Delaware Supreme Court Concludes “Holder Claims” Are Direct But Questions Viability Under Delaware Law
 

On May 24, 2015, the Delaware Supreme Court ruled that former stockholders’ claims against a corporation, under New York or Florida law, for damages allegedly caused by holding already-purchased stock in reliance on purported misrepresentations constitute direct claims.  Citigroup Inc. v. AHW Invest. P’ship, MFS, Inc., No. 614 2015 (“AHW”).  This ruling addressed a certified question from the Second Circuit Court of Appeals,  which sought guidance on whether so-called “holder claims” were direct or derivative in nature.  The ruling is most notable because the court expressed reservations about the validity of holder claims under Delaware law, although it did not decide the issue.

Plaintiffs alleged that they suffered damages because they planned to sell Citigroup stock but instead waited to do so after purportedly relying on alleged misrepresentations regarding the bank’s exposure to subprime mortgages; plaintiffs claim that the value of the stock subsequently dropped as the supposed truth about the bank’s exposure was revealed to the market.

Defendants moved to dismiss for lack of standing, arguing that the claim was derivative and could only be brought by a current shareholder, and for failure to state a claim.  The district court found that the claims were direct but dismissed the fraud and negligent misrepresentation claims for failure to plead non-speculative damages and lack of privity, respectively.  Plaintiffs appealed the dismissal and defendants cross-appealed the ruling that the claims were direct. 

The Delaware Supreme Court ruled that the holder claims, which are cognizable claims under both New York and Florida law, were direct because the claims “are ones that only the holders can assert, not claims that could plausibly belong to the issuer corporation, Citigroup.”  

Although the Court declined to opine on whether Delaware law recognized holder claims because it was not necessary to answer the narrow question presented, the Court expressed notable reservations about perceived “analytical problems” with holder claims.  The Court observed that holder claims “compound” the “very difficult questions of proof and damages” already present in purchaser and seller claims because a holder claim plaintiff “must prove that she would have sold her securities in some particular time period had she had certain information at that time.”  The Court cautioned that “speculation [is] arguably inherent” in this type of argument because “securities holders may decide whether to hold or sell stock for various reasons.”  The Court concluded that these complexities had “led states to be rightly cautious about creating broad causes of action for securities holders … a caution our state law has shared.”

The case will return to the Second Circuit for disposition of the plaintiffs’ appeal of dismissal.