Brookfield Asset Management, Inc. v. Rosson
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Opinion
IN THE SUPREME COURT OF THE STATE OF DELAWARE
BROOKFIELD ASSET § MANAGEMENT, INC., ORION US § HOLDINGS 1 L.P., BROOKFIELD § BRP HOLDINGS (CANADA) INC., § BRIAN LAWSON, HARRY § GOLDGUT, RICHARD LEGAULT, § SACHIN SHAH, and JOHN § STINEBAUGH, § § No. 406, 2020 Defendants-Below, § Appellants/Cross-Appellees, § § § v. § § Court Below: Court of Chancery § of the State of Delaware MARTIN ROSSON and CITY OF § DEARBORN POLICE AND FIRE § REVISED RETIREMENT SYSTEM § (CHAPTER 23), § C.A. No. 2019-0757 § Plaintiffs-Below, § Appellees/Cross-Appellants. §
Submitted: June 30, 2021 Decided: September 20, 2021
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and MONTGOMERY-REEVES, Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery. REVERSED.
Kevin G. Abrams, Esquire, Eric A. Veres, Esquire, Stephen C. Childs, Esquire, Abrams & Bayliss LLP, Wilmington, Delaware. Of Counsel: John A. Neuwirth, Esquire (argued), Stefania D. Venezia, Esquire, Amanda K. Pooler, Esquire, Weil, Gotshal & Manges LLP, New York, New York for Appellants/Cross-Appellees. Ned Weinberger, Esquire, Derrick Farrell, Esquire, Mark Richardson, Esquire, Labaton Sucharow LLP, Wilmington, Delaware; Peter B. Andrews, Esquire, Craig J. Springer, Esquire, David M. Sborz, Esquire, Andrews & Springer LLC, Wilmington, Delaware. Of Counsel: Steven J. Purcell, Esquire, Douglas E. Julie, Esquire (argued), Robert H. Lefkowitz, Esquire, Kaitlyn T. Devenyns, Esquire, Purcell Julie & Lefkowitz LLP, New York, New York; Jeremy S. Friedman, Esquire, David F.E. Tejtel, Esquire, Friedman Oster & Tejtel PLLC, Bedford Hills, NY for Appellees/Cross-Appellants.
2 VALIHURA, Justice:
This is an interlocutory appeal from an Opinion and Order of the Court of Chancery
holding that Appellees/Cross-Appellants, former stockholders of TerraForm Power, Inc.
(“TerraForm”), have direct standing to challenge TerraForm’s 2018 private placement of
common stock to Appellant/Cross-Appellees Brookfield Asset Management, Inc. and its
affiliates, a controlling stockholder, for allegedly inadequate consideration. The trial court
held that Plaintiffs did not state direct claims under Tooley v. Donaldson, Lufkin &
Jennette, Inc.,1 but did state direct claims predicated on a factual paradigm “strikingly
similar” to that of Gentile v. Rossette,2 and that Gentile was controlling here. Appellants
contend that Gentile is inconsistent with Tooley and that this Court’s decision in Gentile
has created confusion in the law and therefore ought to be overruled.
Overruling a precedent of this Court should only occur after a full and fair
presentation and searching inquiry has been made of the justifications for such judicial
action. Having now engaged in such inquiry after a full and fair presentation of the issues
by the parties, and for the reasons set forth herein, we now overrule Gentile. Accordingly,
we REVERSE the judgment below, not because the Court of Chancery erred, but rather,
because the Vice Chancellor correctly applied the law as it existed, recognizing that the
claims were exclusively derivative under Tooley, and that he was bound by Gentile.
1 845 A.2d 1031 (Del. 2004). 2 906 A.2d 91 (Del. 2006).
3 I. Relevant Facts and Procedural Background3
A. The Parties
Nominal Defendant Below TerraForm Power, Inc. (“TerraForm” or the
“Company”) was, at the time of the proceedings below, a publicly traded Delaware
corporation with its principal place of business in New York City. TerraForm acquired,
owned, and operated solar and wind assets in North America and Western Europe.4 The
Company’s common stock traded on the NASDAQ Stock Market under the ticker symbol
“TERP.”
Appellant Brookfield Asset Management, Inc. (“Brookfield”) is a Canadian
corporation headquartered in Toronto. Brookfield is an alternative asset manager that
primarily conducts business through subsidiaries.5 At the time the Complaint was filed,
Brookfield and its affiliates beneficially owned 61.5 percent of TerraForm.
Appellant Orion US Holdings 1 L.P. (“Orion Holdings”) is a Delaware limited
partnership and an affiliate of Brookfield through which Brookfield has held beneficial
voting and dispositive power over Brookfield’s TerraForm shares.
3 The facts, except as otherwise noted, are taken from the operative Verified Stockholder Derivative and Class Action Complaint, C.A. No. 2020-0050-SG (the “Complaint” or Compl.”) and from the Court of Chancery’s Opinion below. In this procedural posture, they are presumed to be true. 4 App. to Op. Br. A86 [hereinafter, “A___”] (Compl. at ¶ 13). 5 A87 (Compl. at ¶ 15). Hundreds of Brookfield’s subsidiaries are incorporated in Delaware or otherwise organized as Delaware entities, including: Brookfield Properties, Inc. (which owns Christiana Mall in Newark, DE), Brookfield Properties Investor LLC, Brookfield Financial Partners, L.P., BOP Management Inc., BOP Properties Holdings LLC, Brookfield Mountain LLC, BOP North Cove Marina LLC, BOP Camarillo LLC, BOP (US) LLC, and BOP One North End LLC.
4 Defendant Below Brookfield BRP Holdings (Canada) Inc. (“BRP Holdings”) is a
Canadian corporation and an affiliate of Brookfield. BRP Holdings’s sole purpose appears
to be holding TerraForm stock. In June 2018, in connection with the Private Placement,
BRP Holdings along with Orion Holdings, joined a Governance Agreement with
TerraForm. The Governance Agreement establishes certain rights and obligations of
TerraForm and Brookfield related to the Company’s governance.
Appellants Brian Lawson, Harry Goldgut, Richard Legault, and Sachin Shah served
as directors of TerraForm. Lawson is a Senior Managing Partner and the Chief Financial
Officer (“CFO”) of Brookfield. Goldgut is Vice Chair of Brookfield’s Renewable Group
and Brookfield’s Infrastructure Group. Legault is Vice Chairman of Brookfield. Shah is
a Managing Partner of Brookfield. He also serves as Chief Executive Officer (“CEO”) of
Brookfield Renewable Partners and BRP Holdings.
Appellant John Stinebaugh was TerraForm’s CEO and was appointed as
TerraForm’s CEO by Brookfield. He is employed as a Managing Partner of Brookfield
and receives no direct compensation from TerraForm for his service as CEO. Instead, he
receives his compensation solely from Brookfield.
Appellees Martin Rosson (“Rosson”) and City of Dearborn Police and Fire Revised
Retirement System (Chapter 23) (“Dearborn,” and collectively with Rosson, “Plaintiffs”)
were holders of TerraForm Class A common stock prior to a merger in July 2020.6
6 A86 (Compl. at ¶ 13). TerraForm eliminated its previous share structure and thereafter had only a single class of stock, namely, the Class A, which was entitled to one vote per share.
5 B. Brookfield’s Investment in Terraform
In October 2017, Brookfield became Terraform’s controlling stockholder, owning
through Brookfield’s affiliates 51 percent of Terraform’s outstanding Class A common
stock. Brookfield had the power to appoint Terraform’s CEO, CFO, and General Counsel
pursuant to a Master Services Agreement and governance agreement. Pursuant to
TerraForm’s certification of incorporation (the “Charter”) and its majority holdings,
Brookfield had the right to designate four of Terraform’s seven directors and used that
power to designate four members of Brookfield’s senior management, namely, Defendants
Lawson, Goldgut, Legault, and Shah, to Terraform’s Board.
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IN THE SUPREME COURT OF THE STATE OF DELAWARE
BROOKFIELD ASSET § MANAGEMENT, INC., ORION US § HOLDINGS 1 L.P., BROOKFIELD § BRP HOLDINGS (CANADA) INC., § BRIAN LAWSON, HARRY § GOLDGUT, RICHARD LEGAULT, § SACHIN SHAH, and JOHN § STINEBAUGH, § § No. 406, 2020 Defendants-Below, § Appellants/Cross-Appellees, § § § v. § § Court Below: Court of Chancery § of the State of Delaware MARTIN ROSSON and CITY OF § DEARBORN POLICE AND FIRE § REVISED RETIREMENT SYSTEM § (CHAPTER 23), § C.A. No. 2019-0757 § Plaintiffs-Below, § Appellees/Cross-Appellants. §
Submitted: June 30, 2021 Decided: September 20, 2021
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and MONTGOMERY-REEVES, Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery. REVERSED.
Kevin G. Abrams, Esquire, Eric A. Veres, Esquire, Stephen C. Childs, Esquire, Abrams & Bayliss LLP, Wilmington, Delaware. Of Counsel: John A. Neuwirth, Esquire (argued), Stefania D. Venezia, Esquire, Amanda K. Pooler, Esquire, Weil, Gotshal & Manges LLP, New York, New York for Appellants/Cross-Appellees. Ned Weinberger, Esquire, Derrick Farrell, Esquire, Mark Richardson, Esquire, Labaton Sucharow LLP, Wilmington, Delaware; Peter B. Andrews, Esquire, Craig J. Springer, Esquire, David M. Sborz, Esquire, Andrews & Springer LLC, Wilmington, Delaware. Of Counsel: Steven J. Purcell, Esquire, Douglas E. Julie, Esquire (argued), Robert H. Lefkowitz, Esquire, Kaitlyn T. Devenyns, Esquire, Purcell Julie & Lefkowitz LLP, New York, New York; Jeremy S. Friedman, Esquire, David F.E. Tejtel, Esquire, Friedman Oster & Tejtel PLLC, Bedford Hills, NY for Appellees/Cross-Appellants.
2 VALIHURA, Justice:
This is an interlocutory appeal from an Opinion and Order of the Court of Chancery
holding that Appellees/Cross-Appellants, former stockholders of TerraForm Power, Inc.
(“TerraForm”), have direct standing to challenge TerraForm’s 2018 private placement of
common stock to Appellant/Cross-Appellees Brookfield Asset Management, Inc. and its
affiliates, a controlling stockholder, for allegedly inadequate consideration. The trial court
held that Plaintiffs did not state direct claims under Tooley v. Donaldson, Lufkin &
Jennette, Inc.,1 but did state direct claims predicated on a factual paradigm “strikingly
similar” to that of Gentile v. Rossette,2 and that Gentile was controlling here. Appellants
contend that Gentile is inconsistent with Tooley and that this Court’s decision in Gentile
has created confusion in the law and therefore ought to be overruled.
Overruling a precedent of this Court should only occur after a full and fair
presentation and searching inquiry has been made of the justifications for such judicial
action. Having now engaged in such inquiry after a full and fair presentation of the issues
by the parties, and for the reasons set forth herein, we now overrule Gentile. Accordingly,
we REVERSE the judgment below, not because the Court of Chancery erred, but rather,
because the Vice Chancellor correctly applied the law as it existed, recognizing that the
claims were exclusively derivative under Tooley, and that he was bound by Gentile.
1 845 A.2d 1031 (Del. 2004). 2 906 A.2d 91 (Del. 2006).
3 I. Relevant Facts and Procedural Background3
A. The Parties
Nominal Defendant Below TerraForm Power, Inc. (“TerraForm” or the
“Company”) was, at the time of the proceedings below, a publicly traded Delaware
corporation with its principal place of business in New York City. TerraForm acquired,
owned, and operated solar and wind assets in North America and Western Europe.4 The
Company’s common stock traded on the NASDAQ Stock Market under the ticker symbol
“TERP.”
Appellant Brookfield Asset Management, Inc. (“Brookfield”) is a Canadian
corporation headquartered in Toronto. Brookfield is an alternative asset manager that
primarily conducts business through subsidiaries.5 At the time the Complaint was filed,
Brookfield and its affiliates beneficially owned 61.5 percent of TerraForm.
