The Delaware Supreme Court recently addressed the issue of whether “holder claims” – claims brought by investors seeking damages based on continuing to hold stock in reliance on a company’s alleged misstatements, rather than buying or selling – are direct or derivative in nature. In Citigroup Inc., et al. v. AHW Investment Partnership, et al., No. 641, 2015, 2016 WL 2994902 (Del. May 24, 2016), the Court held that “the holder claims are not derivative because they are personal to the stockholder and do not belong to the corporation itself.”
The issue came before the Court as a certified question of law from the U.S. Court of Appeals for the Second Circuit. In the case before the Second Circuit, plaintiffs claimed they did not sell their shares of Citigroup based on alleged representations by the company that it had limited exposure to risky investments in subprime mortgages, and they suffered losses after additional information about those investments was disclosed and the stock price dropped. Plaintiffs brought claims for common law fraud and negligent misrepresentation.
Defendants moved to dismiss, arguing in part that the claims were derivative in nature. The District Court reasoned “that Delaware law determines whether claims against Citigroup are direct or derivative because Citigroup is incorporated in Delaware.” The District Court then applied the test to determine whether claims are direct or derivative set forth in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) and held that Williams’s claims were direct, but dismissed on other grounds. Plaintiffs appealed and defendants cross-appealed on the direct/derivative issue, and the Second Circuit certified the question.
In its answering opinion, the Delaware Supreme Court held that Delaware law did not apply to determine whether the claims were direct or derivative because the claims did not involve issues of corporate governance or fiduciary duties. Instead, the substantive law of either New York or Florida would apply. The Court concluded that “the holder claims under both New York and Florida law belong to the holder” and therefore the holder claims were direct in nature.
The Court went on to explain that the Tooley test was not relevant to the outcome, because “Tooley and its progeny deal with the narrow issue of whether a claim for breach of fiduciary duty or otherwise to enforce the corporation’s own rights must be asserted derivatively or directly.” Thus, because plaintiffs did not allege any breach of fiduciary duty, there was no need to undertake a Tooley analysis to arrive at the result.
The Court also questioned whether these direct holder claims should be cognizable as anything other than derivative fiduciary duty claims (which were not pleaded here) but declined to address the issue.
The Court’s opinion thus reaffirmed that the Tooley direct/derivative analysis would only apply where a complaint alleges breaches of fiduciary duty issues under Delaware law.
 AHW Inv. P’ship v. Citigroup, Inc., 806 F.3d 695, 705 (2d Cir. 2015). The certified question read: “Are the claims of a plaintiff against a corporate defendant alleging damages based on the plaintiff’s continuing to hold the corporation’s stock in reliance on the defendant’s misstatements as the stock diminished in value properly brought as direct or derivative claims?”