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June 14 2017
In IATSE Local No One Pension Fund v General Electric Company(1) the Delaware Court of Chancery provided new guidance on a stockholder's standing to bring fiduciary duty claims following a freeze-out merger that forced the stockholder to sell its shares. The case involved a complex series of transactions in which General Electric Company (GE) merged with a subsidiary, General Electric Capital Corporation (GECC). As a result of the merger, holders of GECC preferred stock, including the plaintiff, received new shares of GE preferred stock, which were allegedly worth less due to lower dividend rates. GE subsequently allowed the preferred stockholders to swap their stock for other assets in exchange for a release of their claims, but the plaintiff was not afforded this opportunity because it sold its stock shortly after the merger, prompting this suit.
The defendants (GE and related entities, along with certain GE officers and directors) moved to dismiss on the grounds that the plaintiff lacked standing to pursue its breach of fiduciary duty claim because it no longer held GECC stock. The defendants' argument relied on the Delaware Court of Chancery's 2015 decision in In re Activision Blizzard, Inc Stockholder Litigation,(2) which held that a stockholder selling its stock abandons all but direct claims that are personal in nature, such as a claim that the stockholder was defrauded by the company. Direct claims that are non-personal in nature – that is, claims arising from the relationship between the stockholder and the company – adhere to the stock and may not be brought by former stockholders. In IATSE the court held that when a stockholder is forced to sell its stock in a freeze-out merger representing an alleged breach of fiduciary duty, the transaction "necessarily severs the relationship between the stockholder and the entity". Vice Chancellor Glasscock explained that "the breach of duty claim arose simultaneously with the sundering of the relationship between the plaintiff/stockholder and GECC, and cannot have adhered to the GECC stock".
In rejecting the defendants' arguments and permitting the pension fund to proceed with its claim, the IATSE decision provides important guidance on the limits of Activision, which was distinguishable on the grounds that the stock held by the plaintiff in that case (and which the plaintiff in that case elected to sell) remained intact (although diluted) following the transaction, and was never "eliminated, converted, exchanged, or otherwise transmogrified". IATSE makes clear that a transaction that causes a stockholder to release its stock involuntarily will not foreclose an action by that former stockholder for breach of fiduciary duty.
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