In recent years there has been an upsurge in the number of stockholder derivative lawsuits. This type of lawsuit differs fundamentally from a securities class action. In a securities class action, the plaintiff typically pursues a claim of improper disclosure that is alleged to have improperly impacted the public trading price of a corporation's stock. In a stockholder derivative lawsuit, a current stockholder pursues a claim ostensibly for the benefit of the corporation that the stockholder alleges the corporation is unwilling to pursue itself. This very frequently involves a claim brought by the stockholder in the name of the corporation against the corporation's directors for alleged breach of fiduciary duty.

Whether a claim is a direct claim on behalf of stockholders, as in a class action, or a derivative claim on behalf of the corporation makes a great deal of difference in how or whether the courts permit such suits to proceed. As would be expected, there are a number of procedural hurdles to the maintenance of a stockholder derivative lawsuit whereby a single stockholder purports to sue in the name of a corporation on an allegation that the corporation would not otherwise protect its own interests. These include the requirements that the stockholder must (1) make a demand on the board of the corporation to pursue the claim (or demonstrate why such a demand is unnecessary) before such a suit is brought, and (2) remain a stockholder of the corporation throughout the lawsuit.

Whether a particular claim is direct or derivative has not always been clear. In the case of Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), the Delaware Supreme Court substantially clarified the test that Delaware courts must apply when trying to determine whether a stockholder's claim is a direct claim or a derivative claim brought on the corporation's behalf.

Tooley involved a claim by stockholders of the investment banking firm Donaldson, Lufkin & Jenrette, Inc. (DLJ) that the DLJ directors had breached their fiduciary duties by agreeing to delay the closing of a proposed merger with Credit Suisse by 22 days. As damages, plaintiffs sought the lost time value of the tender price they received for their DLJ stock in the merger. Applying an earlier test, the Court of Chancery concluded that plaintiffs had "at most" alleged a derivative claim that should have been brought on behalf of the corporation because plaintiffs had not alleged any injury that was distinct from injury to other stockholders. Because plaintiffs did not own stock in DLJ at the time they filed suit (they had sold it in the merger), the Court of Chancery dismissed their derivative claim.

In Tooley, the Delaware Supreme Court held that whether a stockholder's claim is derivative or direct depends solely on an analysis of two questions: (1) who suffered the harm the stockholder alleges—the stockholders or the corporation; and (2) who will receive any financial recovery or other remedy—the stockholders or the corporation. If the plaintiff alleges harm to the stockholders, and they will receive any financial recovery, the claim is direct. If the plaintiff alleges harm to the corporation, and the corporation will receive any financial recovery, the claim is derivative.

Although the Delaware Supreme Court found that the claim brought by the DLJ stockholders would not be derivative under the test it stated, it dismissed the case anyway, since even as a direct claim, the stockholders failed to show they had a legal right that was violated by the delayed closing of the merger.

In this age of increasing suits against directors for alleged breaches of duty, clarification of whether suits are direct or derivative (with all the procedural burdens such derivative suits impose upon stockholders) is critical.

Additional Information

This Update is intended only as a summary of the decision in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). You can find discussion of other recent cases and other topics of interest on our website.