New York Appellate Court Adopts Delaware Supreme Court's Tooley Test For Determining Whether a Stockholder's Claim Is Direct or Derivative

by Sheppard Mullin Richter & Hampton LLP

In Yudell v. Gilbert, 2012 WL 3166788 (N.Y. App. Div. 1st Dep’t Aug. 7, 2012), the Appellate Division of the New York Supreme Court, First Department, abandoned its prior ad hoc approach to determining whether a stockholder’s claim is “direct” (i.e., on behalf of the stockholder personally) or “derivative” (i.e., on behalf of the corporation as a whole), and held that the test applied by the Delaware Supreme Court in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), provides the appropriate analysis for resolving this inquiry. Under the Tooley test, the court must consider (i) who suffered the alleged harm (the corporation or the stockholder) and (ii) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually). If the court determines that the corporation suffered the alleged harm and would receive the benefit of any remedy sought in the stockholder’s claim, then the claim must be brought derivatively, on behalf of the corporation, and is subject to the pre-suit demand requirement. Although the court’s decision appears to provide greater clarity to this often vexing issue under New York law, Delaware cases applying the test show that Tooley is far from the last word on the subject.

In Yudell, plaintiffs owned an interest in a joint venture partnership intended to construct and manage a shopping center. Dissatisfied with the perceived mismanagement of the shopping center, plaintiffs initiated a lawsuit against the manager of the shopping center and their partners in the joint venture purporting to allege both direct and derivative claims.

Defendants moved to dismiss the complaint for a failure to plead demand futility with the requisite specificity. In response, plaintiffs argued that although most of their claims were derivative, their third cause of action for breach of fiduciary duty was direct and thus not subject to the demand requirement. In this claim, plaintiffs alleged that the manager “failed to preserve [the entity’s] rights to collect unpaid tax obligations … and rent.”

The trial court disagreed, holding that all of plaintiffs’ causes of action were derivative in nature. For this reason, it dismissed the complaint after concluding that plaintiffs failed to plead either (i) that they made a pre-suit demand upon the board to pursue the claim on behalf of the entity or (ii) particularized facts indicating that pre-suit demand upon the board would have been futile. Plaintiffs appealed.

The Appellate Division affirmed. It began by recognizing that New York courts had not previously articulated a clear test for determining whether a claim is direct or derivative. Instead, New York jurisprudence approached the issue on a case-by-case basis depending upon the nature of the allegations. After discussing various circumstances where New York courts found that a stockholder’s claims are derivative (e.g., where the stockholder suffers solely through depreciation in the value of his or her stock, sues for mismanagement or alleges diversion of corporate assets or corporate opportunity), the Appellate Division adopted the Tooley test as consistent with New York law and applied it expressly to the facts of Yudell.

The Appellate Division observed that the manager’s alleged failure to collect the tax obligations and rent affected each of the joint venture members in proportion to their ownership interest in the entity. Moreover, in the event plaintiffs were successful with their lawsuit, the court recognized that any recovery would properly inure to the benefit of the corporation, not plaintiffs. Accordingly, the court held that plaintiffs’ claims were properly classified as derivative because the harms alleged in the complaint were suffered by the corporation.

By adopting the Delaware Supreme Court’s Tooley test, the court in Youdell appears to articulate a clearer test in New York for determining whether a claim is direct or derivative. Delaware cases applying Tooley, however, have recognized that applying this test can be difficult in practice. For example, in Feldman v. Cutaia, 951 A.2d 727 (Del. 2008), the Delaware Supreme Court rejected the stockholder plaintiffs’ argument that their claims against the company’s directors in connection with a cash-out merger were direct because the shareholders would have ultimately recovered the damages alleged. Instead, the Delaware Supreme Court concluded:

The mere fact that the alleged harm is ultimately suffered by, or the recovery would ultimately inure to the benefit of, the stockholders does not make a claim direct under Tooley. In order to state a direct claim, the plaintiff must have suffered some individualized harm not suffered by all of the stockholders at large.

Likewise, in In re NYMEX Shareholder Litigation, 2009 Del. Ch. LEXIS 176 (Del. Ch. Sept. 30, 2009), stockholders brought a class action alleging, inter alia, that the chairman of the New York Mercantile Exchange (“NYMEX”) breached his fiduciary duties by rejecting a proposed acquisition of NYMEX by the NYSE and favoring a merger with the Chicago Mercantile Exchange in order to secure a continued position with the exchange. Applying Tooley, the Delaware Court of Chancery explained, “the critical question is: ‘Looking at the body of the complaint and considering the nature of the wrong alleged and the relief requested, has the plaintiff demonstrated that he or she can prevail without showing an injury to the corporation.’”

In short, while Youdell certainly clarifies the law in New York, the question of whether a claim is direct or derivative is highly fact-intensive and can still be difficult to resolve.

For further information, please contact John Stigi* at (310) 228-3717 or Alejandro E. Moreno at (619) 338-6664.

* Admitted in New York and California.


Written by:

Sheppard Mullin Richter & Hampton LLP

Sheppard Mullin Richter & Hampton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.