 327 refers only to stockholder-plaintiffs, thus the contemporaneous ownership requirement does not apply to creditor-plaintiffs bringing derivative suits.  However, the Court stated that its reasoning did not necessarily excuse creditor-plaintiffs from complying with other substantive doctrines of shareholder derivative suits.  In dicta, the Court declined to address whether creditors must satisfy the pre-lawsuit demand requirement, but the Court’s emphasis on the requirement’s importance leaves the door open for applying it to creditors in a future decision.
Continue Reading Delaware Court of Chancery Rejects Contemporaneous Ownership Requirement For Creditors Asserting Derivative Claims

In Starr International Co. v. Federal Reserve Bank of New York, No. 12-5022-cv, 2014 U.S. App. LEXIS 1770 (2d. Cir. Jan. 29, 2014), the United States Court of Appeals for the Second Circuit affirmed the dismissal of claims against the Federal Reserve Bank of New York (“FRBNY”) for alleged breaches of its fiduciary duties, holding that federal common law preempted state fiduciary duty law.  This decision provides an example of circumstances in which federal common law preempts state law.  Where, as here, a uniquely federal interest in the stability of the economy conflicts with state law, federal common law will prevail.
Continue Reading Second Circuit Holds Delaware Fiduciary Duty Law Preempted By Federal Interest In Fiscal Stability

In Blaustein v. Lord Baltimore Capital Corp., No. 272, 2013, 2014 Del. LEXIS 30 (Del. Jan. 21, 2014), the Delaware Supreme Court held that a closely-held corporation’s directors owe no fiduciary duty to decide, free from conflicts of interest, whether a corporation will repurchase a minority stockholder’s shares in the corporation.  Additionally, the Supreme Court held that the implied covenant of good faith and fair dealing contained in a shareholders agreement did not give a minority stockholder the right to a good faith, conflict-free negotiation over the repurchase of her stock.  If a minority stockholder wishes to have the right to put his or her stock to the corporation at a fair price to be set through negotiations with independent and disinterested decision makers at the corporation, the stockholder must contract for that right expressly in advance.
Continue Reading Delaware Supreme Court Holds That a Minority Stockholder Has No Common Law Right to a Conflict-Free Board Decision Regarding the Repurchase of Shares

In Anderson v Krafft-Murphy Co. Inc., 2013 Del. LEXIS 597 (Del. Nov. 26, 2013), the Delaware Supreme Court held that Sections 278 and 279 of the Delaware General Corporation Law, 8 Del. C. §§ 278-279, require a dissolved corporation to act through a court-appointed trustee or receiver to defend against third party lawsuits brought after the corporation winds-up its business.  Further, the Court held that Sections 278-279 contain no generally applicable statute of limitation for third party lawsuits against dissolved corporations.  This decision signals that long-tail tort liability can follow a dissolved corporation for decades under Delaware law, underscoring the importance of properly handling a corporation’s dissolution.
Continue Reading Delaware Supreme Court Holds Receiver is Required to Defend Lawsuits Brought After a Corporation is Wound-Up; Finds No Generally Applicable Statute of Limitation for Claims Against a Dissolved Corporation