Commercial Division Blog

Posted: March 15, 2016 / Categories Commercial, Derivative Actions

Plaintiff Allowed to Replead Derivative Claims Against Directors to Show Discrimination

On March 10, 2016, the First Department issued a decision in Davis v. Scottish Re Group Ltd., 2016 NY Slip Op. 01756, distinguishing direct and derivative claims and allowing a plaintiff to replead certain claims as derivative claims, explaining:

In the fourth cause of action, plaintiff alleges that the Directors and the Investors breached their fiduciary duties and unfairly prejudiced the minority shareholders

by pursuing and implementing a dividend policy, and other corporate actions, that resulted in PPS and ordinary shareholders not obtaining any dividend payments in the past, and placing shareholders in a position of not expecting to obtain significant dividend payments in the near future, while at the same time creating windfall dividends for the Investors in a manner which is clearly oppressive, unjust and inequitable, and which in essence constitutes a disguised partial liquidation of the Company.

. . .

The claim, as pleaded, cannot be sustained. Plaintiff's attempt to characterize the dividend policy of which he complains as discriminatory, making the claim a direct one, contains allegations that confuse derivative and individual rights. The deficiencies in plaintiff's pleadings . . . make it virtually impossible to discern just how the dividend policy was discriminatory and therefore affected plaintiff individually within the meaning of Brinckerhoff v JAC Holding Corp., [which held] that where some shareholders received a lesser benefit than other shareholders the harm was suffered individually.

However, plaintiff should be given an opportunity to replead to remedy the pleading deficiencies . . . with respect to his Brinckerhoff claim as against the Directors only. Although a challenge to a decision to pay dividends would generally be derivative, plaintiff asserts, inter alia, that his claim is direct because the disproportionate payment of dividends is discriminatory and directly harmed him as a minority shareholder. Thus, rather than corporate mismanagement, plaintiff asserts unequal treatment in the form of an intentional, premeditated plan to pay the Investors huge windfall dividends while freezing out minority shareholders in order to induce them to sell their shares to the Investors at a steep discount.

(Internal quotations and citations omitted) (emphasis added).