The Delaware Court of Chancery refused to certify a class action by minority shareholders alleging material non-disclosures in connection with a recapitalization plan approved by the written consent of less than all of the shareholders under 8 Del. C. § 228. The corporate action in issue was a recapitalization plan that resulted in the conversion of preferred debt to preferred stock. The transaction increased the defendants’ interest in the company to nearly 80% (from 56%) and diluted the minority shareholders’ interest to 22% (from 44%). The Board, including interested directors, voted for the plan, which was approved by written consents executed by the defendants pursuant to 8 Del. C. § 228. The statutory notice provided to the minority stockholders did not disclose the identity of the debtholders, their connection to the Board or the price at which the debt was exchanged. The omitted facts were disclosed by the company in a proxy statement issued four years later in connection with an acquisition of the company. The minority shareholders filed a class action lawsuit, alleging breach of the fiduciary duty of disclosure.

The Delaware Court of Chancery refused to certify the class, finding that individual issues of proof precluded commonality – the requirement that the class share questions of law or fact under Court of Chancery Rule 23(a)(2). The court held that in the absence of shareholder action, each class member was required to prove reliance, loss causation and damages. And because the statutory notice did not constitute a request for shareholder action, the court found that the individual issues of reliance, loss causation and damages precluded the certification.

Dubroff v. Wren Holdings, LLC, No. 3940 (Del. Ch. Aug. 20, 2010)

The editors would like to thank the following contributor for his assistance with this issue of Securities & Financial News to Note:

Michael Garcia