Delaware corporate law has long recognized the importance of how a stockholder’s claim is characterized. Claims labeled “derivative” are subject to special rules: (1) the need to comply with Rule 23.1, (2) the strict standing rule of continuous stock ownership, and (3) the possible extinguishment of the claim by a merger. Claims labeled “direct” avoid those hurdles to successful litigation. Given the importance of that characterization, the Delaware Court of Chancery’s Dec. 2 decision in In re El Paso Pipeline Partners L.P. Derivative Litigation, C.A. No. 7141-VCL, may prove to be a major turning point in Delaware law.
El Paso upheld a $171 million verdict against the general partner (El Paso Parent) of a Delaware limited partnership (the El Paso Partnership) for causing the limited partnership to overpay for assets sold to it by the general partner’s owner. In doing so, El Paso provided a scholarly review of Delaware’s law on what constitutes a direct or derivative suit. El Paso held that the plaintiff’s claim was properly characterized as a direct suit to vindicate the plaintiff’s contract rights or, alternatively, as both a direct and derivative suit. As a result, the claim survived a merger that eliminated the plaintiff’s status as an owner of limited partnership interests.
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