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Public or minority stockholders also have a separate, and direct, claim arising out of an alleged breach of fiduciary duty. Because the shares representing the overpayment embody both economic value and voting power, the end result of this type of transaction is an improper transfer, or expropriation, of economic value and voting power from the public shareholders to the majority or controlling stockholder. For that reason, the harm resulting from the overpayment is not confined to an equal dilution of the economic value and voting power of each of the corporation's outstanding shares. A separate harm also results: an extraction from the public shareholders, and a redistribution to the controlling shareholder, of a portion of the economic value and voting power embodied in the minority interest. As a consequence, the public shareholders are harmed, uniquely and individually, to the same extent that the controlling shareholder is correspondingly benefited. In such circumstances, the public shareholders are entitled to recover the value represented by that overpayment, an entitlement that may be claimed by the public shareholders directly and without regard to any claim the corporation may have.
A self-dealing transaction was entered whereby the CEO/controlling stockholder of SinglePoint Financial, Inc. ("SinglePoint" or "the company") forgave the corporation's debt to him, in exchange for being issued stock whose value allegedly exceeded the value of the forgiven debt. The transaction, it was claimed, wrongfully reduced the cash-value and the voting power of the public stockholders' minority interest, and increased correspondingly the value and voting power of the controller's majority interest. After the debt conversion, SinglePoint was later acquired by another company ("Cofiniti") in a merger. Shortly thereafter, the acquirer, Cofiniti, filed for bankruptcy and was liquidated. Thereafter, the plaintiffs, who were former minority shareholders of SinglePoint, brought the present action, seeking to recover the value of which they claimed to have been wrongfully deprived in the debt conversion. The Court of Chancery dismissed the action on the ground that the claim was exclusively derivative, and that as a result of the Cofiniti merger the plaintiffs had lost standing to assert the claim on behalf of SinglePoint. Plaintiffs challenged the decision.
Could SinglePoint’s former minority shareholders bring a direct claim against the fiduciaries responsible for the debt conversion transaction complained of?
The court held that under the doctrine stipulated in the case of In re Tri-Star Pictures, Inc. Litigation, the minority shareholders had both derivative and direct claims against defendants. The court noted that the harm resulting from overpayment to the controlling shareholder would result not only in the dilution of the economic value and voting power of each of the corporation’s outstanding shares but also in the extraction from the public shareholders of a portion of the economic value and voting power embodied in the minority interest. Because the trial court's analysis of the debt reduction transaction focused solely upon its dilutive effect on the shares, rather than upon the separate injury to the minority stockholders resulting from the increase in the majority stockholder's ownership interest at the minority's expense, the court held that the trial court committed reversible error.