Applying Delaware's Direct vs. Derivative Analysis

A decade ago, the Delaware Supreme Court, in Tooley v. Donaldson, Lufkin & Jenrette, 845 A.2d 1031, 1036 (Del. 2004), observed that “[d]etermining whether an action is derivative or direct is sometimes difficult and has many legal consequences” and “[t]herefore, it is necessary that a standard to distinguish such actions be clear, simple and consistently articulated and applied by our courts.” (emphasis added). Having concluded that certain concepts found in its prior jurisprudence (in particular, the concept of “special injury”) “are not helpful and should be regarded as erroneous,” the court pronounced, albeit in dicta,¹ “[w]e set forth in this opinion the law to be applied henceforth in determining whether a stockholder’s claim is derivative or direct” and “[t]hat issue must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?” Id. at 1033.

Tooley and the Delaware precedents considered by the Delaware Supreme Court involved conventional claims that defendants violated fiduciary duties arising by law from the defendants’ status in the corporate structure. Neither the Chancery Court nor the Supreme Court considered claims arising from breach of contractual rights.²