NAF Holdings, LLC v. Li & Fung (Trading) Ltd.
118 A.3d 175, 2015 Del. LEXIS 310, 2015 WL 3896792 (2015)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A party to a commercial contract who has their own contractual rights may bring a direct suit for breach of that contract, even if the damages sought are for the diminution in value of a third-party beneficiary corporation that the contracting party owns.
Facts:
- NAF Holdings, LLC (NAF) sought to acquire Hampshire Group, Limited (Hampshire).
- To secure financing for the acquisition, NAF entered into a contract with Li & Fung (Trading) Limited, wherein Li & Fung agreed to serve as the sourcing agent for Hampshire after the acquisition.
- NAF created two wholly-owned subsidiaries (the NAF Subsidiaries) to execute the acquisition.
- The NAF Subsidiaries entered into a merger agreement with Hampshire; NAF itself was not a party to this merger agreement.
- Li & Fung allegedly repudiated its sourcing contract with NAF.
- Due to Li & Fung's alleged breach, NAF lost its third-party financing commitments for the acquisition.
- As a result, the NAF Subsidiaries were unable to purchase Hampshire's stock, and the merger failed.
Procedural Posture:
- NAF Holdings, LLC sued Li & Fung in the U.S. District Court for the Southern District of New York for breach of contract.
- Li & Fung moved for summary judgment, arguing NAF's claim was derivative and could only be brought on behalf of the NAF Subsidiaries.
- The U.S. District Court, applying the Tooley test, granted Li & Fung's motion and dismissed NAF's direct suit.
- NAF Holdings, LLC, as appellant, appealed the dismissal to the U.S. Court of Appeals for the Second Circuit.
- The Second Circuit, finding the issue of Delaware law to be unsettled, certified the controlling question of law to the Delaware Supreme Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does Delaware law require a party to a contract (a promisee) to sue derivatively on behalf of a third-party beneficiary corporation it owns, rather than directly, to enforce its own contractual rights against the other party to the contract (the promisor)?
Opinions:
Majority - Strine, Chief Justice
No. A party to a commercial contract may sue directly to enforce its own contractual rights without proceeding by way of a derivative action. The body of law governing derivative actions, particularly the test established in Tooley v. Donaldson, Lufkin & Jenrette, was developed to distinguish between direct and derivative claims for breach of fiduciary duty and does not apply to a plaintiff's direct claim for breach of a commercial contract to which it is a party. The fundamental principle of contract law is that parties to a contract have the right to enforce its terms. The nature of the plaintiff's injury (e.g., the diminution in the value of its subsidiary's stock) does not convert the plaintiff's own direct contractual claim into a derivative claim belonging to the subsidiary.
Analysis:
This decision carves out a significant exception to the application of the Tooley direct versus derivative analysis, confining Tooley's scope primarily to breaches of fiduciary duty and other internal corporate claims. By doing so, the court reinforces the primacy of contract law in commercial disputes, preventing a party that breaches a contract from using corporate law principles as a procedural shield. The ruling clarifies that the source of the right being asserted (i.e., personal contractual rights vs. corporate rights) is the threshold question, not the nature of the resulting harm. This provides certainty for parent companies and stockholders who enter into contracts to benefit their subsidiaries, ensuring they can directly enforce those contracts.
