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Law School Case Brief

Grimes v. Donald - 673 A.2d 1207 (Del. 1996)

Rule:

The distinction between a direct claim and a derivative claim depends upon the nature of the wrong alleged and the relief, if any, which could result if plaintiff were to prevail. To pursue a direct action, the stockholder-plaintiff must allege more than an injury resulting from a wrong to the corporation. The plaintiff must state a claim for an injury which is separate and distinct from that suffered by other shareholders, or a wrong involving a contractual right of a shareholder which exists independently of any right of the corporation.

Facts:

Nominal defendant DSC Communications Corporation (“DSC”) entered into an employment agreement with defendant appellee CEO James L. Donald, whereby the latter was entitled to be paid a large sum of money in the event of a constructive termination. C.L. Grimes, plaintiff appellant stockholder brought an action seeking to invalidate the said employment agreement. According to Grimes, defendant appellee board of directors unlawfully abdicated its statutory duty to manage the corporation’s affairs by entering into such employment agreement with the CEO. Furthermore, Grimes asserted that the board breached its fiduciary duties by failing to exercise due care and committing waste. The Court of Chancery, New Castle County (Delaware) dismissed the case for failure to state a claim. Grimes challenged the dismissal of the case.

Issue:

Should plaintiff stockholder Grimes’ complaint, which sought declaration of invalidity of employment agreements between the corporation and defendant CEO and sought money damages for defendant board of directors' alleged breach of fiduciary duties, be dismissed for failure to state a claim upon which relief can be granted?

Answer:

Yes.

Conclusion:

The Supreme Court of Delaware affirmed the dismissal of plaintiff appellant stockholder Grimes' action. The Court held that the stockholder's abdication claim was a direct claim--rather than a derivative claim-- where it alleged an injury which was separate and distinct from the injury suffered by other shareholders. However, the stockholder’s abdication claim failed as a matter of law where, in light of the corporation’s financial size, the payment provided for in the employment agreement would not have constituted a de facto abdication. The Court explained that when a stockholder demands that the board of directors take action on a claim allegedly belonging to the corporation and demand is refused, the stockholder may not thereafter assert that demand is excused with respect to other legal theories in support of the same claim, although the stockholder may have a remedy for wrongful refusal or may submit further demands which are not repetitious.

As for the applicable standard of review, the Supreme Court of Delaware reviews de novo the decision by the Court of Chancery on a motion to dismiss a direct claim applying the same standard: Conclusory statements without supporting factual averments will not be accepted as true for purposes of a motion to dismiss.  In considering a motion to dismiss for failure to state a direct claim, the Court of Chancery assumes the truth of well-pleaded allegations, giving to the plaintiff the benefit of all reasonable inferences that can be drawn from the pleading.

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