Chancery Upholds Well-Pled Claims Relating to Former Fiduciaries’ Retention of Derivative Arbitration Award

Morris James LLP

Optimiscorp v. Atkins, C.A. No. 2020-0183-MTZ (Del. Ch. July 15, 2021) -

In Optimiscorp, the Court upheld claims against former directors and officers of plaintiff Optimiscorp arising out of the defendants’ failure to turn over to the company an approximately $7 million derivative arbitration award.  As part of a long-standing and acrimonious legal battle between warring factions of the company’s board of directors, defendants previously had brought a lawsuit in Delaware on behalf of the company asserting that the company’s sitting directors and former outside counsel had breached their fiduciary duties and engaged in legal malpractice.  Stipulating to dismissal of the Delaware complaint, the parties pursued the matter in arbitration and the arbitrator ultimately found the outside counsel liable, issued an award, and ordered the payment of attorneys’ fees and costs.  The financially struggling company received notice of the award and proceeded to make strategic business decisions in expectation of receiving the funds.  However, asserting that certain shareholders who were accused of wrongdoing were not entitled to a pro rata portion of the award, the defendants declined to turn the award over to the company.  As a result, the company was forced to take out short-term loans with unfavorable terms and faced other negative consequences.

In response, the company brought breach of fiduciary duty and unjust enrichment claims concerning defendants’ conduct in the Court of Chancery, and the defendants moved to dismiss for failure to state a claim.  Defendants argued that in bringing the arbitration on the company’s behalf: (1) they only owed duties to fellow shareholders and not the company itself, (2) they owed no fiduciary obligations to the company or the shareholders other than the duty to maintain the derivative action; and (3) they could not be liable for money damages because Delaware does not recognize claims in connection with a derivative plaintiff’s alleged breach of fiduciary duty. 

The Court rejected each of the defendants’ arguments.  First, the Court found that in addition to owing fiduciary duties to the shareholders, a derivative plaintiff owes fiduciary duties to the company because it is acting as a fiduciary in connection with the cause of action which is the company’s asset.  Second, the Court found that a derivative plaintiff is not merely obligated to maintain a derivative action, but, rather, owes “a duty of the finest loyalty” to “those whose cause he advocates.”  The Court found that the company had adequately alleged that defendants breached their duty of loyalty by withholding the award from the company in a manner that benefitted themselves and a select group of other shareholders to the company’s detriment.  While the defendants argued that they withheld the award to keep alleged wrongdoers from receiving a share, the Court found that by taking it upon themselves to withhold the award, the defendants improperly usurped “the function and business judgment of the board of directors.”  Finally, the Court rejected the argument that it was contrary to Delaware law to allow a breach of fiduciary duty claim for monetary damages to proceed against a derivative plaintiff, noting that the absence of precedent on the issue was not dispositive, and reasoning that allowing the claim to go forward was not likely to disincentivize derivative plaintiffs.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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