The Delaware Chancery Court has dismissed with prejudice derivative and direct breach of fiduciary duty claims brought by trust interest-holders against two statutory trust funds within the Vanguard mutual fund complex. In its opinion, the court established two important rules. First, losses from the alleged mismanagement of investments by a mutual fund manager raise a derivative, rather than a direct, claim because the diminution of the value of a plaintiff’s shares is “secondary and derivative” to the injury suffered by the funds themselves. Second, in derivative actions involving interest-holders bringing suits against trusts, the normal rules of derivative litigation apply. Applying these rules, the court held that since all of the plaintiffs’ claims were derivative in nature rather than direct, the complaint must be dismissed because the plaintiffs failed to make demand upon the Board of Trustees or demonstrate why demand would be futile.

Hartsel v. The Vanguard Group, Inc., C.A. No. 5394-VCP (Del Ch. June 15, 2011)