Appellant Orion US Holdings 1 L.P. (“Orion Holdings”) is a Delaware limited
partnership and an affiliate of Brookfield through which Brookfield has held beneficial
voting and dispositive power over Brookfield’s TerraForm shares.
3 The facts, except as otherwise noted, are taken from the operative Verified Stockholder Derivative and Class Action Complaint, C.A. No. 2020-0050-SG (the “Complaint” or Compl.”) and from the Court of Chancery’s Opinion below. In this procedural posture, they are presumed to be true. 4 App. to Op. Br. A86 [hereinafter, “A___”] (Compl. at ¶ 13). 5 A87 (Compl. at ¶ 15). Hundreds of Brookfield’s subsidiaries are incorporated in Delaware or otherwise organized as Delaware entities, including: Brookfield Properties, Inc. (which owns Christiana Mall in Newark, DE), Brookfield Properties Investor LLC, Brookfield Financial Partners, L.P., BOP Management Inc., BOP Properties Holdings LLC, Brookfield Mountain LLC, BOP North Cove Marina LLC, BOP Camarillo LLC, BOP (US) LLC, and BOP One North End LLC.
4 Defendant Below Brookfield BRP Holdings (Canada) Inc. (“BRP Holdings”) is a
Canadian corporation and an affiliate of Brookfield. BRP Holdings’s sole purpose appears
to be holding TerraForm stock. In June 2018, in connection with the Private Placement,
BRP Holdings along with Orion Holdings, joined a Governance Agreement with
TerraForm. The Governance Agreement establishes certain rights and obligations of
TerraForm and Brookfield related to the Company’s governance.
Appellants Brian Lawson, Harry Goldgut, Richard Legault, and Sachin Shah served
as directors of TerraForm. Lawson is a Senior Managing Partner and the Chief Financial
Officer (“CFO”) of Brookfield. Goldgut is Vice Chair of Brookfield’s Renewable Group
and Brookfield’s Infrastructure Group. Legault is Vice Chairman of Brookfield. Shah is
a Managing Partner of Brookfield. He also serves as Chief Executive Officer (“CEO”) of
Brookfield Renewable Partners and BRP Holdings.
Appellant John Stinebaugh was TerraForm’s CEO and was appointed as
TerraForm’s CEO by Brookfield. He is employed as a Managing Partner of Brookfield
and receives no direct compensation from TerraForm for his service as CEO. Instead, he
receives his compensation solely from Brookfield.
Appellees Martin Rosson (“Rosson”) and City of Dearborn Police and Fire Revised
Retirement System (Chapter 23) (“Dearborn,” and collectively with Rosson, “Plaintiffs”)
were holders of TerraForm Class A common stock prior to a merger in July 2020.6
6 A86 (Compl. at ¶ 13). TerraForm eliminated its previous share structure and thereafter had only a single class of stock, namely, the Class A, which was entitled to one vote per share.
5 B. Brookfield’s Investment in Terraform
In October 2017, Brookfield became Terraform’s controlling stockholder, owning
through Brookfield’s affiliates 51 percent of Terraform’s outstanding Class A common
stock. Brookfield had the power to appoint Terraform’s CEO, CFO, and General Counsel
pursuant to a Master Services Agreement and governance agreement. Pursuant to
TerraForm’s certification of incorporation (the “Charter”) and its majority holdings,
Brookfield had the right to designate four of Terraform’s seven directors and used that
power to designate four members of Brookfield’s senior management, namely, Defendants
Lawson, Goldgut, Legault, and Shah, to Terraform’s Board.
The Charter required that the TerraForm Board have a Conflicts Committee
composed of the three non-Brookfield directors (the “Conflicts Committee”).7 The
Conflicts Committee was responsible for reviewing and approving material transactions
and matters in which a conflict may exist between TerraForm and Brookfield (and its
affiliates). Additionally, TerraForm’s Charter contained a supermajority voting provision,
requiring an affirmative vote of at least two-thirds of the outstanding shares of common
stock to amend certain Charter provisions.
C. Terraform Seeks to Finance a Buyout of Saeta Through an Equity Offering
Around January 2018, Brookfield approached TerraForm regarding an opportunity
to acquire for $1.2 billion Saeta Yield, S.A. (“Saeta”), a publicly-traded Spanish company
that owned and operated wind and solar energy assets (the “Saeta Acquisition”).
7 A239 (Charter Art. VI, § 7). Since May 23, 2018, Mark McFarland, Christian S. Fong and Carol Burke comprised the Conflicts Committee.
6 TerraForm had the debt capacity and cash to fund most, if not all, of the Saeta Acquisition.
Notwithstanding this debt capacity, Brookfield recognized the substantial upside
associated with the Saeta Acquisition and steered TerraForm towards funding it with a
backstopped equity offering that, according to Plaintiffs, allowed Brookfield to increase its
ownership percentage of TerraForm at a discount to TerraForm’s anticipated fair value.
On January 23, 2018, Brookfield and TerraForm informed the Conflicts Committee
that, in addition to funding the Saeta Acquisition with debt, TerraForm would raise
approximately $600 - $700 million of equity in the public markets. Brookfield indicated
that in addition to participating up to its pro rata portion of the equity offering (i.e., 51
percent), it was willing to backstop part of the equity offering. At this time, the Conflicts
Committee decided not to retain an independent financial advisor and relied on advice from
Barclays Capital, Inc. (“Barclays”), which was serving as TerraForm’s financial advisor.
The Conflicts Committee met on January 26, 2018 and again on January 29. At the
end of the meeting on the 29th, it determined that the proposed backstop was advisable and
in TerraForm’s best interests. The Conflicts Committee still had not engaged or consulted
with a financial advisor. Instead, it relied on the members of TerraForm’s management
and Brookfield representatives for advice.
On February 6, 2018, without any assistance from an independent financial advisor,
the Conflicts Committee approved a support agreement with Brookfield (the “Support
Agreement”), pursuant to which Brookfield contracted to backstop up to 100 percent of a
$400 million public equity offering (the “Backstop”) if the offering price equaled
7 TerraForm’s five-day volume weighted average price ending February 6, 2018, which was
$10.66 per share.8
Brookfield’s Backstop obligations were contingent on the successful
commencement of a tender offer for Saeta (the “Tender Offer”) under applicable Spanish
law and on the prior effectiveness of the TerraForm registration statement, if required.
TerraForm and Brookfield agreed that the pricing, size, and timing of the Equity offering,
including the decision to use the Backstop, would be subject to prior review and approval
of the Conflicts Committee, together with any other necessary approvals. It was also
agreed in the Support Agreement that TerraForm and the Conflicts Committee would retain
an independent financial advisor (meaning independent from Brookfield) to provide advice
regarding the Equity Offering. However, the Conflicts Committee waited until late May
2018 to begin consulting with its own financial advisor, Greentech Capital Advisors
Securities, LLC (“Greentech”).
On February 7, 2018, TerraForm publicly disclosed its intention to acquire all
outstanding shares of Saeta via the Tender Offer. TerraForm announced its expectation to
fund the $1.2 billion acquisition with $800 million in available liquidity and the $400
million Equity Offering. On May 3, 2018 TerraForm commenced the Tender Offer, and
on May 10, 2018, TerraForm filed its definitive proxy statement with the SEC seeking
8 A83–84 (Compl. at ¶ 5); A114–15 (Compl. at ¶¶ 61–63). At the February 6, 2018 meeting, the Conflicts Committee noted that reducing the Equity Offering component of the Saeta Acquisition would be in TerraForm’s best interests due, in part, to recent stock market volatility. A114–15 (Compl. n.13). The five-day period included the two lowest closing prices for TerraForm’s stock in a nearly two-year period. A129–30 (Compl. at ¶ 103).
8 stockholder approval for the issuance of up to 61 million shares of Class A Common Stock
in connection with the planned Equity Offering. TerraForm’s stockholders approved the
share issuance on May 23, 2018 at TerraForm’s annual meeting.
D. Brookfield Steers Terraform into the Private Placement, which Increases Brookfield’s Economic Interest and Voting Power in Terraform
Minutes after the stockholders approved the Share Issuance at the annual meeting,
the full Board met to discuss the Equity Offering and backstop. Stinebaugh proposed to
the Board that TerraForm raise $650 million, rather than $400 million, through the sale of
equity because “the market expect[ed] a $650 million total equity offering and that the
impact to the returns on the Saeta transaction would not be material.”9 Shah indicated that
Brookfield would be prepared to increase the size of the backstop from $400 million back
up to $650 million. By that point, the Tender Offer to acquire Saeta was scheduled to
expire in only a few weeks, and TerraForm had little time to finalize its financing plan.
Stinebaugh then proposed that if the Equity Offering presented too much market risk, the
full amount be offered to Brookfield through a private placement at $10.66 per share. At
the conclusion of the meeting, TerraForm’s Board determined that the Conflicts Committee
should consider Brookfield’s proposal to increase the size of the Backstop to $650 million.
After the full Board meeting on May 23, 2018, the Conflicts Committee met to
discuss the information that had just been presented. There was no discussion of the
proposed private placement and only a discussion of the proposed increase to the equity
offering (to $650 million) and commensurate increase in Brookfield’s Backstop.
9 A84 (Compl. at ¶ 7); A118 (Compl. at ¶ 73).
9 The Conflicts Committee’s first meeting with its financial advisor, Greentech,
occurred less than an hour after the May 23, 2018 Board meeting ended. Greentech’s
written presentation to the Conflicts Committee contemplated that Brookfield would
backstop the full $650 million even though, according to meeting minutes, Brookfield first
suggested the increased Backstop only a few hours earlier. The Conflicts Committee
directed Greentech to coordinate with Barclays. It then met again the following day. At
that meeting, Greentech reviewed with the Conflicts Committee the materials provided the
previous day. These materials revealed that a $650 million equity offering would
“significantly reduce returns” and accretion from the Saeta Acquisition relative to a $400
million offering. Nonetheless, Greentech advised the Conflicts Committee that it would
be “difficult to predict the price at which the Equity Offering could be executed (and
whether it could be executed at a price above [$10.66]).”10 Greentech also noted that a
backstop covering the full amount of the Equity Offering “was very beneficial.” 11 The
Committee approved increasing the Backstop to $650 million and an amendment to the
Support Agreement reflecting such increase. As with the previous day’s meeting, there
was no discussion of a private placement.
During the period after May 24, 2018, the Conflicts Committee received no advice
concerning whether a private placement with TerraForm’s controller was fair or superior
to TerraForm’s financing alternatives. Nearly all information provided to the Conflicts
10 A122 (Compl. at ¶ 82). 11 Id. (Compl. at ¶ 83).
10 Committee in the ensuing two-week period was geared toward convincing it to abandon
the Equity Offering in favor of a $650 million private placement exclusively with
Brookfield.
On June 4, 2018, after receiving a single slide deck from Greentech, and relying
largely on the advice of Brookfield, TerraForm management, and Barclays, the Conflicts
Committee approved exercising the $650 million Backstop in lieu of the Equity Offering.
TerraForm management recommended doing away with the public offering aspect and
instead simply selling the entire amount of the proposed offering directly to Brookfield.
Despite the fact that the Conflicts Committee never received advice concerning a private
placement with Brookfield, the Conflicts Committee accepted TerraForm management’s
recommendations and approved full exercise of the Backstop–that is, a private placement
of $650 million of TerraForm stock with Brookfield at $10.66 per share.
On June 7, 2018, the Board authorized the sale of 60,975,609 shares of TerraForm
common stock to Brookfield for $650 million using the $10.66 per share Backstop price,
(i.e., the “Private Placement”). The Private Placement proceeds were used to fund the
Tender Offer along with $471 million of TerraForm’s available liquidity. The Private
Placement increased Brookfield’s economic interest in and voting power over TerraForm
from 51 percent to 65.3 percent.
With the $650 million received from Brookfield, along with the available liquidity,
TerraForm acquired approximately 95 percent of Saeta’s shares for an aggregate of $1.12
billion on June 12, 2018. Following the tender offer, TerraForm completed a squeeze-out
under Spanish law for the remaining shares of Saeta that were not tendered.
