Delaware Law Updates
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Schoon v. Smith, No. 554, 2006 (Del. Feb. 12, 2008) (Ridgely, J)

February 12, 2008

In this decision, the Delaware Supreme Court affirmed a decision by the Court of Chancery, which had declined to extend the doctrine of equitable standing to allow a corporate director (who was not a stockholder) to bring a derivative action on behalf of a corporation. The Plaintiff-Appellant was a director, but not a stockholder, of a privately held Delaware corporation. He filed a derivative action alleging breaches of fiduciary duties by his fellow directors. The Court analyzed the equitable origins of derivative suits, concluding that the equitable standing of stockholders to bring a derivative suit had been judicially created to prevent a “complete failure of justice,” but that the legislature had the power both to expand and restrict derivative standing. The Court emphasized that the Delaware General Assembly had in fact acted in the past to restrict derivative standing by statute (e.g., Section 327 of the General Corporation Law). Moreover, notwithstanding a proposal of the American Law Institute to confer derivative standing on corporate directors and that at least one other state’s Supreme Court and the legislature of another state had chosen to confer such standing on directors, the Delaware General Assembly had chosen not to do so. Still, the Delaware Supreme Court viewed the authority to expand equitable standing as being as much a prerogative of the courts as of the legislature. The Court, however, perceived no new exigencies in the corporate context that would require the judicial extension of equitable standing to directors to bring derivative suits. “Because a stockholder derivative action is available to redress any breach of fiduciary duty, [the Court declined] to extend the doctrine of equitable standing to allow a director to bring a similar action.” The Court also focused on the concept of director independence, explaining that the concept of independence does not require a director to remove the debate from the boardroom to the courtroom to resolve board disputes. Nor does it impute a duty to sue on behalf of the corporation in one’s directorial capacity.

The full opinion is available here