Opinion ID: 2811945
Heading Depth: 1
Heading Rank: 2

Heading: the events leading to the certified question3

Text: NAF Holdings, LLC (―NAF‖), a Delaware limited liability holding company wholly owned by Efrem Gerszberg, sought to acquire Hampshire Group, Limited (―Hampshire‖), a public company that produces and markets fashion apparel. NAF contracted with Li & Fung (Trading) Limited (―Li & Fung‖), a Hong Kong Company, to serve as the sourcing agent for Hampshire, which was an essential condition for the thirdparty financing commitments NAF needed to complete the acquisition. After contracting with Li & Fung, NAF created two wholly-owned subsidiaries (the ―NAF Subsidiaries‖) to effectuate the acquisition. The NAF Subsidiaries entered into a merger agreement with Hampshire, which was to take effect when the Subsidiaries purchased Hampshire‘s stock in a tender offer. NAF was not a party to the merger agreement. According to NAF, Li & Fung then repudiated its contract with NAF and refused to serve as Hampshire‘s sourcing agent, causing NAF to lose its financing commitments. 2 845 A.2d 1031, 1039 (Del. 2004). 3 The facts are taken from the Second Circuit‘s opinion certifying the question of law to this Court and from the record submitted by the parties. 2 NAF claims that because of Li & Fung‘s breach, it was unable to fund the NAF Subsidiaries‘ acquisition of Hampshire, which allegedly resulted in a $30 million loss. After the NAF Subsidiaries and Hampshire terminated their merger agreement, Gerszberg drafted a complaint against Hampshire, alleging a variety of claims. The Subsidiaries and Hampshire eventually entered into a settlement agreement in which the Subsidiaries released all claims against Hampshire. The Subsidiaries also agreed not to initiate or support any action ―against any person, whether or not a party to [the] settlement agreement‖ for any ―losses sustained as a result of the transaction agreements or the transaction.‖4 Gerszberg was a signatory to that agreement individually, but NAF and Li & Fung were not. NAF then sued Li & Fung in the U.S. District Court of the Southern District of New York, seeking damages based on the harm Li & Fung allegedly caused when it breached its contract with NAF. The complaint sought $30 million in damages for the reduced value of NAF‘s property, that is, the diminution in value of the NAF Subsidiaries‘ stock. Li & Fung moved for summary judgment on the ground that NAF could only bring its claim as a derivative action on behalf of the NAF Subsidiaries. The District Court granted Li & Fung‘s motion, concluding that because NAF was injured in its capacity as 100% owner of the NAF Subsidiaries, which had directly incurred the losses, 4 NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 2013 WL 489020, at  (S.D.N.Y. Feb. 8, 2013) (quoting the Settlement Agreement entered into between the NAF Subsidiaries, Gerszberg, and Hampshire). 3 NAF‘s contract claim against Li & Fung could not be maintained as a direct suit.5 In so holding, it relied on this Court‘s decision in Tooley v. Donaldson, Lufkin & Jenrette, which stated that when determining whether a claim is direct or derivative, [a] court should look to the nature of the wrong and to whom the relief should go. The stockholder‘s claimed direct injury must be independent of any alleged injury to the corporation. The 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.6 Because NAF had not attempted to meet the pleading requirements of a derivative suit, and even if it had, any suit on behalf of the NAF Subsidiaries would be barred by the settlement agreement with Hampshire in which the Subsidiaries relinquished their right to pursue any claims related to the transaction, the U.S. District Court of the Southern District of New York dismissed the suit.7 NAF then appealed to the U.S. Court of Appeals for the Second Circuit, arguing that Tooley, which involved a claim that the directors of a corporation breached their fiduciary duties, did not apply to its commercial contractual claim. We emphasize ―its‖ for a reason: if, by way of example, a stockholder of Acme Corporation brought an action claiming that Acme‘s board of directors was wrongly failing to prosecute a claim for a breach of a contract that Acme had signed because an insider was the breaching party, that suit would need to be brought derivatively on behalf of Acme. But that is because 5 Id., at . 6 Id. (quoting Tooley v. Donaldson, Lufkin & Jenrette, 845 A.2d 1031, 1039 (Del. 2004)). 7 Id., at . 4 the stockholder was seeking to enforce Acme‘s contractual rights on the corporation‘s behalf, not her own individual rights.8 NAF also argued that requiring shareholders with commercial contract claims to sue their counterparty derivatively because the injury arose out of harm to a subsidiary would conflict with established principles of contract law, discourage stockholders from contracting on behalf of the corporation, and undermine the purposes of derivative suits. Li & Fung contended in response that the District Court correctly concluded that NAF could not bring a direct claim because NAF only sought compensation for the harm suffered by the NAF Subsidiaries. It argued that because NAF did not suffer a direct injury independent of the harm suffered by its subsidiaries, NAF‘s breach of contract claim had to be brought derivatively under the principles articulated in Tooley. 8 See, e.g., Stewart v. Wilmington Trust SP Servs., Inc., 112 A.3d 271 (Del. Ch. 2015) (plaintiffstockholders brought derivative suit alleging that contract to which the corporation was a signatory had been breached by third parties and corporation‘s board of directors improperly declined to prosecute the corporation‘s contract claims); In re Am. Int’l Grp., Inc., 965 A.2d 763, 820 (Del. Ch. 2009), aff’d sub nom., Teachers’ Ret. Sys. of Louisiana v. PricewaterhouseCoopers LLP, 11 A.3d 228 (Del. 2011) (same); Ishimaru v. Fung, 2005 WL 2899680 (Del. Ch. Oct. 26, 2005) (concluding that member of LLC could press a derivative claim on LLC‘s behalf against third party who had breached contract with LLC because managing member of LLC was incapable of disinterestedly deciding whether to cause LLC to sue breaching third party); Sinclair Oil Corp. v. Levien, 280 A.2d 717, 722 (Del. 1971) (plaintiffstockholder of subsidiary corporation brought derivative suit against parent corporation for causing a second subsidiary to breach a contract between the two subsidiaries); Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery, § 9.02[a], at 9-7 (2013) (―In other words, derivative actions are those that seek relief for injuries done to the corporation, while individual or class claims are those that seek to rectify harm inflicted directly upon the individual rights of the stockholders.‖); 1 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations, § 13.10, at 13–24 (3d ed. Supp. 2015) (―The fundamental purpose of a derivative action is to enforce a corporate right that the corporation has refused for one reason or another to assert.‖); cf. Rales v. Blasband, 634 A.2d 927, 934 n.9 (Del. 1993) (describing demand excusal rules when ―a stockholder brings a derivative suit alleging that a third party breached a contract with the corporation‖). 5 The Second Circuit expressed skepticism that Tooley would bar NAF‘s commercial contract claim,9 but sought guidance from this Court on the proper analysis.