Schoon v. Smith

953 A.2d 196 (Del. 2008)

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Nature of the Case

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Facts

Troy Corporation is a privately held Delaware corporation. Series A shares are entitled to elect four of the five Troy directors. Smith (D), the CEO and Chairman of Troy, owns a majority of the Series A shares, which he voted to elect himself and three others to the board of directors. Series B stockholders have the right to elect the final member of the board. Another privately held Delaware Corporation, Steel, owns a majority of Series B shares, which it voted to elect Schoon (P), who owns no stock in Troy, to the Troy board of directors. Series C shares have no voting rights. P alleges that D has taken actions on several occasions that were designed to entrench himself in power and, in turn, thwart potential value-maximizing transactions for the benefit of Troy and its stockholders. P claims in his complaint that none of the directors, other than he, is able to exercise independent judgment regarding Smith or Troy. Ds moved to dismiss P's derivative complaint for lack of standing. The Court concluded that 'Delaware law does not recognize the right of a director, acting in that capacity, to sue on behalf of the corporation he or she serves or on behalf of its stockholders.' P appealed. P argues that as a matter of equity and public policy, a director should be entitled to assert a derivative claim on behalf of the corporation for the same reasons that stockholders are permitted to do so. He urges that equipping directors with standing to sue derivatively is consistent with the fiduciary duties of directors and 'promotes the core Delaware public policy of protecting against misconduct by faithless fiduciaries.'