Chancery Dismisses Challenge to Top Executives’ Stock Awards in Disney-Fox Merger, Finds Plaintiff Lacks Standing to Pursue Derivative Claim

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Brokerage Jamie Goldenberg Komen Rev TRU U/A 06/10/08 Jamie L Komen Trustee for the Benefit of Jamie Goldenberg Komen v. Breyer, C.A. No. 2018-0773-AGB (Del. Ch. June 26, 2020)

Following a merger that alters a stockholder’s ownership status, the stockholder may be able to challenge the entirety of the merger as a direct claim, but the stockholder will typically lack standing to challenge the individual aspects of the merger as derivative claims. The instant case, involving the Disney-Fox merger, shows the difficulties a stockholder faces in attempting to mount such a challenge.

Plaintiff challenged the stock awards given to executives (Rupert Murdoch and his two sons) in conjunction with the two-step transaction that resulted in much of Twenty-First Century Fox, Inc. (“Old Fox”) being sold to Disney in a merger transaction. Plaintiff held stock in Old Fox prior to the merger and received stock in Disney and also Fox Corporation (“New Fox”), which had been spun off before the merger. Plaintiff sued on behalf of a putative class of Old Fox stockholders, or alternatively, derivatively on behalf of New Fox. Defendants moved to dismiss, arguing that Plaintiff’s claims were derivative, and as a result, Plaintiff lacked standing because Plaintiff did not hold New Fox stock at the time of the stock awards.   

The Court agreed that Plaintiff’s claims were derivative, and therefore, Plaintiff lacked standing to bring the action. In concluding that the claims were derivative, the Court rejected Plaintiff’s assertion that it had established a direct claim under the Parnes v. Bally Entertainment Corp., 722 A.2d 1243, 1245 (Del. 1999) line of cases. In Parnes, the Delaware Supreme Court recognized that a challenge to the merger itself (rather than the circumstances surrounding the merger) alleges an injury to the stockholders, not the corporation, and thus the challenge is a direct claim that survives the merger. But as pre- and post-Parnes cases make clear, a plaintiff must allege that the challenged stock awards improperly diverted merger proceeds so as to make the merger unfair. 

Unlike the prior cases, there was no allegation that the Murdochs threatened to block the merger unless they received the awards; nor were the awards the product of post-merger self-dealing. Because Plaintiff’s complaint did not establish that the stock awards tainted the entire merger process by improperly diverting merger consideration from Old Fox’s stockholders, the Plaintiff’s claims were derivative in nature.

Because Plaintiff’s claims were derivative, Plaintiff lacked standing to maintain its action. Well-settled Delaware law requires a derivative plaintiff not only to hold stock at the time of the alleged wrong, but also continually through the prosecution of its action. As a practical matter, the continuous ownership requirement makes the direct/derivative distinction outcome determinative in many cases. Although an exception to the continuous ownership requirement exists for mergers which are, in reality, mere reorganizations, that exception did not apply here. For one, Plaintiff did not allege it, and for another, New Fox and Old Fox were different in numerous respects, including their assets, corporate structures and board composition. Given this, and that Plaintiff conceded that it lacked continuous ownership, the Court concluded that Plaintiff lacked standing to pursue its derivative claims.

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