Delaware Supreme Court Overturns Gentile v. Rosette, Clarifying Direct Versus Derivative Claim Analysis

Brookfield Asset Management, Inc., et al. v. Rosson, et al., No. 406, 2020 (Del. Sept. 20, 2021)

In this unanimous en Banc opinion, the Delaware Supreme Court overturned its oft-criticized decision in Gentile v. Rosette, 906 A.2d 91 (Del. 2006) (“Gentile”). Gentile held that a stockholder who allegedly suffers dilution as a result of a controlling stockholder increasing its holdings had standing to pursue a direct claim because a corporate dilution/overpayment claim was “dual-natured” (i.e., direct and derivative). Gentile, however, stood in tension with the Court’s earlier decision in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (“Tooley”), in which the Court articulated a two-part test for determining whether a stockholder’s claim is direct or derivative.  The Brookfield Court put to rest the Gentile dual-natured exception in favor of Tooley and thereby made clear that stockholder plaintiffs will now need to contend with the demand requirement under Court of Chancery Rule 23.1 in controller dilution cases.

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