Naf Holdings, LLC v. Li & Fung (Trading) Limited

118 A.3d 175 (2015)

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Nature of the Case

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Facts

NAF Holdings, LLC (P) sought to acquire Hampshire Group, Limited (Hampshire'), a public company that produces and markets fashion apparel. P contracted with Li & Fung (D), a Hong Kong Company, to serve as the sourcing agent for Hampshire which was an essential condition for the third-party financing commitments P needed to complete the acquisition. P created two wholly-owned subsidiaries to complete the acquisition. P entered into a merger agreement with Hampshire, which was to take effect when the Subsidiaries purchased Hampshire's stock in a tender offer. P was not a party to the merger agreement. D repudiated its contract with P and refused to serve as Hampshire's sourcing agent. P lost its financing commitments and this resulted in a $30 million loss. The Subsidiaries and Hampshire eventually entered into a settlement agreement in which the Subsidiaries released all claims against Hampshire. P and D were not part of the settlement agreement. P sued D for breach of contract. D moved for summary judgment claiming that P could only bring its claim as a derivative action on behalf of the Subsidiaries. The District Court agreed holding that P's contract claim against D could not be maintained as a direct suit. The court relied on the Tooley case in that a court should look to the nature of the wrong and to whom the relief should go. The stockholder's claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation. P had to sue direct because any suit on behalf of the Subsidiaries would be barred by the settlement agreement with Hampshire in which the Subsidiaries relinquished their right to pursue any claims related to the transaction. The court dismissed the case. P appealed and the Appeals Court certified the question. P argued that requiring shareholders with commercial contract claims to sue their counterparty derivatively because the injury arose out of harm to a subsidiary would conflict with established principles of contract law, discourage stockholders from contracting on behalf of the corporation, and undermine the purposes of derivative suits.