From time to time it is interesting to compare corporate law decisions from courts outside of Delaware. In Fundamental Partners, et al. v. Gaudet, et al., No. 11112589 (Phila. Ct. Com. Pl., Nov. 23, 2011), read opinion here, the Court of Common Pleas in Philadelphia, PA, dismissed a shareholder derivative action challenging the acquisition of Penn Millers Insurance based on the investigation and report of a Special Litigation Committee (“SLC”) of the Penn Millers board of directors. This case was referred to me by my colleague Marc Sonnenfeld of Morgan Lewis who represented the SLC. Other counsel involved in this matter included Norman Goldberger of Ballard who represented Penn Millers, Jeff Weil of Cozen who represented ACE and Richard Brualdi who represented the plaintiffs.
Kevin F. Brady of Connolly Bove Lodge & Hutz LLP prepared this summary.
The plaintiffs filed the action claiming that the directors breached their fiduciary duties in the merger of Penn Millers and ACE by personally benefitting from the merger and failing to disclose all material facts to the transaction. Shortly before filing suit, the plaintiffs made a demand on the Penn Millers board to bring an action against the board of directors. In response to the demand, the board appointed an SLC to determine if such claims should be brought. After suit was filed, the SLC issued its report in which it determined that bringing an action against the directors in connection with the merger would not be in the best interests of Penn Millers. Defendants then moved to dismiss the complaint.
The complaint was dismissed but the decision is instructive insofar as it illustrates two key differences between Delaware and Pennsylvania law with respect to derivative litigation. First, Pennsylvania law adopts the ALI Principles of Corporate Governance and has a universal demand requirement before bringing a derivative case. In Delaware a shareholder can plead demand futility whereas in Pennsylvania a shareholder cannot. Second, the Pennsylvania Business Corporation Law has a limitation on standing, requiring that a claim against directors for alleged breach of fiduciary duty may either be brought by a corporation or derivatively on behalf of a corporation, but cannot be brought in a direct or class action by shareholders.