Sagarra Inversiones, S.L. v. Cementos Portland Valderrivas, S.A., et al., No. 425, 2011, C.A. No. 6179 (Del. Dec. 28, 2011) (Jacobs, J.)
Cementos Portland Valderrivas (“CPV”), the controlling stockholder of Corporación Uniland, S.A., a Spanish corporation (“Uniland”), and Giant Cement Holdings, Inc. (“Giant”), caused Uniland to buy Giant over the objection of Uniland’s only other stockholder, Sagarra Inversiones, S.L.(“Sagarra”). Sagarra brought an action in the Court of Chancery to rescind the sale and purported to sue derivatively on behalf of a wholly-owned Delaware subsidiary of Uniland, Uniland Acquisition Corp.(“UAC”), created for purposes of the acquisition. Defendants moved to dismiss the Chancery Court complaint asserting that Sagarra lacked standing to enforce a claim on behalf of UAC. In this en banc decision, the Delaware Supreme Court affirmed dismissal of Sagarra’s putative direct claims and triple derivative claim on behalf of UAC and held that Sagarra’s standing to sue was governed by Spanish law because Uniland was incorporated in Spain. The Supreme Court found that the Chancery Court correctly applied Spanish law to this question of internal affairs, under which Sagarra failed to request that the Uniland board of directors (the “Uniland Board”) call a stockholder meeting to determine whether the company would sue the Uniland Board.
CPV held 74% of the issued and outstanding stock of Uniland and Sagarra held the other 26%. Uniland held all of the issued and outstanding stock of Uniland International, B.V., a Dutch corporation (“Uniland B.V.”). Uniland B.V., in turn, was the sole stockholder of UAC. In 2009, Giant and its controlling stockholder, CPV, encountered financial distress, so CPV attempted but failed to sell Giant for $270 million. When Uniland, B.V. sold certain businesses for approximately $188 million, CPV approached the Uniland Board regarding the possibility of purchasing Giant. Sagarra’s sole director on the Uniland Board opposed the proposal. The Uniland Board then retained UBS to perform an independent valuation of Giant, but CPV subsequently directed UBS to suspend its valuation of Giant and provided Sagarra with a valuation of Giant prepared by PricewaterhouseCoopers (“PWC”) six months earlier which valued Giant at $700 million. Sagarra’s Board representative expressed the view that the PWC valuation overstated Giant’s value. UBS later opined that a fair purchase price for Giant would fall within a range between $66 million and $151 million. The Uniland Board ultimately approved, over the Sagarra director’s objection, the purchase of Giant stock for $279 million in four installments. After Uniland made two installment payments, Sagarra commenced litigation in Spain and Delaware to rescind the sale.
Sagarra filed a special statutory proceeding in the Spanish courts to nullify the Uniland Board’s vote to acquire Giant. Sagarra also filed putative direct claims and triple derivative claims on behalf of UAC in the Court of Chancery. The Vice Chancellor held that the internal affairs doctrine required application of Spanish law to the derivative claims, and that Sagarra therefore lacked standing for failure to make proper demand, under Spanish law, on the Uniland Board. The Vice Chancellor also held that one purported direct claim was actually derivative, and therefore Sagarra lacked standing. Sagarra did not appeal dismissal, on forum non conveniens grounds, of the other direct claim.
Sagarra asserted, on appeal, that the Vice Chancellor erred by applying Spanish law, and that (1) Delaware equitable principles create multi-tier derivative standing for Delaware corporations such as UAC, (2) the internal affairs doctrine requires application of Delaware law to alleged breaches of fiduciary duty by the UAC board of directors, and (3) public policy compels finding of demand futility under Delaware law. The Court reviewed de novo the Vice Chancellor’s decision to grant CPV’s motion to dismiss. The Court held that, because Sagarra held no UAC shares, Delaware law proscribed its derivative standing at the UAC level. Thus, the Court considered and rejected Sagarra’s standing to sue derivatively on behalf of the parent entity, Uniland. In resolving Sagarra’s standing at the parent level, the Court first held that the dispute fell under the internal affairs doctrine, which instructs that the law of the jurisdiction of incorporation applies to relationships among the corporation, and its officers, directors, and stockholders. The Court held that, because presuit demand allocates the corporate authority to institute litigation, it implicates the internal affairs doctrine, which requires application of Spanish law. Sagarra indisputably failed to satisfy the requirements, under Spanish law, for derivative standing. Finally, the Court held that the public policy of comity, recognizing the ability of Spanish law to control the internal affairs of its corporations, outweighed the purportedly implicated public policy in Delaware’s prevention of its corporations being used for abusive purposes. The Court noted that Sagarra invested in Uniland stock with the presumed knowledge that Spanish law would circumscribe and govern its legal rights.
The Court also addressed, in a two-page footnote, potential discrepancies among the Delaware General Corporation Law (the “DGCL”), Lewis v. Anderson, 477 A.2d 1040 (Del. 1984), and Lambrecht v. O’Neal, 3 A.3d 277 (Del. 2010), as noted by Vice Chancellor Laster in Hamilton Partners, L.P. v. Englard, 11 A.3d 1180 (Del. Ch. 2010). The Court observed that, after a reverse triangular merger, the subsidiary board of directors retains statutory authority to assert, and the parent corporation derives from its status as stockholder the equitable right to cause the subsidiary board to assert, a cause of action. The Court stated that Lambrecht does not stand for the proposition that the parent may directly enforce the subsidiary’s claim, but rather that the parent has the practical ability to cause the subsidiary board to assert the claim. The Court further noted that the subsidiary owned the right to bring a claim, but the parent acquired via the merger an indirect property interest in that right.