Tuesday, August 16, 2011

Applying Spanish Law and Citing Internal Affairs Doctrine, Delaware Chancery Court Dismisses Derivative Action

The Delaware Chancery Court applied Spanish law to dismiss a derivative action by a Spanish minority shareholder on behalf of a Spanish parent company with a Delaware subsidiary that aided in effectuating the challenged acquisition of another company. The parent’s majority shareholder, a Spanish entity, also held a majority interest in the acquired company. Under the internal affairs doctrine, the Court had to consider whether the minority shareholder had standing to bring a derivative claim under Spanish law. Sagarra Inversiones, S.L. v. Cementos :Portland Valderrivas, et al.,Uniland Acquisition Corp., Nominal Defendant, C.A. No. 6179-VCN, Aug. 5, 2011.

The internal affairs doctrine recognizes that only one state should have the authority to regulate a company’s internal affairs and that is the state of incorporation. In a double derivative action of this type involving a wholly-owned subsidiary, a shareholder must plead demand futility at the parent level. Thus, where the parent is not a Delaware corporation, under the internal affairs doctrine, the law of the state of incorporation determines the showing that a plaintiff must make to satisfy the court that it has standing to bring a multiple derivative action. Because the minority shareholder only owns shares in the parent corporation organized under the laws of Spain, the court had to consider whether it had standing to bring a derivative claim under Spanish law.

While earlier proceedings in Spain were not derivative actions, noted Vice Chancellor Noble, it appeared that the shareholder could have pursued a derivative action of some kind against the directors under Spanish law, which conditions a derivative action on a request that the board call a meeting of shareholders to consider whether to pursue the derivative claims. Had the board refused, the shareholder could have then brought an action asserting those derivative claims. Otherwise, had a meeting been held, it would appear that the shareholder still could have pursued the derivative claims after a certain period of time.

But the shareholder did not make a demand on the board. Thus, no request was made for a shareholder meeting to consider the actions relating to the acquisition. Although the parent board was conflicted because of the dominance of the majority shareholder, noted the court, the minority shareholder failed to exhaust its intra-corporate remedies under Spanish law. Had it requested that a shareholder meeting be called, and had that request been refused, it would have been entitled to pursue a derivative action in Spain against company directors. The court concluded that, even though Spanish law recognizes some kind of derivative suit, the shareholder lacked standing under Spanish law to bring a claim of that sort.

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