In Kepley v. Lanz, the Sixth Circuit yesterday reversed the dismissal for lack of standing of an action brought by former shareholders of a Kentucky corporation. In response to the defendant’s motion to dismiss, the district court had sua sponte dismissed the action as derivative in nature, meaning that the individuals did not have appropriate standing to pursue the claim.
The Sixth Circuit wasted little time in reversing. It recognized that the defendant’s alleged threat had forced the plaintiffs to sell their shares of stock at a price lower fair market value. This, the Sixth Circuit found, was a quintessential individual harm rather than a derivative harm suffered by the corporation as a whole. The Sixth Circuit also waded through a choice of law issue concerning the appropriate tests for direct or derivative claims under Kentucky law. After surveying relevant authorities from Kentucky and Delaware, the Court found “little substantive distinction between the tests proposed by the parties.” As the Sixth Circuit framed the test, “we find the focus to be on (1) the nature of the duty owed and (2) the nature of the injuries suffered.” In light of that articulation of the test, the Sixth Circuit had little trouble in finding that the harm suffered was specific to the individual plaintiffs. The Court also recognized that because they are no longer shareholders, if the dismissal stood, they would not be able to bring a derivative action because they would lack standing to do that, which would place them in a proverbial Catch-22 scenario.
This opinion is helpful in not only fleshing out the standards under Kentucky law for direct versus derivative actions, but also explaining the essence of the test. And although this turned on Kentucky law, it is probably safe to say that this opinion could influence other actions arising from other states within the Circuit.