MCG Capital Corp. v. Maginn, C.A. No. 4521-CC (Del. Ch. May 5, 2010), read opinion here.
The Court of Chancery addresses in this 73-page opinion an issue of first impression: Do preferred shareholders have the same right to bring a derivative claim as common shareholders? Short answer: yes (as a general proposition)
Review of Court’s Reasoning
The Court of Chancery ruled that “all stock is created equal.” See footnote 25. Specifically, the Court reasoned that preferred shareholders have standing to bring derivative claims absent some express limitation in the charter or in a preferred share designation or other controlling document. Preferred shareholders still must satisfy the continuous ownership requirement of DGCL Section 327 and the pleading requirements of Rule 23.1.
In addition to deciding directly for the first time that preferred shareholders have the same right to bring derivative claims as common shareholders, the Court also addressed the following important topics of Delaware corporate law in this opinion:
• The Court distinguished between direct and derivative claims and acknowledged that in some instances the same facts can give birth to both direct and derivative claims.
• For an officer or a director to be personally liable for intentional interference with a contract, the plaintiff must show that the intentional acts exceeded the scope of the authority of the officer or director. Moreover, mere wrongful interpretation of a contract is not the same as exceeding authority even when it causes the company to breach the contract.
• The parameters were described of those circumstances where duties owed to preferred shareholders sometimes rise to a fiduciary level, and when they are otherwise limited to a contractual nature. See footnote 84.
• The familiar disjunctive two-prong Aronson test is discussed for purposes of explaining when pre-suit demand is excused as futile. See notes 90 to 97 and accompanying text.
• The important definitional standards of “independence” and “disinterestedness” of directors were examined. Specifically, the issue of whether the loss of $100,000 in annual director compensation was material to the individual director was discussed but the Court determined that it need not be conclusively established at this stage. However, particulars did need to be alleged in the complaint from which the Court could infer that the objective judgment of the directors involved would be impaired by the threat of losing their director compensation, based on the individual director’s personal financial situation. See footnotes 125 and 127.
• Also examined was the standard used to determine if a derivative plaintiff is an inadequate or unqualified representative. See footnotes 132 to 134.
• Footnotes 148 and 149 and related text explain that “an accounting” is more of a type of relief or a remedy as opposed to a cause of action or a claim, but importantly the Court noted that if the allegations are well plead, the count for an accounting would not be dismissed on the basis of the form in which it appears in the complaint. Rather, the Court determined that it would sua sponte make it a part of the requested relief (instead of a separate count).
• The Court was patient but not pleased with the lack of clarity in the complaint in terms of the failure in the complaint to clearly distinguish between those counts that were direct and those claims in the complaint that were to be regarded as derivative. See footnote 14. Naturally the distinction is important for such things as determining compliance with Rule 23.1 in the case of derivative claims, or the applicability of Rule 8(a) for non-derivative claims in the context of a Motion to Dismiss. The Court cited at footnote 15 to Shakespeare’s Macbeth regarding the confusion in the complaint due to the lack of clarity between the identity of direct and derivative claims.