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Direct vs Derivative Claims Minnesota Rejects Delaware Test

Bragança Law LLC

It is nice to see a state court take a skeptical look at Delaware corporate governance law.

The Minnesota Supreme Court chose not to adopt Delaware law on an important corporate governance question — when is a shareholder’s claim “direct” as opposed to “derivative.” The decision is available here: In re Medtronic, Inc. Shareholder Litigation. 

The test of whether a shareholder’s claim is “direct” or “derivative” is important to the outcome of a corporate governance case. As the Minnesota Supreme Court noted “when shareholders are injured only indirectly, the action is derivative; when shareholders show an injury that is not shared with the corporation, the action is direct.” There are procedural obstacles to bringing derivative claims that are not present in direct claims.

In the decision, the Minnesota Supreme Court rejected the Delaware direct/derivative test set forth in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), which had been applied by the district and appellate courts below. The Supreme Court noted “[w]e do not see a need to resort to Delaware law to answer the direct-versus-derivative question here given the guidance available from our own precedent. Moreover, the Tooley test has been limited to claims asserting breach of fiduciary duty.”

The Minnesota Supreme Court concluded that claims alleging injuries to shareholders arising out of overpayments made in a business transaction were not derivative claims. In a derivative claim of overpayment, shareholders claim that their shares have diminished in value by reason of the decrease in value of the corporation’s assets. But here, the claims were that shareholder ownership interest and voting power were diluted by the overpayments made in the business transaction. Not only did the shareholders allege losses in the value of their individual shares, they also alleged an injury based on the loss of certain shareholder rights.  Thus, the Supreme court found the shareholders had sufficiently alleged individual shareholder injury.

For more detail, see the analysis of Stephen Quilivan of Stinson Leonard Street LLP available here.

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