Of the. Supreme Court drops risky precedent over direct shareholder claims
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(Reuters) – It is a bold strategy to argue in a nonsuit motion that the binding precedent is bogus and should be overturned. Bold too? Arguing that the precedent can be rejected in an interlocutory appeal, even before there is a decision on the merits of the case.
However, this is what Weil, Gotshal & Manges proposed last year at Delaware Chancery Court, where its client, Brookfield Asset Management Inc, was facing claims for breach of duty on the part of shareholders of TerraForm Power Inc.
The shareholder lawsuit, as I will explain, was based entirely on the 2006 Delaware Supreme Court decision in Gentile v. Rossette. Gentile allowed minority shareholders, in limited circumstances, to bring direct claims against majority shareholders instead of suing on behalf of the company in a more procedurally complex derivative claim.
by Weil motion to dismiss Brookfield’s lawsuit argued that the Supreme Court’s Gentil precedent led to confusion and inconsistency. The decision should be “dismissed,” the brief said, “including, if necessary, via an interlocutory appeal.”
This is exactly how the litigation unfolded. Last October, Vice-Chancellor Sam Glasscock refuse Brookfield’s motion to dismiss, citing Gentile even as he acknowledged “lingering uncertainty as to whether (the ruling) remains good law.” Weil asked Glasscock to certify an interlocutory appeal to resolve this uncertainty. The Vice Chancellor sent the appeal to the Delaware judges.
And Monday, at Brookfield Asset Management Inc. v. Rosson, the Delaware Supreme Court unanimously overturned its own precedent in Gentile, ruling that the 2006 ruling created a contradictory and unnecessary exception to the test that establishes whether shareholder claims are direct or derivative.
The decision means that shareholders can no longer directly sue controlling shareholders for diluting their stock value and voting rights. These claims, the court concluded, can only be made under the Supreme Court’s 2004 test in Tooley v. Donaldson, Lufkin & Jenrette Inc because the harm to individual shareholders arises from the harm done to the company, and any recovery for shareholders would flow from the recovery of the company.
The 2006 Nations Court ruled that the exception it created – allowing minority shareholders to bring direct claims against controllers who act to expand their ownership – “fits perfectly into… Tooley”. In Monday’s opinion overthrowing Gentile, the Delaware judges said the 15 years since have shown that “the ‘fit’ is not that ‘comfortable.’
“We do not intend to disrespect any previous panel of this tribunal,” wrote Judge Karen Valihura. “On the contrary, we recognize that the law must evolve through trial and error, through the tests of time and practical application.”
Monday’s ruling ends the case against Weil Gotshal’s client. Shareholders alleged that in 2018, the Brookfield entities underpaid the TerraForm shares they acquired in a $ 650 million private placement that increased Brookfield’s stake in the company. green energy from 51% to 63.5%. A Brookfield entity acquired the remaining public shares in 2020, depriving minority shareholders of the right to bring derivative actions arising from the private placement. Thus, the only chance of recovery for the plaintiffs was a direct lawsuit against Brookfield.
The Delaware Supreme Court ruling not only banned direct shareholder claims under Gentile, but also rejected their alternative argument for direct ownership based on interference with their voting rights. The judges said the specific facts of the case did not support the theory of voting rights.
Shareholder lawyers Steven Purcell and Douglas Julie of Purcell Julie & Lefkowitz did not respond to my email question about the ruling.
Weil Gotshal’s termination brief in the Brookfield case relied heavily on a concurring opinion from then-Chief Justice Leo Strine in 2016 El Paso Pipeline GP Co LLC v. Brinckerhoff. By this time, Chancellery Court justices had begun to expand the limits of the Supreme Court’s ownership interest in Gentile, allowing shareholders to bring direct dilution claims against board members as well as controlling shareholders, believing that it made no sense to keep controlling shareholders at a higher than corporate directors.
El Paso involved extremely unusual facts. Shareholders arguing derivative claims won a first-instance ruling that found the board of directors approved a deal favoring the controlling general partner of the company. After the trial, however, the plaintiffs lost the quality of their derivative claims when the limited partnership was acquired in a merger.
The trial judge concluded that the shareholders could continue to advance their theory as a direct claim under Gentile. The Delaware Supreme Court overturned the decision, ruling that Gentile could not be extended beyond the particular circumstances of this case, in which minority shareholders would have lost both economic value and voting rights due to the actions of the controlling shareholder.
In a deal, Strine said Gentile should be thrown out completely, though he agreed the El Paso affair didn’t present the opportunity squarely. Gentile, he wrote, is “a puzzling decision, which blurs the clarity of our law in an important context,” he wrote. The precedent “cannot be reconciled with the heavy weight of our precedent,” Strine said, and purports to fill a loophole in Delaware law that is already filled by case law allowing shareholders to sue board members directly. for transactions that transfer control of a company to a majority shareholder.
“Gentile undermines the clarity and consistency that Tooley brought to determining which claims are derived from,” Strine wrote.
Weil, who declined to make a statement on Monday’s ruling, acknowledged that the Brookfield case presented an opportunity that had eluded the Delaware Supreme Court in the 2016 El Paso case. The Brookfield facts matched perfectly with those of Gentile. It was an opportunity for the court, Brookfield told the Delaware judges, to set aside the precedent that had so troubled the former chief justice.
“Practitioners and jurists have argued that the good guys should not remain a good law, and this court’s decision to clarify and harmonize the law will have no surprising or unsettling effect,” Weil argued in his brief. final of the Supreme Court. “On the contrary, the elimination of the doctrine of the status of the Gentiles will promote a more consistent and sensible application of Delaware law. “
The judges accepted. Every now and then when you swing towards the fences you manage to hit a grand slam.
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