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| 2 minutes read

Delaware Court of Chancery underscores fiduciary obligations of derivative plaintiffs

In a June 1, 2023 decision in OptimisCorp v. Atkins, C.A. No. 2020-0183-MTZ, the Delaware Court of Chancery held that defendant stockholders breached their fiduciary duties to the company where the stockholders failed to promptly release proceeds of their prior derivative lawsuit to the company. 

The Court explained that “[a] derivative claim is a company asset.” Corporate directors owe their fiduciary duties to stockholders because directors control company assets, which the stockholders own. These assets include legal claims or causes of action belonging to the company. Derivative claims are legal claims belonging to the company. In specific circumstances, it is in the best interest of the stockholders for another stockholder (or group of stockholders) to control a cause of action rather than the directors. Specifically, a stockholder is permitted “to temporarily manage derivative claims” if (i) the board permits them to do so, or (ii) a court permits them to do so because they can demonstrate either that the board wrongfully refused the stockholder’s demand that the directors pursue the claim or demand is excused. Because derivative stockholder plaintiffs “control derivative claims for the purposes of enforcing the company’s rights,” derivative stockholder plaintiffs are “agents of the company” and “fiduciaries.” Hence, stockholder plaintiffs owe the company and their fellow stockholders the duties of care and loyalty.

The facts of this case were somewhat unusual because, as the Court pointed out, “[i]n a typical derivative action, derivative plaintiffs’ agency authority ends when the derivative claim is monetized.”  In other words, after there is a judgement, settlement, or arbitral award, the “managerial authority” over that award typically falls to the board, not the derivative plaintiffs. In the ordinary course of events, “[s]tockholders may request pro rata distribution from a tribunal, but they lack authority to possess or manage a monetized award themselves.” Here, however, the three stockholders negotiated possession of the derivative arbitration award, and then instead of turning it over to the company, they retained the award, purporting to manage it on their own. 

The Court explained the problem as follows: “As agents of the company, [the defendants] were duty-bound to return that award to the board’s managerial authority. Instead, they withheld it from the board and purported to manage it, intending to distribute it to stockholders they deemed ‘innocent.’ The stockholders breached their duty of care by divesting the company of its authority to manage the award and by failing to perform their obligations as company agents. By withholding the award with designs of distributing it to themselves, their friends, and their family, the stockholders breached their duty of loyalty.”

The parties cross-moved for summary judgment. The defendants’ motion presented two questions: (i) what standard governed the defendants’ conduct; and (ii) what standard governs the Court’s review of that conduct.  Defendants sought summary judgment under the (i) gross negligence standard of conduct, and (ii) the business judgment standard of review. But the Court found that “those standards are reserved for directors; derivative stockholder plaintiffs as agents are held to a simple negligence standard, and do not enjoy the protections of the business judgment rule.” The Court concluded that the company “need not establish gross negligence, or rebut the business judgment rule, to succeed on its breach of care claim.” The business judgment rule “does not protect just anyone’s ‘business’ decisions.” Instead, the business judgment rule is a “judicial creation” designed to, under certain circumstances, “reinforce and preserve the directors’ unique plenary authority” under 8 Del. C. §141. Hence, when a derivative stockholder plaintiff makes decisions about a company asset, even where these are decisions that the board might otherwise make, the stockholder is “not doing so with the authority granted by Section 141.”

The Court granted summary judgement in favor of the company and against the defendant stockholders on liability for breach of the fiduciary duty of care.


delaware court of chancery, corporate law