11 TerraForm’s stock price increased in the aftermath of the Saeta Acquisition and by
June 25, 2018, TerraForm’s stock was trading at $11.77 per share, 10.4 percent above the
$10.66 per share Private Placement price, representing an unrealized profit of $68 million
to Brookfield. On January 23, 2020, prior to the Complaint’s filing, TerraForm’s stock
closed at $17.30 a share, representing $400 million in unrealized profit to Brookfield since
the Private Placement.
In October 2019, TerraForm conducted a $250 million public offering for
14,907,573 shares of common stock at a price of $16.77 per share, a price 60 percent greater
than Brookfield paid in the Private Placement. Concurrently, Brookfield entered into a
second private placement purchasing 2,981,514 shares of common stock for $16.77 per
share. Brookfield’s equity percentage thereby decreased from 65.3 percent to 61.5 percent.
E. Proceedings in the Court of Chancery
On September 19, 2019, Rosson filed a verified derivative and purported class
action complaint against Brookfield, Orion, and BRP Holdings for breach of fiduciary
duties.12 On January 11, 2020, after Rosson filed his complaint and Dearborn demanded
TerraForm’s books and records, Brookfield-affiliate BR Partners proposed to acquire all
of TerraForm’s public shares.13 Dearborn then filed a verified derivative and purported
class action complaint against all Defendants for breach of fiduciary duty on January 27,
2020. The trial court consolidated the two actions and designated the Complaint filed by
12 A38–77 (Compl.); A44 (Rosson Compl.). 13 A329 (Brookfield Form F-1 Registration Statement Amendment dated Apr. 20, 2020).
12 Dearborn as the operative complaint in the consolidated action.14 The Complaint alleges
that Brookfield caused TerraForm to issue its stock in the Private Placement for inadequate
value, diluting both the financial and voting interest of the minority stockholders. The
Complaint also alleges that the Company was damaged as a result.15
Defendants moved to dismiss Plaintiffs’ direct claims on the basis that they are
entirely derivative. The Motion to Dismiss was argued on July 16, 2020.
On March 16, 2020, BR Partners and BR Corp agreed to acquire all TerraForm stock
not held by Brookfield (i.e., the “Merger”). On July 31, 2020, Brookfield affiliates
acquired all outstanding TerraForm shares not already owned by Brookfield. In light of
the Merger, the trial court granted an order dismissing the derivative counts of the
Complaint. Following the Merger, TerraForm’s public stockholders ceased to have any
interest in TerraForm, and all of TerraForm’s assets, liabilities, rights and causes of action
became the property of TerraForm’s acquirer.16
14 A145–153 (Order of Consolidation and Appointment of Lead Plaintiffs and Co-Lead Counsel). The Complaint alleges three counts of breach of fiduciary duty. Count I is against Brookfield, Orion Holdings, and BRP Holdings as controlling stockholders. Count II is against Lawson, Goldgut, Legault, and Shah. Count III is against Stinebaugh. All counts were putatively brought both derivatively and directly. 15 A140 (Compl. at ¶ 135) (“As a direct and proximate result of this misconduct, the Company and the Company’s minority stockholders (through a reduction in economic value and voting power) have been damaged.”); see also A142 (Compl. at ¶ 145) (“As a result of the misconduct described above, Defendants have caused loss and damages to the Company and its minority stockholders.”); A149 (Compl. at ¶ 149) (“As a result of the misconduct described above, Stinebaugh has caused loss and damages to the Company and the Class for which Plaintiff seeks appropriate judicial relief.”). 16 8 Del. C. § 259(a); see also Lewis v. Anderson, 477 A.2d 1040, 1044 (Del. 1984) (holding that the right to bring a derivative action passes via merger to the surviving corporation).
13 The Court of Chancery issued a thoughtful Opinion denying the Motion to Dismiss
on October 30, 2020.17 In its Opinion, the Court of Chancery rejected Plaintiffs’ arguments
that they have standing to pursue direct claims against the Defendants under Tooley v.
Donaldson, Lufkin & Jennette, Inc. The Court of Chancery explained that under Tooley,
dilution claims are classically derivative, i.e., “the quintessence of a claim belonging to an
entity: that fiduciaries, acting in a way that breaches their duties, have caused the entity to
exchange assets at a loss.”18 The court explained further that the claims are still derivative,
and that “[t]his rationale extends even where a controlling stockholder allegedly causes a
corporate overpayment in stock and consequent dilution of the minority interest.”19 Thus,
it held that “under Tooley alone, the Plaintiffs’ overpayment claims neatly fall into the
derivative category.”20
Notwithstanding its conclusion that the Plaintiffs had failed to state direct claims
under Tooley, the court nevertheless found that Plaintiffs had stated direct claims because
the claims were predicated on facts similar to those presented in Gentile v. Rossette.21 In
fact, the Court of Chancery observed that “[t]he facts alleged in the Complaint fit Gentile’s
transactional paradigm to a T.”22 In Gentile, this Court determined that “the plaintiffs pled
17 In re TerraForm Power, Inc. S’holders Litig., 2020 WL 6375859 (Del. Ch. Oct. 30, 2020) (hereafter, “Opinion”). 18 Opinion, 2020 WL 6375859, at *9. 19 Id. 20 Id. at *11. 21 906 A.2d 91 (Del. 2006). 22 Opinion, 2020 WL 6375859, at *12.
14 two independent harms arising from the transaction: (1) that the corporation was caused
to overpay (in stock) for the debt forgiveness, and (2), the minority stockholders lost a
significant portion of the cash value and voting power of the minority interest.”23
Regarding Gentile, the Court of Chancery observed that the current law is, as a matter of
doctrine, unsatisfying.24 But it concluded that it was “not free to decide cases in a way that
deviates from binding Supreme Court precedent.”25 Accordingly, it held that
[c]onsistent with Gentile, the Plaintiffs have made a sufficient pleading that Brookfield is TerraForm’s controller, that Brookfield caused TerraForm to issue excessive shares of its stock in exchange for insufficient consideration, and that the exchange caused an increase in the percentage of the outstanding shares owned by Brookfield, and a corresponding decrease in the share percentage owned by the public (minority) stockholders. Such a pleading is sufficient, under controlling Supreme Court precedent, to withstand the Defendant’s Motion to Dismiss the Plaintiffs’ direct claims.26
Bound by this Court’s decision in Gentile, the Court of Chancery determined that Plaintiffs
had standing to assert direct claims and denied the Defendants’ Motion to Dismiss.
Finally, the Court of Chancery held that Plaintiffs’ “entrenchment” claims could not
withstand dismissal because they did not satisfy the “reasonably conceivable” pleading
standard.
On November 9, 2020, Defendants submitted an application to the trial court for
certification of an interlocutory appeal of the Court of Chancery’s decision denying their
motion to dismiss. The trial court granted Defendants’ application on November 24, 2020,
23 Gentile, 906 A.2d at 99. 24 Opinion, 2020 WL 6375859, at *15. 25 Id. at *16. 26 Id.
15 finding that the appeal could end the litigation and would serve considerations of justice
“by clarifying an area of law that appears to be in a state of flux.” 27 It held that, “in light
of case law questioning the continued vitality of Gentile at the trial court level, and in light
of criticism at the Supreme Court level,” the matter should be available for review by the
Supreme Court at this Motion to Dismiss stage in the interests of justice.28
Defendants filed a timely Notice of Appeal on November 30, 2020. This Court
accepted the interlocutory appeal on December 14, 2020.
F. Contentions on Appeal and Cross Appeal
First, Appellants contend that the Plaintiffs’ claims are exclusively derivative under
Tooley and that the Supreme Court’s decision in Gentile deviated from, and is doctrinally
inconsistent with, the “simple analysis” set forth in Tooley. Second, Appellants assert that,
because Gentile contradicts and undermines long-standing case law, complicates real-
world commercial transactions, and is superfluous given existing legal remedies, that stare
decisis is inapplicable, and that Gentile should be overruled.
Appellees contend on cross-appeal that the Court of Chancery erred in holding that
they had failed to plead reasonably conceivable direct claims for voting power dilution.
II. Standard of Review
The Delaware Supreme Court exercises de novo review when evaluating a trial
court’s decision to deny a motion to dismiss.29 Additionally, the Delaware Supreme Court
27 A488–490 (Letter Op. at 2–4). 28 A489 (Letter Op. at 3). 29 In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 70 (Del. 1995).
16 reviews questions relating to standing under the de novo standard of review.30
III. Analysis
A. Standing is a Threshold Question
In El Paso, we explained that “‘[t]he concept of standing, in its procedural sense,
refers to the right of a party to invoke the jurisdiction of a court to enforce a claim or redress
a grievance.’”31 Thus, “‘[a]s a preliminary matter, a party must have standing to sue in
order to invoke the jurisdiction of a Delaware court.’”32 Standing is therefore properly
viewed as a threshold issue “to ‘ensure that the litigation before the tribunal is a “case or
controversy” that is appropriate for the exercise of the court’s judicial powers.’”33
We explained further in El Paso that “[d]erivative standing is a ‘creature of equity’
that was created to enable a court of equity to exercise jurisdiction over corporate claims
asserted by stockholders ‘to prevent a complete failure of justice on behalf of the
corporation.’”34 A plaintiff may lose standing in a variety of ways during the progress of
litigation. In corporate derivative litigation, for example, a plaintiff’s standing is
extinguished as a result of loss of plaintiff’s status as a stockholder.35 Once standing is
30 El Paso Pipeline GP Co. v. Brinckerhoff, 152 A.3d 1248, 1256 (Del. 2016). 31 El Paso, 152 A.3d at 1256 (citing Schoon v. Smith, 953 A.2d 196, 200 (Del. 2008)). 32 Id. (quoting Ala. By-Prod. Corp. v. Cede & Co., 657 A.2d 254, 264 (Del. 1995)). 33 Id. (quoting Dover Historical Soc’y. v. City of Dover Planning Comm’n., 838 A.3d 1103, 1110 (Del. 2003)). 34 Id. (citing Schoon, 953 A.2d at 208). 35 Id. (citing Lewis, 477 A.2d at 1049 (Del. 1984)). Frequently, the issue of standing arises in the context of the continuous ownership rule which is reflected in 8 Del. C. § 327 and in Court of Chancery Rule 23.1. In Lewis, this Court held that “[a] plaintiff who ceases to be a shareholder,
17 lost, “the court lacks the power to adjudicate the matter, and the action will be dismissed
as moot unless an exception applies.”36 Thus, the question of derivative standing is
“‘properly a threshold question that the [c]ourt may not avoid.’”37
B. The Test for Derivative Standing: Tooley and Gentile’s Carve-Out
1. First, the Tooley Test for Direct Versus Derivative Standing
A derivative suit enables a stockholder to bring a suit on behalf of the corporation
for harm done to the corporation.38 Because a derivative suit is brought on behalf of the
corporation, any recovery must go to the corporation. However, a stockholder who is
directly injured retains the right to bring an individual action for injuries affecting his or
her legal rights as a stockholder.39 “Such a claim is distinct from an injury caused to the
corporation alone.”40 In such individual suits, “the recovery or other relief flows directly
to the stockholders, not to the corporation.”41 Classification of a particular claim as
whether by reason of a merger or for any other reason, loses standing to continue a derivative suit.” 477 A.2d at 1049. 36 El Paso, 152 A.3d at 1256–57 (footnotes omitted). 37 Id. at 1257; see also Morris v. Spectra Energy P’rs (DE) GP, LP, 246 A.3d 121, 129 (Del. 2021) (“The standing inquiry ‘has assumed special significance in the area of corporate law.’”). 38 Tooley, 845 A.2d at 1036. 39 An example of harm unique to the stockholders would be a board failing to disclose all material information when seeking stockholder action. See, e.g., In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 766, 772 (Del. 2006) (“This Court has recognized, as did the Court of Chancery, that where it is claimed that a duty of disclosure violation impaired the stockholders’ right to cast an informed vote, that claim is direct.”). 40 Id. 41 Id.
18 derivative or direct can be difficult.42 Further, “[t]he decision whether a suit is direct or
derivative may be outcome-determinative.”43 Such is the case here as the central question
is whether Plaintiffs have direct standing to pursue their claims or whether their claims are
entirely derivative. If the latter, then their claims were extinguished in the Merger, and
they lack standing to pursue them.
