In Carsanaro v. Bloodhound Technologies, Inc., the Vice Chancellor of the Delaware Court of Chancery held that stock dilution claims can be direct when there is a breach of the duty of loyalty by the rest of the board. This decision expands stockholder’s rights to bring claims since derivative claims can only be brought in the name of a corporation and are subject to stricter pleading rules.
Carsanaro also helps reconcile the distinction between direct and derivative claims. Previously, the two main tests came from Tooley and Gentile. Under Tooley’s special injury test, the stock dilution claim can be both derivative and direct; however, the Gentile decision takes the traditional view that stock dilution is characterized as a derivative claim. Some commentators observe that by focusing on “the fiduciary duties at play in the allegedly dilutive transaction . . . the Vice Chancellor appears to have created a means of analyzing dilution claims that does not rely on the special injury test or its reasoning.” This outcome “can be read as a step towards reconciliation of the accepted Tooley test for identifying direct claims with the reasoning of Gentile that permitted claims for expropriation to be pled directly despite the traditional view of such claims as exclusively derivative.” In this way, Carsanaro is “an important development in the law governing the relationship between company founders and venture capitalists.”
Other commentators recognize that the Carsanaro decision “may well change Delaware law by permitting direct stockholder claims that avoid the pitfalls of derivative litigation.” Since “the prior case law on this issue was, at best, confusing,” this decision is “likely to lead to more litigation alleging insiders have taken for themselves what belongs to all stockholders.”
Read the entire case here.