Opinion ID: 2291974
Heading Depth: 2
Heading Rank: 1

Heading: Nature of Claims Stated

Text: The distinction between derivative and individual actions rests upon the party being directly injured by the alleged wrongdoing. The common law countries have devised one of the most interesting and ingenious of accountability mechanisms for large formal organizations: the shareholder's derivative suit. In such a suit, the shareholder sues on behalf of the corporation for harm done to it. Ordinarily, therefore, any damages recovered in the suit are paid to the corporation. Historically, the derivative suit was conceived of as a double suit, or two suits in one: The plaintiff (1) brought a suit in equity against the corporation seeking an order compelling it (2) to bring a suit for damages or other relief against some third person who had caused legal injury to the corporation. Shareholders may also bring direct actions, both as individuals and as a class, for injuries done to them in their individual capacities by corporate fiduciaries. Recovery, in these individual or class actions goes to the suing shareholders, not their corporation. R. Clark, Corporate Law 639-40 (1986) (emphasis added); see also D. Block, N. Barton & S. Radin, The Business Judgment Rule: Fiduciary Duties of Corporate Directors and Officers at 216 (1987). Thus, to 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. See Moran v. Household International, Inc., Del.Ch., 490 A.2d 1059, 1070, aff'd, Del.Supr., 500 A.2d 1346 (1985) ([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) (quoting Fletcher's Cyclopedia Corps., § 5921, at 451 (Perm.Ed., Rev.Vol. 1984) (citations omitted)). For a plaintiff to have standing to bring an individual action, he must be injured directly or independently of the corporation. See Bokat v. Getty Oil Co., Del.Supr., 262 A.2d 246, 249 (1970). Despite these clear theoretical distinctions between derivative and individual causes of action, the line of distinction between derivative suits and those brought for the enforcement of personal rights asserted on behalf of a class of stockholders is often a narrow one.... Abelow v. Symonds, Del.Ch., 156 A.2d 416, 420 (1959). Whether a cause of action is individual or derivative must be determined from the nature of the wrong alleged and the relief, if any, which could result if plaintiff were to prevail. See Elster v. American Airlines, Inc., Del.Ch., 100 A.2d 219, 221-23 (1953). [3] In determining the nature of the wrong alleged, a court must look to the body of the complaint, not to the plaintiff's designation or stated intention. Lipton v. News Int'l, PLC, Del.Supr., 514 A.2d 1075, 1078 (1986). Kramer, seeking to avoid loss of standing through merger, has designated his suit as a class action stating individual and not derivative claims. Kramer asserts that the Trial Court misinterpreted the causes of action stated against management when it found them to be derivative claims, thus passing upon the merger to Danaher under Lewis. Kramer makes two arguments: (i) that the causes of action pleaded, though constituting claims for waste of assets [$11,000,000 in stock options and termination bonuses and $18,000,000 of excessive fees], worked a  special  and  direct  injury to the common shareholders' contractual rights that is distinct from any injury to the corporation; and (ii) that the individual defendants' alleged breaches of fiduciary duty directly and adversely affected the merger consideration; hence, the complaint should be construed as an attack on the fairness of the terms of the merger, which, being individual in nature under Cede & Co. v. Technicolor Inc. Del.Supr., 542 A.2d 1182 (1988), survives the merger. Kramer argues that the class sustained an injury when it was wrongfully deprived of a portion of the Merger Sale proceeds. Kramer reasons that since the $29,000,000 unnecessarily spent by management could only come out of the Sale Proceeds, the class of common shareholders thereby sustained a special injury by the reduction of the amount of their distributive share. [4] However, in our view, the allegations of the amended complaint do not sustain Kramer's characterization of the complaint  that is, as representing either allegedly wrongful acts of management resulting in an injury to the common shareholders that is separate and distinct from that sustained by the corporation as a whole or as a direct attack on the fairness of the terms of the merger. The claims alleged against Messrs. Newman and Scott are claims of waste of assets from conduct extending over a period of six months or more that are largely unrelated to the Danaher sale. Moreover, the disputed corporate obligations were incurred in response to a series or sequence of events that plaintiff argues, with hindsight, were entirely foreseeable and predictable. Because the culminating event was the Danaher going-private transaction, plaintiff treats the six months of expenditures as if incurred simultaneously and attributes them to the ultimate buy-out by Danaher. So construed, plaintiff contends that the expenditures collectively represent a special or direct injury to the common shareholder of Western Pacific as distinguished from an injury to the corporation itself. In our view, plaintiff strains for a result that a reasonable construction of the amended complaint does not support. The complaint states simply a series of claims of waste of assets (through the payment of unnecessary options, bonuses, fees and expenses) that, by virtue of the timing of payout, are said to result in an illegal diversion of funds from the shareholders in breach of a contract right and the cause of special injury to them. [5] We do not find such allegations to be sufficient to state a claim of special or direct injury to the common shareholders rather than a derivative claim for waste. Suits against management for waste resulting from excessive payments of corporate funds (whether made to individual defendants or to third parties) do not affect contractual rights of shareholders associated with the ownership of common stock in the sense of altering the ratable distribution of a going private sale. [6] The gravamen of Kramer's complaint is mismanagement resulting in waste of corporate assets and treatment uniformly accorded such allegations is well settled under Delaware law. Delaware courts have long recognized that actions charging mismanagement which depress[] the value of stock [allege] a wrong to the corporation; i.e., the stockholders collectively, to be enforced by a derivative action. Bokat, 262 A.2d at 249; see also Harff v. Kerkorian, Del.Ch., 324 A.2d 215, 218 (1974), rev'd on other grounds, Del.Supr., 347 A.2d 133 (1975). Thus, where a plaintiff shareholder claims that the value of his stock will deteriorate and that the value of his proportionate share of the stock will be decreased as a result of alleged director mismanagement, his cause of action is derivative in nature. See Elster, 100 A.2d at 222. A claim of mismanagement resulting in corporate waste, if proven, represents a direct wrong to the corporation that is indirectly experienced by all shareholders. Any devaluation of stock is shared collectively by all the shareholders, rather than independently by the plaintiff or any other individual shareholder. Thus, the wrong alleged is entirely derivative in nature.