In Tooley, this Court undertook to create a simple test of straightforward application
to distinguish direct claims from derivative claims. Under the Tooley test, the
determination of whether a stockholder’s claim is direct or derivative “must turn solely on
the following questions: (1) who suffered the alleged harm (the corporation or the
stockholders, individually); and (2) who would receive the benefit of any recovery or other
remedy (the corporation or the stockholders, individually)?”44
In explaining its test further, the Tooley Court cited with approval the analysis set
forth by Chancellor Chandler in Agostino v. Hicks,45 and adopted his suggestion that part
42 See, e.g., Agostino v. Hicks, 845 A.2d 1110, 1117–1118 (Del. Ch. 2004) (noting that “[t]he distinction between direct and derivative claims is frustratingly difficult to describe with precision,” and that “[r]eference to Supreme Court opinions, while certainly instructive, does not conclusively resolve how this Court should draw the line between direct and derivative claims.”). Other courts applying our law have experienced this difficulty as evidenced by our issuance of several opinions responding to other courts’ request to answer certified questions involving distinguishing between a direct and derivative claim. See, e.g., Citigroup Inc. v. AWH Investment P’ship, 140 A.3d 1125 (Del. 2016) (en banc); NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 118 A.3d 175 (Del. 2015) (en banc); Culverhouse v. Paulson & Co., 133 A.3d 195 (Del. 2016) (en banc). 43 Tooley, 845 A.2d at 1036. Derivative claims are also subject to higher pleading standards than direct claims. 44 Id. at 1033 (emphasis in original). 45 845 A.2d 1110 (Del. Ch. 2004).
19 of the inquiry should be whether the stockholder has demonstrated that he or she has
suffered an injury that is not dependent on an injury to the corporation:
In the context of a claim for breach of fiduciary duty, the Chancellor articulated the inquiry as follows: “[l]ooking at the body of the complaint and considering the nature of the wrong alleged and the relief requested, has the plaintiff demonstrated that he or she can prevail without showing an injury to the corporation?” We believe that this approach is helpful in analyzing the first prong of the analysis: what person or entity has suffered the alleged harm? The second prong of the analysis should logically follow.46
In announcing this simplified test, this Court retreated from “our confusing
jurisprudence on the direct/derivative dichotomy.”47 It concluded that the trial court’s
analysis had been “hindered . . . because it focused on the confusing concept of ‘special
injury’ as the test for determining whether a claim is derivative or direct.” 48 It then
unequivocally abandoned the “special injury” concept in stating:
In our view, the concept of “special injury” that appears in some Supreme Court and Court of Chancery cases is not helpful to a proper analytical
46 Tooley, 845 A.2d at 1036. 47 Id. at 1034. 48 Id. at 1035. In describing the confusing jurisprudence, the Tooley Court observed that, “[t]his simple analysis is well embedded in our jurisprudence, but some cases have complicated it by injection of the amorphous and confusing concept of ‘special injury.’” Id. After observing that the “special injury” concept had been set forth in Elster v. American Airlines, Inc., 100 A.2d 219 (Del. Ch. 1953), it criticized the application of that concept in Bokat v. Getty Oil, 262 A.2d 246 (Del. 1970) and in Lipton v. News Int’l Plc., 514 A.2d 1075 (Del. 1986) as not setting forth the proper analysis. The Tooley Court then noted that “[t]he proper analysis has been and should remain that stated in Grimes; Kramer and Parnes.” Id. at 1039 (citing Grimes v. Donald, 673 A.2d 1207 (Del. 1996); Kramer v. Western Pac. Indus. Inc., 546 A.2d 348 (Del. 1988), and Parnes v. Bally Enter. Corp., 722 A.2d 1243 (Del. 1999)). As explained herein, we note that Gentile added to the confusion by applying In re Tri-Star Pictures, Inc. Litig, 643 A.2d 319 (Del. 1993). In Tri- Star, where stockholder plaintiffs alleged that a controlling stockholder stood on both sides of a dilutive assets-for-stock transaction, this Court employed the special injury test and did not cite to Kramer. Instead, the Court in Tri-Star referred to the special injury test set forth in Lipton.
20 distinction between direct and derivative actions. We now disapprove the use of the concept of “special injury” as a tool in that analysis.49
It expressly disapproved “both the concept of ‘special injury’ and the concept that a claim
is necessarily derivative if it affects all stockholders equally.”50 Instead, “the tests going
forward should rest on those set forth in” its opinion.51
2. The Gentile Carve-Out from the Tooley Test
Two years after deciding Tooley, this Court decided Gentile. Gentile involved a
controlling stockholder and transactions that resulted in an improper transfer of both
economic value and voting power from the minority stockholders to the controlling
stockholder. There, a corporation’s CEO and controlling stockholder forgave a portion of
the company’s $3 million debt to him in exchange for additional equity. The applicable
contractual conversion rate was $0.50 of debt per share, but the CEO and the company’s
board of directors (which included himself and one other person) agreed to $0.05 of debt
per share. Without disclosing the underlying transaction, the board secured a stockholder
vote authorizing the shares needed to issue the additional equity.
The share issuance increased the CEO’s equity position from 61.19 percent to 93.49
percent. The minority stockholders suffered a corresponding decrease in their interest from
38.81 percent to 6.51 percent. When the CEO later negotiated a merger between the
corporation and its only competitor, the CEO received a generous put agreement that was
49 Tooley, 845 A.2d at 1035. 50 Id. at 1039. 51 Id.
21 not disclosed to the other stockholders. The trial court dismissed the ensuing stockholders
litigation after concluding that the claims were exclusively derivative and that the plaintiff
stockholders’ standing had been extinguished following the merger.
This Court reversed and allowed the plaintiffs to proceed with direct claims. The
Court reasoned that there were two independent aspects of the plaintiffs’ claims, namely,
the overpayment claim and the minority’s significant loss of cash value and voting power.
These claims constituted “a species of corporate overpayment claim” that was “both
derivative and direct in character.”52 Accordingly, this Court held that “[u]nlike the typical
overpayment transaction,”53 a dual-natured claim arises where:
(1) a stockholder having a majority or effective control causes the corporation to issue “excessive” shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and (2) the exchange causes an increase in the percentage of the outstanding shares owned by the controlling shareholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders.54
The Court in Gentile clearly recognized that allowing direct standing to assert a
corporate dilution/overpayment claim was a deviation from the norm:
Normally, claims of corporate overpayment are treated as causing harm solely to the corporation and, thus, are regarded as derivative. The reason (expressed in Tooley terms) is that the corporation is both the party that suffers the injury (a reduction in its assets or their value) as well as the party to whom the remedy (a restoration of the improperly reduced value) would flow. In the typical corporate overpayment case, a claim against the corporation’s fiduciaries for redress is regarded as exclusively derivative, irrespective of whether the currency or form of overpayment is cash or the corporation’s stock. Such claims are not normally regarded as direct,
52 Gentile, 906 A.2d at 99. 53 Id. at 100 n.21. 54 Id. at 100.
22 because any dilution in value of the corporation’s stock is merely the unavoidable result (from an accounting standpoint) of the reduction in the value of the entire corporate entity, of which each share of equity represents an equal fraction. In the eyes of the law, such equal “injury” to the shares resulting from a corporate overpayment is not viewed as, or equated with, harm to specific shareholders individually.55
The Gentile panel addressed the tension with Tooley by acknowledging that
“[a]lthough the corporation suffered harm (in the form of a diminution of its net worth),
the minority shareholders also suffered a harm that was unique to them and independent of
any injury to the corporation.”56 Focusing on the identity of the alleged wrongdoer, the
Court stated that, the harm to the minority plaintiffs “resulted from a breach of a fiduciary
duty owed to them by the controlling shareholder, namely, not to cause the corporation to
effect a transaction that would benefit the fiduciary at the expense of the minority
shareholders.”57 Thus, in Gentile the Court held that the value represented by the corporate
overpayment is “an entitlement that may be claimed by the public shareholders directly
and without regard to any claim the corporation may have.”58
3. Plaintiffs Have Standing Under Gentile but Not Tooley
In this case, the Vice Chancellor determined that Plaintiffs’ Complaint “does not
state direct claims without Gentile, but that it does state direct claims under Gentile’s
55 Id. at 99. 56 Id. at 103 (citing Tooley, 845 A.2d at 1039). 57 Id. 58 Id. at 100.
23 rationale.”59 In other words, that the Complaint does not state direct claims under “a classic
Tooley analysis,”60 but that it does under Gentile. We agree.
As noted above, to plead a direct claim under Tooley, a “stockholder must
demonstrate that the duty breached was owed to the stockholder and that he or she can
prevail without showing an injury to the corporation.”61 We do not think Plaintiffs can
prevail without showing an injury to the corporation. The claim is derivative because they
allege an overpayment (or over-issuance) of shares to the controlling stockholder
constituting harm to the corporation for which it has a claim to compel the restoration of
the value of the overpayment. Clearly, the gravamen of the Complaint is that the Private
Placement was unfair and that TerraForm suffered harm.62 Further, they seek rescissory
damages on behalf of TerraForm.63
If the Private Placement was for inadequate consideration, the worth of the
stockholder’s interest is reduced to the extent TerraForm was harmed -- as the Vice
Chancellor put it, “a classic derivative claim.” The alleged economic dilution in the value
of the corporation’s stock is the unavoidable result of the reduction in the value of the entire
corporate entity, of which each share of equity represents an equal fraction. Dilution is a
typical result of a corporation’s raising funds through the issuance of additional new shares.
59 Opinion, 2020 WL 6375859, at *9. 60 Id. 61 Tooley, 845 A.2d at 1039. 62 See A140 (Compl. at ¶ 135) (alleging damage to “the Company” and to its minority stockholders only “through a reduction in economic value and voting power”). 63 A82, A141 (Compl. at ¶¶ 1, 140).
24 As the Court in Gentile recognized, normally such equal “injury” to the shares resulting
from a corporate overpayment is not equated to specific, individual harm to stockholders.
Here, the economic and voting power dilution that allegedly harmed the stockholders
flowed indirectly to them in proportion to, and via, their shares in TerraForm, and thus any
remedy should flow to them the same way, derivatively via the corporation.64
That is why in El Paso we suggested that Gentile “can be read as undercutting the
traditional rule that dilution claims are classically derivative.”65 We think that when a
corporation exchanges equity for assets of a stockholder who is already a controlling
stockholder for allegedly inadequate consideration, the dilution/overpayment claim is
exclusively derivative. Carving out an exception to the Tooley test and allowing for a
separate, direct claim in such circumstance presents both practical and doctrinal difficulties
as we discuss herein. To the extent the corporation’s issuance of equity does not result in
a shift in control from a diversified group of public equity holders to a controlling interest,
(a circumstance where our law, e.g., Revlon,66 already provides for a direct claim), holding
64 In such cases, the remedy could be cancelling the shares and allowing the corporation to sell them for fair value or requiring the acquirer to pay fair value for the shares. 65 152 A.3d at 1251. 66 Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173, 182 (Del. 1986) (finding that once a corporate board decides to effectuate the sale of the company, its duty changes “from the preservation of [the company] as a corporate entity to the maximization of the company’s value at a sale for the stockholders’ benefit”). As we explained in Paramount Communications, Inc. v. QVC Network Inc., “[i]n the absence of devices protecting the minority stockholders, stockholder votes are likely to become mere formalities where there is a majority stockholder . . . [t]he acquisition of majority status and the consequent privilege of exerting the powers of majority ownership come at a price,” and that price “is usually a control premium which recognizes not only the value of a control block of shares, but also compensates the minority stockholders for their resulting loss of voting power.” 637 A.2d 34, 42–43 (Del. 1994).
25 Plaintiffs’ claims to be exclusively derivative under Tooley is logical and re-establishes a
consistent rule that equity overpayment/dilution claims, absent more, are exclusively
derivative.67 Because we agree with the Vice Chancellor that Plaintiffs’ claims do fit
precisely into the Gentile paradigm, we now explain why Gentile should be overruled.
