In Gentile v. Rossette, previously summarized here, the Chancery Court recently ruled that a claim for dilution is derivative, not direct, and was transferred to a surviving corporation. As a result, the court granted partial summary judgment, thereby defeating the claim. Now the Chancery Court has allowed an interlocutory appeal to the Delaware Supreme Court under Rule 42, on that issue, which was summarized thusly:
The question posed by the Plaintiffs is whether they can obtain any remedy for the issuance of stock for little or no value when that transaction is followed by a merger that precludes pursuit of a derivative claim. The waste claim passes to the acquiring corporation. Their stockholder dilution claim, based on the [the court’s prior] Order, has escaped any judicial review. Ultimately, the Plaintiffs, in the Court’s view, were unable to demonstrate that they can “prevail without showing an injury to the corporation,” because their dilution claim cannot exist independently of the harm suffered by SinglePoint. This case does not present a question involving a material change in voting power, such as an increase in the insider’s holdings from less than 50% to more than 50% (or increasing the holdings above some supermajority shareholder vote threshold). Here, Rossette’s holdings were increased substantially as a percentage of outstanding shares, but his voting power (i.e., the power to control the outcome of any shareholder vote) and the voting power of the minority shareholders did not change materially. See Gentile v. SinglePoint Fin., Inc., 2003 WL 1240504, at *5, n.36 (Del. Ch. Mar. 5, 2003)(related appraisal action in which the Court speculated that “no forum may be available for injured shareholders [in this context] to assert their dilution claims”).
Copy of decision is available for download here.