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E-MailWilliam Savitt and Ryan A. McLeod, are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum, and is part of the Delaware law series; links to other posts in the series are available here.
In a carefully reasoned decision, the Delaware Supreme Court this week overruled a 15-year precedent that had permitted minority stockholders to pursue classically derivative dilution claims directly against controlling stockholders. Brookfield Asset Management, Inc. v. Rosson, No. 406, 2020 (Del. Sept. 20, 2021).
The case concerned a private placement of TerraForm Power’s common stock to its controlling stockholder, Brookfield Asset Management, which TerraForm’s minority stockholders alleged was underpriced and dilutive. TerraForm was thereafter merged out of existence. Defendants moved to dismiss, arguing that the claims were derivative and that plaintiffs’ standing to prosecute derivative claims was extinguished by the merger. The Court of Chancery recognized that such “overpayment” claims are generally considered derivative, but nevertheless sustained the complaint on the basis of a 2006 decision that had concluded such claims were both derivative and direct where the transaction allegedly benefitted a controlling stockholder at the expense of the minority.
The Supreme Court reversed. Recognizing that the “[c]lassification of a particular claim as derivative or direct can be difficult” generally, the Court held that its 2006 opinion had “led to doctrinal confusion.” The Court reasoned that the doctrine, properly conceived, should not “focus on the alleged wrongdoer” but instead on “who suffered the harm and who would receive the benefit of any recovery.” The Court went on to hold that “there is no principled reason to allow dilution/overpayment claims to proceed directly against controllers when the law rightly refuses to permit such claims to proceed directly in non-controller dilution cases.”
The decision marks a welcome clarification of the law concerning direct and derivative claims. More important, it rejects the suggestion that the mere involvement of a controlling stockholder should allow stockholders to prosecute claims directly that properly belong to the corporation.