C. Gentile Should be Overruled
1. Gentile’s Tension with Tooley
Appellants persuasively argue that, “[g]iven the clear conflict between Gentile and
Tooley, the confusion Gentile imposes on Tooley’s straightforward and easy-to-apply
analysis, and the policy reasons for removing the exception . . ., this Court should exercise
its discretion to overrule Gentile.68 After careful consideration of the relevant doctrinal,
practical, and policy considerations, we agree and address these points in turn. We first
focus on Gentile’s analytical tension with Tooley.
In Gentile, this Court stated that its holding “fits comfortably within the analytical
framework mandated by Tooley.”69 Based upon that comment, the Vice Chancellor stated
that, “to the extent that Gentile can be said to rely on Tri-Star, the Gentile decision itself
67 See, e.g., Oliver v. Bos. Univ., 2006 WL 1064169, at *17 (Del. Ch. Apr. 14, 2006) (“Under Tooley, the harm alleged by the Plaintiffs was suffered by the corporation because it was the corporation in the Plaintiffs’ scenario that issued its stock too cheaply.”); Green v. Locate Plus Holdings Corp., 2009 WL 1478553, at *2 (Del. Ch. May 15, 2009) (“Classically, Delaware law has viewed as derivative claims by shareholders alleging that they have been wrongly diluted by a corporation’s overpayment of shares.”); Feldman v. Cutaia, 951 A.2d 727, 732–33 (Del. 2008). 68 Op. Br. at 26. 69 Gentile, 906 A.2d at 102. We note that Tooley was decided by an en banc panel of five Justices. Gentile was decided by a panel of three Justices, all of whom were part of the Tooley en banc panel.
26 forecloses any argument that Gentile’s citation of Tri-Star renders Gentile irreconcilable
with Tooley.”70 But our critical self-assessment of Gentile, coupled with subsequent
decisions at the trial court level, lead us now to the conclusion that the “fit” is not so
“comfortable.”
Instead, we agree with Appellants that certain aspects of Gentile are in tension with
Tooley.71 One aspect is Gentile’s conclusion that the economic and voting dilution was an
injury to stockholders independent of any injury to the corporation. A second is Gentile’s
reliance on Tri-Star, which itself was criticized in Tooley. A third is Gentile’s focus on the
alleged wrongdoer, here the controller, and the devising of a special rule or Tooley “carve-
out” for cases involving controlling stockholders.
As to the first point, in Tooley, this Court stated that “[t]he stockholder’s claimed
direct injury must be independent of any alleged injury to the corporation.”72 In Gentile,
this Court acknowledged that the corporation was injured also, but nevertheless, found the
plaintiffs’ claims to be both derivative and direct:
Because the means used to achieve that result is an overpayment (or “over- issuance”) of shares to the controlling stockholder, the corporation is harmed 70 Opinion, 2020 WL 6375859, at *13. 71 We intend no disrespect to any prior panel of this Court. Rather, we recognize that the law must evolve as a result trial and error, through the tests of time and practical application. The Court at the time perceived Gentile as being harmonious with the Tooley test. The parties in Gentile did not appear to have perceived the case as a departure either as they did not move for rehearing en banc as only an en banc panel may modify or overrule a prior decision of this Court. Supr. Ct. R. 4(f). Cases should not be overruled because the composition of the Court changes and members of the Court may have different views, and mere difference of opinion should not -- and does not today -- cause a departure from precedent. Rather, with the benefit of hindsight and the added perspective of fifteen years of development in Delaware corporate law which our predecessors did not enjoy, we find compelling reasons to revisit Gentile. 72 Tooley, 845 A.2d at 1039 (emphasis added).
27 and has a claim to compel the restoration of the value of the overpayment. That claim, by definition, is derivative.73
It went on to find a “separate, and direct, claim arising out of that same transaction.”74 The
direct claim was “an improper transfer–or expropriation–of economic value and voting
power from the public shareholders to the majority or controlling stockholder.”75
The gravamen of Plaintiffs’ Complaint is that the Private Placement allegedly
harmed the Company by issuing shares to Brookfield for an unfairly low price and harmed
the stockholders indirectly through economic and voting power dilution proportional to
their shareholdings. Thus, the harm to the stockholders was not independent of the harm
to the Company, but rather flowed indirectly to them in proportion to, and via their shares
in, TerraForm. We agree with the Vice Chancellor that under Tooley, this alleged corporate
overpayment in stock and consequent dilution of minority interest falls “neatly” into
Tooley’s derivative category.
73 Gentile, 906 A.2d at 100. 74 Id. 75 Id. This Court in Gentile chose not to use the word “dilution” and instead used “extraction or expropriation:” In Tri-Star, this Court articulated the harm to the minority in terms of a “dilution” of the economic value and voting power of the stock held by the minority. In this case, we adopt a more blunt characterization -- extraction or expropriation -- because that terminology describes more accurately the real-world impact of the transaction upon the shareholder value and voting power embedded in the (pre- transaction) minority interest, and the uniqueness of the resulting harm to the minority shareholders individually, than does a description framed in terms of “dilution.” 906 A.2d at 102 n.26. But the presence of a controlling stockholder does not negate the fact that the minority stockholders were diluted in proportion to their stockholdings in TerraForm.
28 Gentile’s second point of tension with Tooley is its reliance upon Tri-Star. In
Gentile, the plaintiffs argued that their case was “functionally indistinguishable from, and
thus [was] controlled by Tri-Star.”76 In Gentile, this Court summarized their argument:
Their argument runs as follows: even if the SinglePoint shares had value, the debt conversion was a self-dealing corporate transaction with a significant stockholder, that increased the voting and economic value of that significant stockholder’s interest in SinglePoint, at the expense and to the corresponding detriment of the minority shareholders. The plaintiffs claim that the Court of Chancery erred by reading into Tri-Star a requirement that for such a transaction to give rise to a direct claim, the loss of voting power must be ‘material,’ i.e., that it must reduce the public stockholders’ voting power from majority to minority status.77
This Court then “conclude[d] that the plaintiffs are correct and that Tooley and Tri-Star,
properly applied, compel the conclusion that the debt conversion claim was both derivative
and direct.”78 In fact, it held that “[t]his case is . . . functionally indistinguishable from Tri-
Star, and Tri-Star’s governing rule should control.”79
Plaintiffs argue on appeal that “Tooley noted that Tri-Star addressed the special
injury concept that was being discarded but did not discuss or overrule Tri-Star’s result.”80
They argue further that Gentile did not specifically discuss the “special injury” test, and
that its reference to Tri-Star “merely recognizes that the special injury analysis partially
concerns the same issue as Tooley’s first prong -- i.e., whether stockholders were directly
76 Id. at 101. 77 Id. at 99. 78 Id. 79 Id. at 101. 80 Ans. Br. at 27.
29 harmed.”81 They also point out that Gentile cites to Kramer which Tooley had cited with
approval.
Some historical perspective may be useful in explaining the confusion that Tooley
sought to eliminate, and why there is support for the view that Gentile is doctrinally in
tension with Tooley. The phrase “special injury” was first used by the Court of Chancery
in Elster v. Am. Airlines, Inc.82 There, the plaintiff asserted a direct claim for dilution,
alleging that a stock issuance to senior management was for inadequate consideration. The
court rejected plaintiff’s claim, in part, because
[a]ny injury which plaintiff may receive by reason of the dilution of his stock would be equally applicable to all the stockholders of defendant, since plaintiff holds such a small amount of stock in proportion to the amount of stock outstanding that the control or management of defendant would not be affected by the granting of these options, and, further, since there is no averment that the pre-emptive rights of plaintiff as a stockholder are affected by their issuance.83
The Court of Chancery, in setting forth the “special injury” test, identified three
categories of direct injury. It also recognized that stockholders could be harmed indirectly
as a result of harm to the corporation and that such claims would be derivative:
There are cases . . . in which there is injury to the corporation and also special injury to the individual stockholder. In such case a stockholder . . . may proceed on his claim for the protection of his individual rights rather than in the right of the corporation. The action would then not constitute a derivative action . . . Here the wrong of which plaintiff complains is not a wrong inflicted upon him alone or a wrong affecting any particular right which he is asserting,—such as his pre-emptive rights as a stockholder, rights involving control of the corporation, or a wrong affecting the stockholders
81 Id. 82 100 A.2d 219, 222 (Del. Ch. 1953). 83 Id. at 222.
30 and not the corporation,—but is an indirect injury as a result of the wrong done to the corporation.84
But later decisions in this class of cases omitted Elster’s reference to “indirect
injury” in describing derivative claims. In Bokat v. Getty Oil Co.,85 a stockholder sought
“money damages for improper management of [the corporation].”86 Thus, the Bokat Court
classified the claims as belonging to the corporation and not its stockholders. But it reached
that result by reasoning that, “[w]hen an injury to corporate stock falls equally upon all
stockholders, then an individual stockholder may not recover for the injury to his stock
alone, but must seek recovery derivatively on behalf of the corporation.”87
Similarly, in Moran v. Household Int’l. Inc.,88 the Court of Chancery inquired
whether the plaintiffs had suffered an “injury distinct from that suffered by other
shareholders.”89 There the Court of Chancery held that the adoption of a shareholder rights
plan was not subject to an individual challenge unless shareholders were actively engaged
in a proxy fight that the rights plan would thwart. It reasoned that the claims were
derivative, “[b]ecause the plaintiffs are not engaged in a proxy battle, they suffer no injury
distinct from that suffered by other shareholders as a result of this alleged restraint on the
84 Id. (emphasis added). 85 262 A.2d 246 (Del. 1970). 86 Id. at 249. 87 Id. (citing 13 Fletcher, Corporations (Perm. Ed.) § 5913). 88 490 A.2d 1059, 1069–70 (Del. Ch. 1985), aff’d, 500 A.2d 1346 (Del. 1985). 89 Id. at 1069–70.
31 ability to gain control of [the company] through a proxy contest.”90 Moran cited Elster but
did not refer to the “special injury” concept. Instead, Moran set forth the following test for
ascertaining the nature of the claim:
To set out an individual action, the plaintiff must allege either an injury which is separate and distinct from that suffered by other shareholders, or a wrong involving a contractual right of a shareholder, such as the right to vote, or to assert majority control, which exists independently of the corporation.91
This Court affirmed the decision but did not specifically address the Court of Chancery’s
holding that the claims were derivative.92
The following year, this Court addressed the direct/derivative distinction in Lipton
v. News Int’l, Plc.93 In its analysis, Lipton compared the passages from both Moran and
Elster quoted above. But in doing so, Lipton failed to mention the third situation in Elster
giving rise to “special injury,” namely, when “a wrong affected the stockholders and not
the corporation:”
In comparing the two-pronged test of Moran with the definition of “special injury” in Elster, it appears that the term encompasses both prongs of the Moran test. That is, a plaintiff alleges a special injury and may maintain an individual action if he complains of an injury distinct from that suffered by other shareholders or a wrong involving one of his contractual rights as a shareholder. Moreover, while Moran serves as a useful guide, the case should not be construed as establishing the only test for determining whether a claim is derivative or individual in nature. Rather, as was established in
90 Id. at 1070–1071. In addition, the Court found that, although the plaintiff corporation was the defendant corporation’s largest stockholder (holding approximately five percent of the defendant corporation’s stock), it did not suffer any unique harm merely by virtue of its holdings because it had no alleged intent to use its block position to gain control of the defendant corporation. 91 Id. at 1070 (internal quotations and citations omitted). 92 Moran v. Household Int’l Inc., 500 A.2d 1346 (Del. 1985). 93 514 A.2d 1075 (Del. 1986).
32 Elster, we must look ultimately to whether the plaintiff has alleged “special” injury, in whatever form.94
In 1988, this Court again addressed the direct/derivative distinction in Kramer v.
