Tooley v. Donaldson, Lufkin, & Jenrette, Inc.
2003 WL 203060 (Del.Ch. Jan. 21, 2003) (2004)
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Rule of Law:
The determination of whether a stockholder’s claim is direct or derivative must turn solely on two questions: 1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and 2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually). The concept of 'special injury' is no longer a valid test.
Facts:
- Patrick Tooley and Kevin Lewis were minority stockholders of Donaldson, Lufkin & Jenrette, Inc. (DLJ).
- AXA Financial, Inc. was the majority stockholder of DLJ, owning 71% of its stock.
- Credit Suisse Group agreed to acquire DLJ through a deal that included a cash tender offer of $90 per share for the minority stockholders.
- The merger agreement allowed Credit Suisse to unilaterally extend the tender offer and also allowed Credit Suisse and DLJ to mutually agree to postpone it.
- After one unilateral extension by Credit Suisse, DLJ and Credit Suisse mutually agreed to a second extension, which delayed the closing of the tender offer by 22 days.
- Tooley and Lewis alleged that this 22-day delay harmed them by diminishing the time-value of the money they were to receive for their shares.
Procedural Posture:
- Patrick Tooley and Kevin Lewis filed a purported class action suit against the directors of Donaldson, Lufkin & Jenrette, Inc. in the Delaware Court of Chancery (trial court).
- The defendants filed a motion to dismiss the complaint.
- The Court of Chancery granted the motion to dismiss with prejudice, holding that the claim was derivative in nature and that the plaintiffs lost their standing to sue when they tendered their shares during the merger.
- The plaintiffs appealed the dismissal to the Delaware Supreme Court (highest court).
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Issue:
Is the determination of whether a stockholder lawsuit is a direct or derivative claim based on a 'special injury' test, which requires a plaintiff-stockholder to show a harm that is separate and distinct from that suffered by other stockholders?
Opinions:
Majority - Veasey, Chief Justice
No. The determination of whether a stockholder’s claim is direct or derivative must turn solely on who suffered the harm and who would receive the benefit of a recovery, not on the confusing concept of 'special injury.' The court explicitly disapproved the 'special injury' test, finding it amorphous and unhelpful. The proper analysis requires a court to ask two questions: (1) who suffered the alleged harm—the corporation or the suing stockholder individually? and (2) who would receive the benefit of the recovery or other remedy? The court traced the history of Delaware jurisprudence, noting how cases like Lipton created confusion with the 'special injury' standard, while cases like Kramer and Grimes correctly focused on the nature of the wrong and the recipient of relief. Applying the new, clearer test to the present case, the court found that the plaintiffs did not state a derivative claim because the alleged harm was not to the corporation, and any recovery would not go to the corporation. However, the court also found that the plaintiffs failed to state a valid direct claim because they had no vested contractual right to payment at the time of the extension; their right to payment had not yet ripened. Therefore, while the lower court's reasoning was wrong, its ultimate decision to dismiss the complaint was correct, though it should have been for failure to state a claim.
Analysis:
This decision fundamentally simplifies and clarifies the test for distinguishing between direct and derivative stockholder claims in Delaware corporate law. By explicitly rejecting the amorphous 'special injury' test, the court established a more predictable and analytically sound framework. The resulting 'Tooley test' provides clear guidance for courts and litigants, focusing the inquiry on the core issues of who was harmed and who benefits from the remedy. This clarity reduces uncertainty in litigation and reinforces the distinct legal natures of the corporate entity and its individual shareholders.
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