Optimiscorp v. Atkins, et al., C.A. No. 2020-0183-MTZ (Del. Ch. June 1, 2023), Zurn, V.C.—A derivative shareholder plaintiff owes fiduciary duties of care and loyalty to the company, according to a recent opinion from the Delaware Court of Chancery. These fiduciary duties are subject to a more stringent standard than the traditional duties of a director. If a derivative shareholder plaintiff breaches its fiduciary duty, it may be liable to the company for damages.
In Optimiscorp, a number of shareholders pursued an arbitration claim on behalf of the company for legal malpractice and breach of fiduciary duty. The company was not a party to the arbitration. The arbitrator found in favor of the derivative shareholders on the legal malpractice claim and awarded $5,278,222.95 in compensatory damages, plus fees, costs, and interest. The derivative shareholders subsequently took steps to collect the award, and the defendant agreed to pay the award to the interest on lawyers’ trust account of the derivative shareholders’ attorney in exchange for keeping the arbitration confidential. The company learned of the payment, and its attorneys demanded the money. The derivative shareholders resisted, and their attorney proposed a distribution of the award on a pro rata basis to certain “innocent” shareholders, all of whom were either the derivative shareholders or their families and friends. The company filed suit against the former derivative shareholders in the Delaware Court of Chancery, asserting claims for declaratory relief, breach of fiduciary duties, and unjust enrichment. The court ruled that the arbitration award was derivative and must be paid to the company. The parties litigated the remainder of the claims through summary judgment.
On summary judgment, the Delaware Court of Chancery ruled that the former derivative shareholders owed fiduciary duties of care and loyalty to the company. As agents of the company, a derivative shareholder’s fiduciary duty of care is subject to a simple negligence standard. The court expressly rejected the notion that a derivative shareholder could benefit from the business judgment rule afforded directors. The court reasoned that directors make decisions pursuant to their managerial authority under Section 141 of the Delaware General Corporation Law. A derivative shareholder lacks this authority; thus, it is not afforded the protection of the business judgment rule. The court further ruled that a derivative shareholder possesses a fiduciary duty of loyalty as an agent of the company that is “‘additional and more concrete … to their principal’ than corporate directors owe to their corporation and its stockholders.” In this context, a derivative shareholder must not seek or obtain a private benefit from actions undertaken on behalf of the company.
The Delaware Court of Chancery granted summary judgment in favor of the company on the breach of fiduciary duty claims. The court found that the former derivative shareholders violated their fiduciary duty of care by exercising control over the arbitration award. Once the company’s arbitration claim was monetized, the former derivative shareholders’ authority ceased to exist. The recovery should have been paid to the company directly. If the former derivative shareholders sought to influence the distribution of the recovery, then they should have petitioned the court for relief. Their failure to turn over the money constituted a breach. Further, the court found that the former derivative shareholders violated their fiduciary duty of care by failing to communicate their actions to the company and adhere to the company’s instruction to turn over the money. Finally, the court found that the former derivative shareholders violated their duty of loyalty by withholding the recovery for the benefit of themselves and their friends and families as well as to the exclusion of the company’s other shareholders.
While the Delaware Court of Chancery has not rendered a decision on the issue of damages, the Optimiscorp ruling provides a cautionary tale. Derivative shareholder plaintiffs have fiduciary duties of care and loyalty to the company. These duties are more stringent than the fiduciary duties of a director, in which the court, among other things, will not defer to the judgment of a derivative shareholder plaintiff. If a derivative shareholder plaintiff fails to honor its duties, it may be financially liable to the company for damages.