“‘In a double derivative action involving a wholly owned subsidiary, a stockholder plaintiff only must plead demand futility (or otherwise satisfy Rule 23.1) at the parent level.’  [However], where ‘the parent entity is not a Delaware corporation, then under the internal affairs doctrine, the law of the state of incorporation determines the showing that a plaintiff must make’ to satisfy the Court that the plaintiff has standing to bring a multiple derivative action.”

In Sagarra Inversiones, S.L. v. Cementos Portland Valderrivas, S.A., et al., the Delaware Court of Chancery granted Defendants’ Motion to Dismiss based upon lack of standing and the McWane doctrine, and returned the case to the Spanish Courts.  The prior Court of Chancery decision denying a request for a status quo order relating to this case is here


A complete set of facts can be found in the prior decision linked above in this post.    This action arose out of the sale of Giant Cement Holding, Inc. (“Giant”) by Defendant Cementos Portland Valderrivas (“CPV”) to Defendant Corporacion Uniland S.A. (“Uniland, S.A.”).  Plaintiff Sagarra Inversiones, S.L. (“Sagarra”) challenged the approximately $279 million transaction on the basis of CPV’s alleged self-dealing because of its position as the majority shareholder on both sides of the transaction.  Through the lawsuit, Sagarra sought to prevent the payment of additional funds under the stock purchase agreement governing the transaction (the “SPA”), and to rescind the SPA.

Sagarra first commenced proceedings to challenge the Giant transaction in Spain, asserting an action in the Spanish Commercial Court in or around January 28, 2011, and later filed the instant matter before the Court of Chancery on February 9, 2011. 


Defendants filed a motion to dismiss based upon Court of Chancery Rules 12(b)(1) through 12(b)(7), for lack of personal jurisdiction, invalid service and improper venue (under McWane and forum non conveniens).  Also asserted was a failure to comply with Court of Chancery Rule 23.1 on the grounds of failure to comply with derivative suit requirements of both Spanish and Delaware law.

Sagarra alleged four counts in the Complaint: (i) a multiple derivative claim on behalf of Uniland Acquisition Corp. (“Uniland Delaware”) (discussed below) based on purported breaches of fiduciary duty of loyalty by directors of that entity; (ii) multiple derivative claims on behalf of Uniland Delaware, alleging that a number of other defendants, including CPV, aided and abetted the breach of duty of loyalty by Uniland Delaware directors; (iii) claims against CPV for breach of fiduciary duty under Delaware law; and (iv) claims against CPV for breach of fiduciary duty under Spanish Law.

  • Lack of Standing to Assert a Double Derivative Claim Under Spanish Law

The Court granted Defendants’ motion to dismiss as to all counts.  As to Counts I and II, the Court held that Spanish law, and not Delaware law, applied to the right of Sagarra to pursue a derivative action.  This was so because, despite the fact that Uniland Delaware was a Delaware corporation, Sagarra was only a shareholder of its parent company, Uniland, S.A., and not of Uniland Delaware.  The Court determined that in such a “multiple” or “double” derivative action, the law of the state or country governing the parent company controls, and therefore the Court applied the law of the country of Uniland Delaware’s parent company, Uniland, S.A., which was Spain.

Under Spanish law, Sagarra lacked standing to assert these multiple derivative claims on behalf of Uniland Delaware.  The Court found that Sagarra could have pursued a derivative action against Uniland S.A.’s directors under Spanish law, but in failing to call for a shareholders meeting, it failed to exhaust its intra-corporate remedies under Spanish law.  Accordingly, the Court dismissed Counts I and II.

For similar reasons, the Court dismissed Count III—the claim for breach of fiduciary duty under Delaware law.  The Court applied Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), and a recent decision, Hartsel v. The Vanguard Group, Inc., C.A. No. 5394-VCP (Del. Ct. Ch., June 15, 2011), which stated that the Court “must look exclusively to (1) who suffered the alleged harm and (2) who would receive the benefit of any recovery or other remedy.”  Based upon the facts of this case, the Court concluded that such claim was in fact a derivative claim under the Tooley two-part analysis, and Sagarra’s lack of standing, detailed above, precluded it from asserting its breach of fiduciary duty claim under Delaware law.

  • Application of McWane Doctrine

Finally, the Court dismissed Count IV—the claim for breach of fiduciary duty under Spanish law.  The Court applied “the McWane doctrine, which favors granting a stay when there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues.  See McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281 at 283 (Del. 1970).  The fact that Sagarra commenced earlier-filed proceedings in Spain involving functionally similar parties and issues led the Court to dismiss this Count based upon McWane, and to hold that “[b]ecause Count IV raised fiduciary duty claims under Spanish law, the better course of action is for the Court to exercise its discretion and dismiss Count IV.”


The moral of this story is that shareholders seeking double derivative claims should be aware of the application of the internal affairs doctrine, and must be careful to ensure that they have standing to assert a derivative claim under the laws of the state or country of the parent company, instead of assuming that the law of the subsidiary company, on behalf of which it seeks to assert a derivative action, will apply.