Western Pacific Industries, Inc.95 Surprisingly, Kramer did not rely on Lipton, although it
cited it. Nor did it refer to “special injury.” There plaintiffs challenged certain corporate
insiders’ receipt of stock options and golden parachutes in a merger transaction. In
determining that the claims amounted only to “waste” and were derivative, the Court
articulated the direct/derivative test as:
[T]o have standing to sue individually, rather than derivatively on behalf of the corporation, the plaintiff must allege more than an injury resulting from a wrong to the corporation. . . . “[T]o set out an individual action, the plaintiff must allege either ‘an injury which is separate and distinct from that suffered by other shareholders,’ or a wrong involving a contractual right of a shareholder . . . which exists independently of any right of the corporation.” For a plaintiff to have standing to bring an individual action, he must be injured directly or independently of the corporation.96
In 1993, this Court next addressed the direct/derivative analysis in Tri-Star. There
we relied on Lipton and the “special injury” test without ever citing to the more recent
decision in Kramer. Tri-Star stated the “special injury” test as follows:
It is well settled that the test used to distinguish between derivative and individual harm is whether the plaintiff suffered ‘special injury.’ A special injury is established where there was a wrong suffered by the plaintiff that
94 Id. at 1078; see also Kurt M. Heyman & Patricia L. Enerio, The Disappearing Distinction between Derivative and Direct Actions, 4 DEL. L. REV. 155 (2001). 95 546 A.2d 348 (Del. 1988). 96 Id. at 351 (quoting Moran, 490 A.2d at 1070 and citing Bokat, 262 A.2d at 249) (emphasis in original).
33 was not suffered by all the stockholders generally or where the wrong involves a contractual right of the stockholders, such as the right to vote.97
Like Lipton, Tri-Star omits Elster’s third category of special injury “when the wrong
affects the stockholders and not the corporation.”
But then three years later, in Grimes v. Donald,98 this Court, in distinguishing
between direct and derivative claims, relied almost exclusively on Kramer and Moran but
did not mention either Lipton or Tri-Star. Nor did it mention the “special injury” concept:
“Although tests have been articulated many times, it is often difficult to distinguish between a derivative and an individual action.” . . . The distinction depends upon “‘the nature of the wrong alleged’ and the relief, if any, which could result if plaintiff were to prevail.” . . . To pursue a direct action, the stockholder-plaintiff “must allege more than an injury resulting from a wrong to the corporation.” . . . The plaintiff must state a claim for “‘an injury which is separate and distinct from that suffered by other shareholders,’ . . . or a wrong involving a contractual right of a shareholder . . . which exists independently of any right of the corporation.”99
Then came our decision in Parnes v. Bally Entertainment Corp.,100 where the
plaintiff alleged that the Chairman and CEO of Bally wrongfully required that corporate
assets be transferred to him in order to obtain his consent in proceeding with a merger.
This Court concluded that such allegations directly challenged the fairness of the process
97 Tri-Star, 634 A.2d at 330 (finding that plaintiffs stated individual claims for cash-value and voting power dilution and separately, that the controlling stockholder’s alleged breach of the duty of disclosure, if true, is a unique special harm to each uninformed stockholder for which the wrongdoer is answerable in damages.). 98 673 A.2d 1207 (Del. 1996). 99 Id. at 1213 (citing Kramer, 546 A.3d at 352 and Moran, 490 A.2d at 1070). 100 722 A.2d 1243 (Del. 1999).
34 and the price in the merger.101 Citing only to Kramer and avoiding the term “special
injury,” it stated simply that “[a] derivative claim is one that is brought by a stockholder,
on behalf of the corporation, to recover for harms done to the corporation.”102 By contrast,
“[s]tockholders may sue on their own behalf (and, in appropriate circumstances, as
representatives of a class of stockholders) to seek relief for direct injuries that are
independent of any injury to the corporation.”103
In 2004, this Court in Tooley sought to bring clarity to this confusing area of the law
by discarding the “special injury” test and announcing a simple test that would be easier to
apply. It is important to identify precisely which part of Tri-Star’s analysis was discarded
by Tooley. The answer lies in the refocused Tooley test itself and in Tooley’s statement
that
two confusing propositions have encumbered our caselaw governing the direct/derivative distinction. The “special injury” concept, applied in cases such as Lipton, can be confusing in identifying the nature of the action. The same is true of the proposition that stems from Bokat -- that an action cannot be direct if all stockholders are equally affected or unless the stockholder’s injury is separate and distinct from that suffered by other stockholders.104
The problem with Lipton, according to Tooley, was that the trial court had found a
“special injury” because the board’s manipulation of certain transactions “worked an injury
101 Id. at 1245. 102 Id. 103 Id. (citing Kramer, 546 A.3d at 352). This Court further stated that, “[a] stockholder who directly attacks the fairness or validity of a merger alleges an injury to the stockholders, not the corporation, and may pursue such a claim even after the merger has been consummated.” Id. 104 Tooley, 845 A.2d at 1038–39.
35 upon the plaintiff-stockholders unlike the injury suffered by other stockholders.”105 That
was because the plaintiff-stockholder was actively seeking to gain control of the defendant
corporation. According to Tooley, the court could have reached the same correct result by
simply concluding that the manipulation directly and individually harmed the stockholders,
without injuring the corporation.
The problem with this Court’s decision in Bokat, according to Tooley, was different.
Though the Tooley Court agreed that the Bokat matter was derivative, it explained that
Bokat’s concept that a suit “must be maintained derivatively if the injury falls equally upon
all stockholders” was both “confusing” and “inaccurate.”106 It was inaccurate because “a
direct, individual claim of stockholders that does not depend on harm to the corporation
can also fall on all stockholders equally, without the claim thereby becoming a derivative
claim.”107 It was “confusing” because the “equal injury” concept appeared to be intended
to address the fact that an indirect stockholder injury flowing derivatively through the
105 Id. at 1037. 106 Id. 107 Tooley, 845 A.2d at 1037. The Court of Chancery recognized this weakness in the “special injury” rule in In re Gaylord Container Corp. S’holder Litig., when it allowed a class of all non- defendant stockholders to pursue a direct claim against controlling shareholders who were also board members and who had taken entrenchment actions which included anti-takeover provisions ten days before a post-bankruptcy restructuring terminated their shares’ super-voting privileges and ended their control of the shareholder vote. 747 A.2d 71, at 73. Reviewing Moran, the Court of Chancery in Gaylord wondered why the special injury cases would classify the case as direct or derivative based on whether the entrenching board were also shareholders themselves. Id. at 80. “The mere fact that such an injury is to the economic property rights of all the stockholders rather than to their voting rights does not make the injury suffered any less ‘special’ and non-corporate.” Id. It then cited to commentators who had criticized Moran’s focus “on the similarity of treatment” as missing “the central point that fundamental shareholder rights (e.g., voting and alienability) can be infringed by a variety of board actions that treat existing shareholders alike.” Id. at 81 (citing 2 Principles of Corporate Governance: Analysis & Recommendations § 7.01 n.3 at 30 (1994)).
36 corporation diminishes each share of stock equally.108 But the relevant factor was not that
all stockholders could equally assert the claim -- it was that the claim “does not arise out
of any independent or direct harm to the stockholders, individually.”109
The Tooley Court then noted that “[t]he proper analysis has been and should remain
that stated in Grimes, Kramer, and Parnes. That is, a court should look to the nature of the
wrong and to whom the relief should go.”110
Further, Gentile, by focusing on whether one group of stockholders (a controller)
was impacted differently from another group (the public or minority holders), arguably
relied on one aspect of Tri-Star’s special injury concept, i.e., focusing on whether a wrong
suffered by plaintiff was not suffered by all stockholders generally.111 We note that, if this
were the proper focus and requirement for finding a direct injury as opposed to whether a
stockholder suffered an injury independent of any injury suffered by the corporation, then
that would seem to preclude a class of all stockholders asserting a direct claim. Tooley’s
108 Tooley, 845 A.2d at 1037. 109 Id. 110 Id. at 1039. 111 See Tri-Star, 634 A.2d at 330 (“A special injury is established where there is a wrong suffered by plaintiff that was not suffered by all stockholders generally or when the wrong involves a contractual right of stockholders, such as the right to vote.”). But Tri-Star recognized two different types of direct injury to shareholder voting rights: “Voting power dilution is a harm distinct and separate from that suffered by the minority shareholders due to the alleged nondisclosures made by the defendants in their proxy materials. The harm from voting power dilution goes to the impact of an individual stockholder's vote, the latter harm goes to a stockholder's right to cast an informed vote.” Id. at n.12 (emphasis in original).
37 first prong instead properly focuses on who suffered the alleged harm and requires that the
stockholder demonstrate that he or she has suffered an injury that is not dependent on an
injury to the corporation.
In sum, Gentile’s statements that Tri-Star “created the analytical framework for this
issue,” that Gentile “was functionally indistinguishable from Tri-Star,” and that it applied
Tri-Star and Tooley in determining the debt conversion claim was both derivative and
direct,112 detracts from Tooley’s stated goal of adding clarity to a difficult and important
area of our law. Although Gentile does not expressly discuss the “special injury” test, it
creates confusion by heavily relying on Tri-Star’s analysis,113 which in turn relies on Lipton
and the “special injury test” that Tooley rejected. By expressly stating that it had “applied”
Tooley and Tri-Star, Gentile blurred Tooley’s clear rejection of the “special injury” test.114
The third area of tension is Gentile’s focus on the wrongdoer. Gentile is premised
on the presence of a controlling stockholder that allegedly used its control to “expropriate”
and extract value and voting power from the minority stockholders. Controlling
stockholders owe fiduciary duties to the minority stockholders, but they also owe fiduciary
duties to the corporation.115 The focus on the alleged wrongdoer deviates from Tooley’s
112 Gentile, 906 A.2d at 99, 101. 113 We note in this regard that Gentile states that “Tri-Star’s governing rule should control.” Id. at 101. 114 Tri-Star also did not cite to Kramer which, by contrast, had been cited with approval in Tooley. Gentile, however, does cite Kramer, but for the proposition that equity dilution is normally a derivative harm, not a direct harm. Gentile, 906 A.2d at 99. 115 Carr v. New Enter. Assocs., Inc., 2018 WL 1472336, at * 22 (Del. Ch. 2018) (“A controlling stockholder owes fiduciary duties to the corporation and its minority stockholders, and it is
38 determination, which turns solely on two central inquiries of who suffered the harm and
who would receive the benefit of any recovery. That shift has led to doctrinal confusion in
our law. The presence of a controller, absent more, should not alter the fact that such equity
overpayment/dilution claims are normally exclusively derivative because the Tooley test
does not turn on the identity of the alleged wrongdoer.116
Because of this shift in focus, the Vice Chancellor aptly observed that “[p]ost-
Gentile, Delaware courts have struggled to define the boundaries of dual-natured
claims.”117 Understandably, cases decided soon after Gentile assumed that direct standing
was only available in circumstances involving a controlling stockholder or, by implication,
a functionally equivalent control group.118
Thereafter, however, courts construed Gentile more expansively to logically extend
to non-controller issuances involving participating insiders. In Carsanaro v. Bloodhound
Tech, Inc.,119 for example, the Court of Chancery held that Gentile also applied to self-
‘prohibited from exercising corporate power (either formally as directors or officers or informally through control over officers and directors) so as to advantage [itself] while disadvantaging the corporation.’”) (citation omitted). 116 See, e.g., Agostino, 845 A.2d at 1126 n.84 (“The identity of the culpable parties does not speak to whether the conduct of those parties injured the corporation, rather than its stockholders.”). 117 Opinion, 2020 WL 6375859, at *13 (citing Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *7 (Del. Ch. July 26, 2018). 118 Feldman, 956 A.2d at 657 (Del. Ch. 2007) (“Indeed, any other interpretation would swallow the general rule that equity dilution claims are solely derivative, and would cast great doubt on the continuing vitality of the Tooley framework.”), aff’d, 951 A.2d 727 (Del. 2008). Under Feldman, a dual-natured claim arises only where “a controlling stockholder, with sufficient power to manipulate the corporate processes, engineers a dilutive transaction whereby that stockholder receives an exclusive benefit of increased equity ownership and voting power for inadequate consideration.” Id. at 657. 119 65 A.3d 618 (Del. Ch. 2013).
