CHANCERY COURT EXPLAINS STANDING FOR FIDUCIARY CLAIMS WHEN A STOCKHOLDER IS SQUEEZED OUT
By: Holly Hatfield and Michael Bill
In I.A.T.S.E. Local No. One Pension Fund v. General Electric Company, et al., No. 11893-VCG (Del. Ch. Ct. December 6, 2016), the Delaware Court of Chancery, denied defendants’ motion to dismiss and held that a breach of fiduciary duty claim is personal and does not adhere to the stock of the company where the transaction at issue severs the relationship between the stockholder and the entity.
This case arose from a series of reorganization transactions; a simplified version is as follows: Plaintiff was a preferred stockholder of General Electric Capital Corporation (“GECC”). All of GECC’s common stock was owned, either directly or indirectly, by General Electric (“GE”) and all of the directors of GECC were either directors or officers of GE. In 2015, GE unilaterally decided to merge GECC out of existence, exchanging Plaintiff’s interest in GECC for GE preferred stock which had a lower dividend rate and traded at a lower price on the market. Plaintiff subsequently sold its GE preferred stock and pursued claims against GE, GECC, and other related entities involved in the reorganization transaction for breaches of fiduciary duties. Defendants argued that Plaintiff lacked standing to bring such claims because Plaintiff no longer owned the GE preferred stock and moved to dismiss.
Defendants alleged Plaintiff’s claims arose out of the relationship between Plaintiff, as a stockholder, and GECC and that In re Activision Blizzard, Inc. Stockholder Litigation instructs that such claims are non-personal and adhere to the stock. Thus, because Plaintiff sold its GE preferred stock to a buyer, the claim transferred to the buyer and Plaintiff no longer had standing. Defendants conceded Activision was not directly on point because Plaintiff’s GECC preferred stock was converted into GE preferred stock, a different entity, but argued the new stock was in the same “family” and should be treated as a continued relationship between Plaintiff and the ultimate parent company, GE. The Court was unpersuaded by this line of thought.
The Court agreed that a non-personal claim arises from the relationship among a stockholder, stock, and the company and generally adheres to the stock. A stockholder in a non-personal claim can disassociate itself from causes of action involving the stockholder-corporate relationship by selling its shares on the market and the market “recognizes implicitly the value of the adherent cause of action in the price of the stock.” Whereas, when a stockholder is squeezed out by a merger, the transaction severs the relationship between the stockholder and the entity and “claims arising from the transaction vest in the former owner of the stock,”– the individual who suffered the injury. The Court further clarified that this “is true whether the stock is converted into a right to receive cash or, as here, the right to receive different stock in a different corporation” because there is no ongoing relationship between the stockholder and the entity. The Court distinguished Activision and ruled Plaintiff has standing in this instance because (i) Plaintiff did not choose to sell the GECC preferred stock, (ii) Plaintiff’s relationship with GECC was terminated by the transaction and not by Plaintiff’s sale of the GE preferred stock, and (iii) the market did not assign any value to the potential breach of duty claim onto the GE preferred stock.