Opinion ID: 1470259
Heading Depth: 1
Heading Rank: 8

Heading: Count XIII Derivative Under Kramer

Text: Feldman's argument is inconsistent with this Court's holding in Kramer v. Western Pacific Industries, Inc. [31] Kramer was decided before Tooley and employed, in part, the special injury test for determining whether a claim is derivative or direct. [32] Nevertheless, this Court has continued to rely upon other aspects of Kramer after Tooley because in Tooley, we explained why Kramer had been correctly decided: In Kramer v. Western Pacific Industries, Inc., this Court found to be derivative a stockholder's challenge to corporate transactions that occurred six months immediately preceding a buy-out merger. The stockholders challenged the decision by the board of directors to grant stock options and golden parachutes to management. The stockholders argued that the claim was direct because their share of the proceeds from the buy-out sale was reduced by the resources used to pay for the options and golden parachutes. Once again, our analysis was that to bring a direct action, the stockholder must allege something other than an injury resulting from a wrong to the corporation. We interpreted Elster to require the court to determine the nature of the action based on the nature of the wrong alleged and the relief that could result. That was, and is, the correct test. The claim in Kramer was essentially for mismanagement of corporate assets. Therefore, we found the claims to be derivative. That was the correct outcome. [33] In Gentile, we cited Kramer for the proposition that equity dilution does not generally constitute a direct harm, but, instead, a derivative one. [34] In Kramer, the plaintiff also raised a post-merger challenge to options and other compensation that had previously been issued to management, claiming, like Feldman, that he received less in the merger because of the inclusion of the options in the merger consideration. This Court's decision in Kramer explains why Count XIII is derivative under the test in Tooley. In Kramer, [35] the stockholder-plaintiff alleged that the individual defendants, who were members of the corporation's board of directors, had improperly diverted a portion of the merger proceeds to themselves in the form of stock options and golden parachutes paid out of the merger consideration. After the plaintiff lost his stock by operation of an all-cash merger, the Court of Chancery held that the plaintiff's claims were derivative in nature and dismissed them for lack of standing under Lewis v. Anderson . [36] This Court affirmed and rejected the plaintiff's argument that his claims were an attack upon the fairness of the terms of the merger and that the plaintiff was wrongfully deprived of a portion of the Merger Sale proceeds. Instead, we held that the plaintiff in Kramer alleged neither harm to the stockholders separate and distinct from that suffered by the corporation as a whole nor a direct attack on the terms of the merger. [37] In Kramer, our analysis recognized that claims of mismanagement resulting in a decrease in the value of corporate stock are derivative in nature, while attacks involving fair dealing or fair price in a corporate transaction are direct in nature. [38] Accordingly, we held that the plaintiff's claims that the individual defendants received excessive payments as a result of pre-merger transactions amounting to waste, which in turn depressed the price that the plaintiff received in the merger, fell into the former category and, as such, were properly dismissed under Lewis v. Anderson . [39] In Kramer, we concluded that the plaintiff's claim of diversion of funds and excessive payments clearly does not rise to an attack on the merger itself sufficient for his suit to survive the merger. [40] Feldman's claims in Count XIII, like the plaintiff's claims in Kramer, attack that portion of the Merger consideration received by Cutaia, Lawrence and Todd Raymond as a result of their pre-Merger ownership of the Challenged Stock Options. Feldman does not attack the Merger price or the process used by the Telx board in obtaining that price. He attacks only what he perceives as a failure on the part of the Telx board to reconsider the validity of the Challenged Stock Options and, therefore, the wrongful diversion of part of the Merger consideration to the holders of the Challenged Stock Options. As in Kramer, we hold that Feldman's attack on the validity of the Challenged Stock Options is derivative because it does not relate to the fairness of the merger itself and does not allege a harm that is distinct from that suffered by the corporation as a whole. [41] Therefore, Count XIII was also properly dismissed under Lewis v. Anderson . [42]