39 interested stock issuances effectuated by a board lacking a disinterested and independent
majority. The Court of Chancery reasoned that “the core insight of dual injury applies to
non-controller issuances in which insiders participate.”120
Similarly, in In re Nine Sys. Corp. S’holders. Litig.,121 the Court of Chancery found
direct standing with respect to a dilutive recapitalization transaction in which the directors
and their affiliated funds participated. The court commented that “it makes little sense to
hold a controlling stockholder to account to the minority for improper expropriation after
a merger but to deny standing for stockholders to challenge a similar expropriation by a
board of directors after a merger.”122 The court asked why Delaware law should hold
controlling stockholders to a higher standard than the board of directors when, after all, the
board has exclusive authority to manage the business and affairs of the corporation, which
includes the power to issue stock.123 We agree 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.
This expanded application of Gentile was subsequently curtailed by this Court’s
120 Id. at 658. The Court of Chancery stated further that “[t]he expropriation principle operates only when defendant fiduciaries (i) had the ability to use the levers of corporate control to benefit themselves and (ii) took advantage of the opportunity.” Id. at 659. 2014 WL 4383127, at *26 (Del. Ch. Sept. 4, 2014), aff’d sub nom. Fuchs v. Wren Holdgs., 121
LLC, 129 A.3d 882 (Del. 2015) (TABLE). 122 Id. at *28. 123 Id.
40 opinion reversing the Court of Chancery in El Paso.124 The challenged transaction in El
Paso did not fall squarely under the Gentile paradigm as the entity involved was a limited
partnership and the alleged harm involved economic dilution where the limited partner
conceded that he had proved only expropriation of economic value, and not any dilution of
voting rights. Understandably, the defendants in El Paso did not argue on appeal that
Gentile should be overruled. Thus, this Court was not asked -- and did not reconsider --
Gentile at that time. However, in El Paso we expressly “decline[d] the invitation to further
expand the universe of claims that can be asserted ‘dually’ to hold here that the extraction
of solely economic value from the minority by a controlling stockholder constitutes direct
injury.”125 Thus, we made clear that Gentile should be read narrowly because any other
interpretation would swallow the general rule that equity dilution claims are solely
derivative and cast doubt on the Tooley framework.126
124 See, e.g., Carr, 2018 WL 1472336, at *9 (“to invoke the dual dynamic recognized in Gentile, a controlling stockholder must exist before the challenged transaction.”) (emphasis in original); Cirillo Family Trust v. Moezinia, 2018 WL 3388398, *16 (Del. Ch. 2018) (“the Gentile paradigm only applies when a stockholder already possessing majority or effective control causes the corporation to issue more shares to it for inadequate consideration.”) (emphasis in original). 125 152 A.3d at 1264. 126 Id.; see also W&M Helenthal Holdg. LLC v. Schmitt, C.A. No. 2018-0505-AB (Del. Ch. June 3, 2019) (TRANSCRIPT) at 51:11–115 (“In its 2016 El Paso decision, our Supreme Court made clear that the Gentile doctrine is to be construed narrowly and that the sort of dual claims described in that case only apply in the unique circumstances of that case.”); Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at * 10 (Del. Ch. Jul. 26, 2018) (“El Paso thus implicitly rejected the reasoning of decisions such as Carsanaro and Nine Systems, which had extended Gentile to any dilutive issuance approved by a conflicted board.”); In re: Zohar III, Corp., --- B.R. ----, 2021 WL 2495146, at *39 (Bankr. D. Del. June 18, 2021) (“While the continued application and viability of the holdings in Gentile have been questioned, they have not been overruled. Regardless, they should be applied cautiously and narrowly.”).
41 The Court of Chancery in Sciabacucchi observed our guidance that “the reasoning
of El Paso, applied here, means that Gentile must be limited to its facts, which involved a
dilutive stock issuance to a controlling stockholder.”127 However, it noted that limiting
Gentile to controller situations rather than expanding it to non-controller dilution cases, or
overruling it entirely is, as a matter of doctrine, unsatisfying, because there is no reason to
permit direct dilution claims against controllers while prohibiting direct claims in other
contexts.128
Chief Justice Strine’s concurrence in El Paso agreed that the facts presented did
“not require us to consider Gentile’s ongoing viability in the corporate law context,” and
that it was “[s]ufficient for today” that “we refuse to extend Gentile further, to a situation
where a limited partnership was already firmly under the control of a general partner and
where the transaction under attack had no effect whatsoever on limited partner voting
rights.”129 But he more directly questioned Gentile’s continued viability as sound law,
writing that Gentile “is a confusing decision, which muddies the clarity of our law in an
127 Sciabacucchi, 2018 WL 3599997, at *10. In Reith v. Lichtenstein, 2019 WL 2714065 (Del. Ch. June 28, 2019), the Court of Chancery determined that even an issuance of preferred stock to a controller for allegedly unfair consideration which resulted in a dilution of the minority stockholders’ voting power, was derivative because stockholders retained the same percentage of the Company’s shares of common stock after the Preferred Stock was issued as they had before. See also Klein v. H.I.G. Capital, L.L.C., 2018 WL 6719717, at *7 (Del. Ch. Dec. 19, 2018) (noting “this court has exercised caution in applying the Gentile framework”); Almond v. Glenhill Advisors LLC, 2018 WL 3954733, at *24 (Del. Ch. Aug. 17, 2018) (the Supreme Court in El Paso “recently construed the [Gentile] doctrine narrowly” and “[i]n the wake of El Paso, this court has exercised caution in applying the Gentile framework”). We agree with Appellants that the different treatment of common and preferred stock in these cases makes little sense. 128 Id. at *10, n.147 129 El Paso, 152 A.3d at 1266 (Strine, C.J., concurring).
42 important context,”130 and that it “cannot be reconciled with the strong weight of our
precedent.”131
It was not until this case that the issue of Gentile’s continued viability was squarely
presented to this Court.132 The Vice Chancellor appropriately observed that changing
settled law by the Supreme Court requires reasoned analysis by this Court. The difficulty
courts have had in applying Gentile in a logically consistent way, along with Gentile’s
erosion of Tooley’s simple analysis convinces us that Gentile should be overruled.
2. The Gentile “Carve-Out” is Superfluous
Aside from the doctrinal difficulties discussed above, we see no practical need for
the “Gentile carve-out.” Other legal theories, e.g., Revlon, provide a basis for a direct claim
for stockholders to address fiduciary duty violations in a change of control context.133 And
as we observed in El Paso, “equity holders confronted by a merger in which derivative
claims will pass to the buyer have the right to challenge the merger itself as a breach of the
130 Id. at 1265–66. 131 Id. at 1266. 132 In Sheldon v. Pinto Technology Ventures, L.P., for example, this Court did not address the continued vitality of Gentile because the sole issue presented was whether the plaintiff had adequately alleged the existence of a control group. 220 A.3d 245, 250 n.15 (Del. 2019). 133 El Paso, 152 A.3d at 1266 (Strine, C.J., concurring) (noting that even in a change of control situation, “there is no gap in our law for Gentile to fill” since “Revlon already accords a direct claim to stockholders when a transaction shifts control of a company for a diversified investor base to a single controlling stockholder.”).
43 duties they are owed.”134 Such stockholders might claim that the seller’s board failed to
obtain sufficient value for the derivative claims.135
In addition, Gentile creates the potential practical problem of allowing two separate
claimants to pursue the same recovery.136 The double recovery rule prohibits a plaintiff
from recovering twice for the same injury from the same tortfeasor.137 In a corporate-
overpayment-to-a-controlling shareholder claim, the amount of the overpayment deprives
the corporation of assets to which minority shareholders have only a pro rata claim as
residual claimants on the corporation’s assets. If the corporation recovers the overpaid
funds, then the minority shareholders are beneficiaries of that recovery on that same pro
rata basis.
134 El Paso, 152 A.3d at 1252 (citing Parnes v. Bally Entm’t Corp., 722 A.2d 1243, 1245 (Del. 1999) (“In order to state a direct claim with respect to a merger, a stockholder must challenge the validity of the merger itself, usually by charging the directors with breaches of fiduciary duty resulting in unfair dealing and/or unfair price.”) (additional citations omitted). 135 See, e.g., Morris, 246 A.3d at 132 (“After Parnes, ‘to state a direct claim with respect to a merger, a stockholder must challenge the validity of the merger itself, usually by charging the directors with breaches of fiduciary duty resulting in unfair dealing and/or unfair price.’”); id. at 136 (“When the court is faced with a post-merger claim challenging the fairness of a merger based on the defendant’s failure to secure value for derivative claims, we think the Primedia framework provides a reasonable basis to conduct a pleadings-based analysis to evaluate standing on a motion to dismiss.”). 136 We note that following the acquisition in Gentile (when the corporation was acquired by a third party and plaintiffs lost derivative standing), the acquiring company was liquidated and the stockholders of the acquired company were left as the only parties who could recover for a dilution claim. 137 As this Court observed in J.P. Morgan Chase & Co. S’holder Litig., “if the plaintiffs’ damages theory is valid, the directors of an acquiring corporation would be liable to pay both the corporation and its shareholders the same compensatory damages for the same injury. That simply cannot be.” 906 A.2d at 773.
44 As Appellees concede, the double recovery rule does not permit both the direct and
derivative claimants to recover for that single injury. Rather, they propose that the Court
of Chancery devise a mechanism to “proportion” the recovery for the overpaid funds
between the plaintiffs if both derivative and direct shareholders claim it.138 Permitting such
“dual” claims unnecessarily complicates fashioning a remedy for such claims. Tooley
appropriately sought to simplify the law, not complicate it.
For the foregoing reasons, like the Court of Chancery, we think that the corporation
overpayment/dilution Gentile claims, like those present here, are exclusively derivative
under Tooley and that Gentile, for all of the reasons identified above, should be overruled.
We now explain why stare decisis does not compel our adherence to Gentile.
3. Stare Decisis Presents No Obstacle Here
Plaintiffs argue that “stare decisis” compels this Court to uphold Gentile. No doubt,
the development of and adherence to precedent is an essential feature of common law
138 COUNSEL: I think I was perhaps unclear then. I don’t think there would be a double recovery, I think that in the end, there would only be one recovery and the court may have to determine as it would on any case, whether its direct and derivative claims permitted, how to proportion the damages. I think one solution might be to really allow the direct claim to go forward because ultimately those shareholders can receive the full remedy. But I don’t at all think if the shares were underpriced by $3, that the corporation would get a $3 damages award and the shareholders would also get a $3 damages award, plus something else for derivative, for voting dilution damages, because then the shareholders would be double recovering. I don’t know if that was a satisfactory answer, but I don’t think there would be a double recovery. Oral Argument at 23:00–25:44, https://livestream.com/delawaresupremecourt/events/9697327/ videos/222905751.
45 systems,139 and as such, precedent should not be lightly cast aside. The United States
Supreme Court has explained that “[s]tare decisis ‘promotes the evenhanded, predictable,
and consistent development of legal principles, fosters reliance on judicial decisions, and
contributes to the actual and perceived integrity of the judicial process.’”140 That principle,
embodied in the Latin term, “stare decisis,”141 is an important feature of Delaware law and
of judicial restraint. As this Court stated in Seinfeld v. Verizon Comm’n, Inc., “[u]nder the
doctrine of stare decisis, settled law is overruled only ‘for urgent reasons and upon clear
manifestation of error.’”142
When re-examining a question of law in a prior case, the essential danger is that
parties have acted in reliance on the answer that this Court previously gave.143 There is no
hard and fast rule for when a decision is or is not immutable, because the nature of reliance
139 See 1 Blackstone, Commentaries, *68–70 (conceiving of the common law as having its “maxims” known and “their validity determined” by “the judges in the several courts of justice,” and that they are subject to “an established rule to abide by former precedents.”); see also Patterson v. McClean Credit Union, 491 U.S. 164, 172 (1989) (observing that “stare decisis is a basic self- governing principle within the Judicial Branch, which is entrusted with the sensitive and difficult task of fashioning and preserving a jurisprudential system that is not based upon ‘arbitrary discretion.’”) (quoting the Federalist, No. 78, p. 490 (H. Lodge ed. 1888) (A. Hamilton)). 140 Gamble v. United States, 139 S.Ct. 1960, 1969 (2019) (citation omitted). 141 Literally “to stand by things decided.” Stare Decisis, Black’s Law Dictionary (11th ed. 2019). 142 909 A.2d 117, 124 (Del. 2006) (citing Oscar George, Inc. v. Potts, 115 A.2d 479, 481 (Del. 1955)). We have quoted that language verbatim on many occasions. See, e.g., Shuba v. United Servs. Auto. Ass’n, 77 A.3d 945, 949 (Del. 2013); White v. Liberty Ins. Corp., 975 A.2d 786, 790– 91 (Del. 2009); Account v. Hilton Hotels Corp., 780 A.2d 245, 248 (Del. 2001). 143 See State v. Barnes, 116 A.3d 883, 891 (Del. 2015) (“The doctrine of stare decisis exists to protect the settled expectations of citizens because, ‘elementary considerations of fairness dictate that individuals should have an opportunity to know what the law is and to conform their conduct accordingly.’”) (alteration omitted) (quoting Landsgraf v. USI Film Prods., 511 U.S. 244, 265 (1994)).
