Harris v. Carter - 582 A.2d 222 (Del. Ch. 1990)

Rule:

Derivative suits are an invention of equity and the conditions that called forth that innovation continue. It is, of course, the case that courts entertaining such actions must exercise caution so that through this device shareholders do not improperly seize corporate powers. Del. R. Civ. P. 23.1 is designed to assist this effort. But that rule and the policy behind it ought not to be so construed as to stall the derivative suit mechanism where it has been properly initiated. When claims have been properly laid before the court and are in litigation, neither Del. R. Civ. P. 23.1 nor the policy it implements requires that a court decline to permit further litigation of those claims upon the replacement of the interested board with a disinterested one. In that circumstance a new board should be required to take steps, should it decide to act at all with respect to the matter.

Facts:

Plaintiff, minority shareholder, sued defendants, old shareholders/directors, new owners/directors, alleging that the old shareholders/director were negligent and that their negligence breached a duty to the corporation. The minority shareholder also asserted that the new owners/directors looted the corporation. The defendants moved to dismiss the amended and supplemental complaint, asserting that the action was not properly instituted as a derivative action because the shareholder suit was filed after the change of control occurred; that the amended complaint did not state a claim upon which relief could be granted; and, that with respect to certain defendants the court lacked personal jurisdiction.

Issue:

Under the circumstances, should the defendants’ motion to dismiss plaintiff’s complaint be granted?

Answer:

No.

Conclusion:

The motions to dismiss were denied. The court held that pre-suit demand on the directors was excused, and the consent statute authorized service of process on the old shareholders/directors. Further, the complaint stated a claim for breach of duty of care owed by the old shareholders/directors who negligently sold control of the corporation. Further, all the defendants were properly served with process; thus, the motion to dismiss for want of personal jurisdiction was denied.