Corporate Benefit Doctrine Not Applicable to Volunteers

Raul v. Astoria Financial Corporation, C.A. No. 9169-VCG (Del. Ch. June 20, 2014).

Issue Addressed: Whether attorneys’ fees were appropriate under the corporate benefit doctrine when the court considered the benefit to be in the nature of volunteer help, and the claim presented could not survive a motion to dismiss.  Answer:  No.

Short Overview

This memorandum opinion provides a very useful overview of those situations where a benefit may be conferred on a corporation by a stockholder suggesting corporate action, but when those efforts do not rise to the level of the type of corporate benefit for which attorneys’ fees will be granted.

The key holding was summarized by the court as follows:  “. . . the stockholder has simply done the company a good turn by bringing to the attention of the board an action that it ultimately decides to take, [therefore,] she is not entitled to coerced payments of her attorneys’ fees by the stockholders at large.” See generally footnote 51 (explaining that the court does not typically issue injunctions requiring defendants to comply with the law, which they already have an obligation to honor).

The background of this case was a request by the stockholder that the company correct a failure to make proper disclosures pursuant to the Dodd-Frank Act.

The court explained that under the corporate benefit doctrine as it applies to moot claims, it is not necessary that a plaintiff actually file an action in order to recover fees.  See footnote 21.  However, the claim must have been meritorious when presented to the board.  The court observed that the corporate benefit doctrine promotes the private enforcement of fiduciary breaches, and through the fee-shifting mechanism, the legal system incentivizes private actors to police corporate misconduct.

The court also noted that the legal system is designed to adjudicate corporate wrongdoing and not the directors’ exercise of their discretion.

Key Excerpts

The Court reasoned that: “Where a volunteer stockholder . . . notifies directors, not that they are in breach of their duties, but simply that they have missed a corporate opportunity or should avoid a corporate loss, the consideration of such a notification is a board, not a Court, affair.”

Moreover, the court held that:  “It is only where a benefit results from a demand to address corporate wrongdoing under Rule 23.1, however, that it is appropriate for the Court to intervene in the equitable distribution of the costs among all stockholders . . .”

Moreover, the court emphasized that a claim is considered meritorious for purposes of the corporate benefit doctrine “if it can withstand a motion to dismiss on the pleadings, and if, at the same time, the plaintiff possesses knowledge of provable facts which hold out some reasonable likelihood of ultimate success.”  See footnotes 27 and 29.