46 interests at play and the importance of improving doctrinal law are highly context-specific
inquiries. Thus, the formulation we gave in Seinfeld, (quoting Oscar George v. Potts)
though longstanding, is necessarily vague.
Nevertheless, decisions by Delaware and federal courts offer some guideposts by
which to measure and weigh these reliance interests. One consideration is the nature of
any reliance interests in the decision. Reliance interests flow from a number of sources.144
Because parties have a right to have confidence that long-established rules will be retained,
the “antiquity” of the precedent is accorded importance,145 with due consideration for
whether the challenged precedent was itself a departure.146 The area of law the precedent
addresses is likewise a consideration, since some subjects are more apt to induce reliance
than others.147
144 For example, the General Assembly, in its lawmaking capacity, necessarily relies upon this Court’s pronouncements of what the law already is. Thus, “prior statute-interpreting rulings gain approving harmony from ensuing legislative silence.” See Nationwide Prop & Cas. Ins. Co. v. Irizarry, 2020 WL 525667, at *4 (Del. Super. Jan. 31, 2020) (“Any concerted judicial misconstruction of a statute is subject to corrective tuning by the legislature, and thus prior statute- interpreting rulings gain approving harmony from ensuing legislative silence.”), aff’d, 238 A.3d 191, 2020 WL 5031953 (Del. Aug. 25, 2020) (affirming the Superior Court on the basis of its opinion). 145 Gamble, 139 S.Ct. at 1969 (“the strength of the case for adhering to such decisions grows in proportion to their ‘antiquity’”) (quoting Montejo v. Louisiana, 556 U.S. 778, 792 (2009)). 146 See Adarand Constructors, Inc. v. Peña, 515 U.S. 200, 231 (1995) (if the precedent under consideration itself departed from the Court’s jurisprudence, returning to the “intrinsically sounder” doctrine established in prior cases may “better serv[e] the values of stare decisis than would following the more recently decided cases inconsistent with the decisions that came before it”). 147 See Kimble v. Marvel Entertainment, LLC, 576 U.S. 446, 457 (2015) (“Considerations favoring stare decisis are at their acme” in “cases involving property and contract rights” because “parties are especially likely to rely on such precedents when ordering their affairs.”). In criminal matters, reliance interests are so strong that “under the doctrine of stare decisis, we must take seriously the
47 Clarity and administrability also relate to reliance interests, since reliance can only
be created by a ruling which is amenable to consistent, stable, and thus predictable
application.148 Thus, a “traditional justification for overruling a prior case is that a
precedent may be a positive detriment to coherence and consistency in the law, either
because of inherent confusion created by an unworkable decision, or because the decision
poses a direct obstacle to the realization of important objectives embodied in other laws.”149
Bounded up with reliance interests are institutional considerations of the Court.
Precedent should not be overturned by narrow majorities150 and very recent precedent
should not lightly be overturned when the only change is the composition of the court,151
because society must be able to “presume that bedrock principles are founded in the law
longstanding interpretation of a statute held by our Superior Court, especially when it has been relied upon by the key actors in our criminal justice system.” Barnes, 116 A.3d at 890–91. 148 See Itel Containers Int’l Corp. v. Huddleston, 507 U.S. 60, 79–80 (1993) (Scalia, J., concurring) (“Like almost all their predecessors, these latest tests are so uncertain in their application (and in their anticipated life span) that they can hardly be said to foster stability or to engender reliance deserving of stare decisis protection.”). 149 Patterson, 491 U.S. at 173; see also Urdan v. WR Cap. P’rs, LLC, 244 A.3d 668, 678 (Del. 2020) (overturning, in part, Schultz v. Ginsburg, 965 A.2d 661 (Del. 2009) which has “caused some confusion in later cases”); Brinkerhoff v. Enbridge Energy Co., Inc., 159 A.3d 242, 252 (Del. 2017) (reversing one of this Court’s prior rulings because it had departed from a common definition of bad faith used elsewhere in Delaware entity law and resulted in “confusing precedent”). 150 Supreme Court Rule 4(d) likewise informs this view, requiring a panel of this Court to seek rehearing en banc if a decision has a “reasonable likelihood” to modify or overrule a prior decision, even if the panel is unanimous. 151 See June Med. Servs. L. L. C. v. Russo, 140 S.Ct. 2103, 2134 (2020) (“I joined the dissent in Whole Women’s Health [v. Hellerstedt, 136 S.Ct. 2292 (2016)] and continue to believe that the case was wrongly decided,” but concurring in the same outcome four years later because “[t]he legal doctrine of stare decisis requires us, absent special circumstances, to treat like cases alike.”) (Roberts, C.J., concurring in the judgment). But see id. at 2151 (“[w]hen our prior decisions clearly conflict with the text of the Constitution we are required to ‘privilege [the] text over our own precedents.’”) (Thomas, J., dissenting.).
48 rather than in the proclivities of individuals.”152 “Overruling precedent is never a small
matter.”153 Mere disagreement with the reasoning and outcome of a prior case, even strong
disagreement, cannot be adequate justification for departing from precedent or stare decisis
would have no meaning.154
This Court decided Gentile fifteen years ago. This is old enough, we think, that we
can properly say that the practical and analytical difficulties courts have encountered in
applying it reflect fundamental unworkability and not growing pains, but not so old as to
carry the weight of “antiquity.” Moreover, that gap in time has given us the perspective to
see that Gentile is more of a departure from the then-recent Tooley than the continuation
we perceived it to be at the time.155 Any reliance is further muted by El Paso, from which
parties could rightly anticipate that Gentile’s continued viability was in doubt. Finally, in
overturning it today we speak unanimously, with the concomitant aid to certainty that
provides. Having given all due consideration to the weight of precedent, the circumstances
persuade us that we should overrule the Gentile exception to our Tooley test for derivative
and direct standing. Accordingly, Gentile should be, and hereby is, overruled.
152 Vasquez v. Hillery, 474 U.S. 254, 265–66 (1986). 153 See Kimble, 576 U.S. at 455. 154 Id. (“Respecting stare decisis means sticking to some wrong decisions.”). 155 See, e.g., Adarand Constructors, Inc., 515 U.S. at 234 (noting that “reliance on a case that has recently departed from precedent is likely to be minimal.”).
49 D. Appellees Cross-Appeal Contention that They Have Direct Standing Regardless of Gentile is Meritless
Appellees also separately argue on cross-appeal that they have direct standing to
proceed without Gentile because the transaction consolidated Brookfield’s control of the
corporate levers of power, and so the Board violated its fiduciary duties by approving the
transaction without compensating the minority shareholders for the further diminution of
their voting power. Appellees argue that because entrenchment works a
disenfranchisement felt by the minority stockholders as voters, they have direct standing
apart from Gentile.
At the outset, it is not clear that the cross-appeal is procedurally proper. Unlike
Brookfield, Appellees did not present their application for interlocutory appeal to the Court
of Chancery,156 and Plaintiffs opposed the defendants’ application. Our rules instruct us
not to take interlocutory cross-appeals that fail to adhere to procedural requirements.157
But for the sake of efficiency, we address the issue presented.
Appellees’ direct disenfranchisement argument is twofold. First, Plaintiffs contend
that the Private Placement allowed Brookfield to expand their majority voting control
enough that a subsequent sale would not eliminate their majority status (the “Entrenchment
See Del. Supr. Ct. R. 42(c) (“An application for certification of an interlocutory appeal shall be 156
made in the first instance to the trial court.”). 157 See Del. Supr. Ct. R. 42(d)(ii) (“No interlocutory order shall be reviewed by this Court unless the appeal therefrom has been accepted by this Court in accordance with the following procedure: . . . (ii) Form of Filing. The notice of appeal and any cross-appeal shall comply with this rule, Rules 6 and 7 of this Court and with such version of Official Form M as shall be applicable to the situation”) (emphasis added) (italics in original).
50 Claim”).158 Second, the Private Placement brought Brookfield near to supermajority
voting control, a threshold that, if they crossed it, would permit them to unilaterally alter
certain provisions of the corporate charter without Appellees’ consent (the “Supermajority
Claim”).159 Appellees emphasize that theirs was a substantial loss of voting power.160
The Entrenchment Claim fails because Plaintiffs fail to allege any facts supporting
a reasonably conceivable inference that Brookfield, absent the Private Placement, would
have permitted a dilution of their equity stake sufficient to relinquish their majority control.
Brookfield’s stake in TerraForm declined slightly in the 2019 equity issuance because,
concurrently with the $250 million October 2019 public offering of close to fifteen million
shares at $16.77 per share, Brookfield made a further investment in a private placement (of
close to three million shares) at the same price.161 Plaintiffs’ theory is that Brookfield
entrenched itself in 2018 in anticipation of failing to purchase sufficient stock to maintain
control in 2019. In other words, had it not increased its majority interest in 2018 from 51
percent to 65.3 percent, and if it had acted in that hypothetical situation as it did in fact—
not participating pro rata in the 2019 offering—Brookfield would have allowed TerraForm
to issue stock and decrease its holdings below a majority level without compensation.
158 A131–32 (Compl. at ¶¶ 105–06). 159 A135 (Compl. at ¶¶ 113–14). 160 Ans. Br. at 44. Appellees also argue in their Reply Brief on Cross Appeal that “[b]ecause entire fairness review applies, the trial court erred in conducting an entrenchment analysis.” Appellees’ Reply Br. on Cross Appeal at 4. But this was not a theory that was fairly presented below. See https://livestream.com/delawaresupremecourt/events/9697327/videos/222905751, 40:46–42:06 (Oral Argument held June 30, 2021). 161 A131–32 (Compl. at ¶¶ 105–06, nn.18–19).
51 We agree that it is not reasonably conceivable that these allegations state a claim.
As the Vice Chancellor points out, Plaintiffs fail to allege that anyone knew in June 2018
that TerraForm would conduct an offering in October 2019. Moreover, it would have to
be reasonably conceivable that even had the Private Placement not occurred, Brookfield
would not have participated on a pro rata basis in the 2019 offering, thereby choosing to
forego its majority stake. Because a control premium has value, we agree it is not
reasonably conceivable that Brookfield would have declined to participate in the 2019
offering if that would translate into Brookfield forfeiting majority control for no premium.
Nor does the Supermajority Claim hit the mark, again for the reasons the Court of
Chancery explained. To overcome the supermajority threshold, Brookfield needed to
expand its equity stake to exceed two-thirds of the Company’s voting shares. The Private
Placement raised Brookfield’s share to 65.3 percent only. As the Vice Chancellor found,
Brookfield never achieved the level of control necessary to unilaterally remove the
supermajority voting rights, and Brookfield never attempted to abrogate the rights through
the 2019 offering. For the reasons stated by the Vice Chancellor, we agree that Plaintiffs’
entrenchment claims fail.
IV. Conclusion
For the foregoing reasons, this Court overrules Gentile and REVERSES the Court
of Chancery’s denial of Defendant’s Motion to Dismiss for lack of standing.
Related
Cite This Page — Counsel Stack
Brookfield Asset Management, Inc. v. Rosson, Counsel Stack Legal Research, https://law.counselstack.com/opinion/brookfield-asset-management-inc-v-rosson-del-2021.