A “holder” claim alleges that a plaintiff was wrongfully induced by a defendant, usually company management, to retain shares of stock, resulting in economic loss to the plaintiff.
The question becomes whether such “holder” claims are direct (i.e. they are personal to the shareholder and can be brought directly by the shareholder), or derivative (i.e. they belong to the company and can only be brought derivatively on behalf of the company).
This precise issue was addressed in the recent opinion by the Delaware Supreme Court in Citigroup Inc., et al. v. AHW Investment Partnership, et al., No. 641, 2015 (Del. May 24, 2016). There, the Delaware Supreme Court confirmed that plaintiff’s “holder” claims did not involve corporate governance or fiduciary duty issues, and thus Delaware law did not apply to the direct versus derivative conundrum, but rather the determination of whether the claims were direct or derivative rested with the laws of the jurisdictions giving rise to such claims.
By way of background, the U.S. Court of Appeals for the Second Circuit certified to the Delaware Supreme Court the following question of law arising from an appeal from a decision issued by the U.S. District Court for the Southern District of New York:
Are the claims of a plaintiff against a corporate defendant alleging damages based on the plaintiff‘s continuing to hold the corporation‘s stock in reliance on the defendant‘s misstatements as the stock diminished in value properly brought as direct or derivative claims?
The Delaware Supreme Court’s opinion, authored by Chief Justice Strine, rejected the argument that because Citigroup is a Delaware corporation, Delaware law should apply to the determination of whether the claims are direct or derivative. Rather, such holder claims were brought under the laws of New York of Florida where actions of this type generally belong to the stockholder directly.
The opinion noted that neither the plaintiffs’ common law fraud claims nor the negligent-representation claims involve fiduciary duty or corporate governance charges or “claims otherwise belonging to the corporation.” As such, Delaware case law on the direct-or-derivative issue, under the two-prong test of Tooley v. Donaldson, Lufkin & Jenrette, Inc. does not apply. 845 A.2d 1031 (Del. 2004).
In sum, because the “holder” claims at issue did not invoke Delaware law (given that no claims were made for, i.e., breach of fiduciary duty), the Delaware Supreme Court confirmed that the laws of the jurisdictions governing those claims (here New York or Florida) would determine whether such claims are direct or derivative. “Delaware law cannot convert a direct claim that another state‘s law has granted to securities holders by deciding that it actually belongs to the corporation that the securities holder is suing.” Slip op. at 28.