Second Circuit Affirms Dismissal Of Shareholder Suit, Finding Subject Matter Jurisdiction Was Properly Exercised, Equity Dilution Claim Was Derivative, And Demand Futility Was Inadequately Pleaded

by Shearman & Sterling LLP

On April 26, 2017, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a lawsuit brought by a shareholder of Star Bulk Carriers Corp. (“Star Bulk”) against its directors and entities affiliated with the director defendants.  F5 Capital v. Pappas, No. 16-530 (2d Cir. April 26, 2017).  Challenging various transactions in which Star Bulk had engaged, plaintiff asserted derivative claims for breaches of fiduciary duty and waste, as well as a purported direct class-action claim for wrongful equity dilution.  Affirming the dismissal of all claims, the Second Circuit held that (1) the equity dilution claim was not within the “limited circumstances involving controlling stockholders” to enable it to be considered a direct (rather than derivative) claim; (2) the district court nevertheless had and properly retained subject matter jurisdiction; and (3) plaintiff failed to plead demand futility, as required under Federal Rule of Civil Procedure 23.1 to maintain shareholder derivative claims. 

Plaintiff, a Star Bulk shareholder, alleged generally that three defendant entities, which were also Star Bulk shareholders, orchestrated various transactions to the detriment of Star Bulk’s other shareholders.  In advance of the transactions, these three defendant groups held approximately 3.3% (“Group I”), 19.6% (“Group II”), and 21% (“Group III”) of Star Bulk shares (amounting in total to 43.9%).  The complaint focused principally on a transaction in which Star Bulk acquired Oceanbulk Carriers LLC (“Oceanbulk”), allegedly allowing defendants “to consolidate their control.”  After this merger, the first two groups increased their holdings to 12.6% and 61.3%, respectively, but Group III had its interest decrease to 7.4%.  Notably, 95.6% of all Star Bulk shareholders voted in favor of the deal.   

Plaintiff initially brought the case in state court in New York, asserting derivative claims for breaches of fiduciary duty, aiding and abetting, and waste, as well as a purported direct class-action claim for equity dilution.  The defendants removed to federal district court asserting jurisdiction over the direct, class-action dilution claim under the Class Action Fairness Act (“CAFA”), 28 U.S.C. § 1332(d), and supplemental jurisdiction over the non-class, state law derivative claims, 28 U.S.C. § 1367(a).  Plaintiff did not contest removal.

Regarding the substance of the claims, the Court noted that the parties agreed that Delaware law applied because Star Bulk is incorporated in the Marshall Islands, which adopted Delaware corporate law. 

As to the equity dilution claim, the Court explained that Delaware considers such claims derivative except in “limited circumstances” involving an increase in the percentage of shares owned by the “controlling stockholder” and a corresponding decrease in the share percentage owned by the other shareholders that amounts to “an improper transfer . . . of economic value and voting power.”  Here, the Court found that plaintiff had failed to allege “sufficient facts” to demonstrate a plausible claim that “the three groups of defendants constituted a single control group.”  Specifically, the Court explained that “[i]t is implausible . . . to allege that [Group III] committed with [the other two defendant groups] to expand their ownership stake while shrinking its own.”  Further, the Court found that even if the shares held by the three defendant groups could be aggregated, “their collective interest [of 43.9%] is insufficient to satisfy the definition of a controlling stockholder” because 43.9% is “plainly less than 50%, and [plaintiff] has not plausibly alleged that the group collectively exercise[d] control over the business and affairs of the corporation.”  The Court also highlighted that the fact that 95.6% of all Star Bulk shareholders voted in favor of the Oceanbulk merger “renders still more implausible [plaintiff’s] claim that [the three defendant groups] colluded to take over the corporation to the other shareholders’ detriment.”  

Although neither side raised the issue, the Court next addressed whether the federal district court had and retained subject matter jurisdiction over the claims.  First, the Court considered the implications of its decision that the equity dilution claim was a derivative claim and not a direct class-action claim.  At the time of removal, the equity dilution class-action claim satisfied the jurisdictional requirements under CAFA, including “minimal diversity” because plaintiff was a foreign corporation and at least one defendant was a United States citizen.  The Court held that “the later failure of the class claim”—which it found to be derivative—“did not divest the district court of subject matter jurisdiction because CAFA anchored jurisdiction at the time of removal.”

Second, the Court held that—“on the facts of this case”—the absence of “complete diversity” (because plaintiff was a foreign corporation and there were foreign defendants) did not “preclude[] the district court from exercising supplemental jurisdiction” over the claims that had initially been brought as derivative non-class claims.  The Court explained:  “Given that CAFA is the jurisdictional anchor for the complaint and that the evident purpose of that statute was to expand federal jurisdiction over suits that meet its requirements, it would be inconsistent with that purpose to interpret [28 U.S.C.] § 1367(b) [a provision limiting supplemental jurisdiction] to keep the pendent claims out of federal court while allowing the class claims to proceed, where the anchor of jurisdiction plainly does not contemplate such a result.” The Court added that “[t]he fact that this is a removal case also favors exercising supplemental jurisdiction here.” 

Finally, the Court held that all of the claims—now found to be derivative—must, but did not, satisfy the requirement under Rule 23.1 to plead that a demand on the board to sue was excused.  Applying Delaware law, the Court determined that “at least a majority of the board [five of nine members] was disinterested.”  Specifically, the Court found that, as to one director, allegations that he served on other boards with an interested director did not “raise a reasonable doubt concerning” his independence.  As to three other directors who (after the Oceanbulk transaction) had been appointed by and were employees of the Group II shareholder, plaintiff had “not pled any particularized facts concerning [their] conduct in their positions or the nature of their obligations to [the Group II shareholder] that raise a reasonable doubt concerning their independence.”  As to a fifth director, plaintiff alleged only that he was Star Bulk’s CEO before the Oceanbulk merger and received shares as a change-of-control payment and became non-executive chairman in connection with the transaction.  The Court concluded that “[a]bsent a suggestion that the compensation was excessive, the receipt of such payment does not disqualify [him] from passing on the pre-suit demand.”  The Court also held that the complaint failed to plead facts showing the challenged transactions were undertaken in “bad faith” or that the directors “failed to inform themselves” in advance.  Therefore, the Court affirmed the dismissal.    

Written by:

Shearman & Sterling LLP

Shearman & Sterling 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.