Opinion ID: 1470259
Heading Depth: 1
Heading Rank: 7

Heading: Equity Dilution Generally Derivative Claim

Text: In Tooley v. Donaldson, Lufkin & Jenrette, Inc ., [21] this Court set forth the analytical framework for ascertaining whether a cause of action is direct or derivative. In Tooley, we held that this determination can be made by answering two questions: [W]ho suffered the alleged harm . . . and who would receive the benefit of any recovery or other remedy . . .? [22] If the corporation alone, rather than the individual stockholder, suffered the alleged harm, the corporation alone is entitled to recover, and the claim in question is derivative. [23] Conversely, if the stockholder suffered harm independent of any injury to the corporation that would entitle him to an individualized recovery, the cause of action is direct. [24] In Count V of the Third Amended Complaint, Feldman alleges that the Challenged Stock Options resulted in Telx issuing stock for inadequate consideration, and that his equity holdings in the Company were thereby diluted. A claim for wrongful equity dilution is premised on the theory that the corporation, by issuing additional stock for inadequate consideration, made the complaining stockholder's investment less valuable. In Gentile v. Rossette , this Court stated that dilution claims are not normally regarded as direct, 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. [25] In the absence of a controlling stockholder, such equal `injury' to the [company's] shares resulting from a corporate overpayment is not viewed as, or equated with, harm to specific shareholders individually. [26] The Court of Chancery dismissed Count V as a derivative claim for dilution and Feldman does not challenge that ruling in this appeal. Count XIII alleges a breach of fiduciary duty by the Telx board for its purported failure to consider the validity of the Challenged Stock Options when it negotiated and approved the merger with GI Partners. The Court of Chancery held that [p]ursuant to Tooley, the harm flowing from the Telx directors' purported breach of fiduciary duty in Count XIII is the same type of harm that allegedly resulted from the options grants in the first place, i.e. a harm generated by corporate overpayment. The Court of Chancery observed that Feldman's creative attempt to recast the derivative claim for dilution in Count V, by alleging the same fundamental harm in a slightly different way in Count XIII, is disfavored. In J.P. Morgan, [27] this Court rejected a plaintiff's effort to bootstrap the harm and damages causatively linked to a derivative claim onto what, according to that plaintiff, was an independently arising direct cause of action. In dismissing Feldman's Third Amended Complaint, the Court of Chancery relied upon the ratio decidendi of this Court's opinion in J.P. Morgan. The Court of Chancery concluded that in Count XIII, Feldman seeks to recast the alleged harm to the Company caused by the asserted overpayment to the holders of the Challenged Stock Options as harm to him directly. [28] Where all of a corporation's stockholders are harmed and would recover pro rata in proportion with their ownership of the corporation's stock solely because they are stockholders, then the claim is derivative in nature. [29] The mere fact that the alleged harm is ultimately suffered by, or the recovery would ultimately inure to the benefit of, the stockholders does not make a claim direct under Tooley. In order to state a direct claim, the plaintiff must have suffered some individualized harm not suffered by all of the stockholders at large. [30] Count XIII does not, however, plead any facts from which either the Court of Chancery or this Court could conclude that the failure to reconsider the validity of the Challenged Stock Options when the Merger agreement was adopted caused Feldman harm separate and distinct from the alleged harm to the Company. The only harm alleged in Count XIII is exactly the same that was allegedly caused by the invalidity of the Challenged Stock Options in the first place  the dilution harm asserted in Count V that is derivative in nature. The Court of Chancery properly relied upon our decision in J.P. Morgan, and concluded that the damages allegedly flowing from the purportedly direct claim [in Count XIII] are exactly the same as those suffered by the corporation in the underlying derivative claim [in Count V], and thus the injury alleged in the complaint is properly regarded as injury to the corporation and not to the class.