July 17, 2015
Delaware Supreme Court Clarifies Divide Between Direct and Derivative Claims in Breach of Contract Actions and Demonstrates the Value of the Certified Question
By Stephen B. Brauerman and Sara E. Bussiere
The Delaware Supreme Court recently answered a certified question of Delaware law from the United States Court of Appeals for the Second Circuit pursuant to a constitutional amendment that authorizes such proceedings. The Delaware Supreme Court’s authority to consider and determine questions of law posed to it from jurisdictions across the United States, including the Securities and Exchange Commission, allows the Court quickly and efficiently to decide critical legal issues as they arise, and to develop and strengthen Delaware’s existing robust corporate law. The Court’s recent decision in NAF Holdings, LLC v. Li & Fung Trading Ltd., C.A. No. 641, 2014, 2015 WL 3896792 (Del. June 24, 2015), exemplifies this point. In NAF Holdings, the Delaware Supreme Court, in response to a question submitted by the Second Circuit, clarified the distinction between a direct and derivative action and held that “a suit by a party to a commercial contract to enforce its own contractual rights is not a derivative action under Delaware law,” even where the only economic damage the plaintiff suffered was to the value of stock of two wholly owned subsidiaries. This article provides a brief overview of Delaware’s “Certified Questions” procedures, the NAF Holdings decision, and its impact on the scope of direct and derivative claims brought under Delaware law.
In 1983, Delaware amended its constitution to permit the Delaware Supreme Court to hear questions certified to it from other state and federal courts. In 2007, the Delaware legislature amended the Delaware Constitution to include questions certified from the Securities and Exchange Commission. To effect its constitutional mandate, the Delaware Supreme Court adopted Rule 41(b), which provides that the Court may, in its discretion, accept questions certified from eligible tribunals “only where there exist important and urgent reasons for an immediate determination by this Court.” To meet Rule 41(b)’s stringent requirements, the parties may not dispute any material facts and the Court must consider whether the case involves a novel question of Delaware law, conflict in trial court decisions, or an unsettled question involving a Delaware statute or contractual provision.
Since the adoption of the “Certified Question” amendment, the Delaware Supreme Court has considered 25 certified questions and answered 23 of them. Consistent with the Court’s preferences, nearly all of these certified questions originated from non-Delaware tribunals. (The Delaware Supreme Court prefers to address questions of first impression from its own courts on a fully developed record or through an interlocutory appeal.) NAF Holdings was no exception. The NAF Holdings decision demonstrates how the Delaware Supreme Court’s authority to hear questions certified to it creates efficiency by allowing for timely resolution of critical questions of Delaware law.
In NAF Holdings, the Second Circuit asked the Delaware Supreme Court to consider whether, under Delaware law, a plaintiff who
The Delaware Supreme Court recently answered a certified question of Delaware law from the United States Court of Appeals for the Second Circuit pursuant to a constitutional amendment that authorizes such proceedings. The Delaware Supreme Court’s authority to consider and determine questions of law posed to it from jurisdictions across the United States, including the Securities and Exchange Commission, allows the Court quickly and efficiently to decide critical legal issues as they arise, and to develop and strengthen Delaware’s existing robust corporate law. The Court’s recent decision in NAF Holdings, LLC v. Li & Fung Trading Ltd., C.A. No. 641, 2014, 2015 WL 3896792 (Del. June 24, 2015), exemplifies this point. In NAF Holdings, the Delaware Supreme Court, in response to a question submitted by the Second Circuit, clarified the distinction between a direct and derivative action and held that “a suit by a party to a commercial contract to enforce its own contractual rights is not a derivative action under Delaware law,” even where the only economic damage the plaintiff suffered was to the value of stock of two wholly owned subsidiaries. This article provides a brief overview of Delaware’s “Certified Questions” procedures, the NAF Holdings decision, and its impact on the scope of direct and derivative claims brought under Delaware law.
Delaware’s Constitutional Mandate
In 1983, Delaware amended its constitution to permit the Delaware Supreme Court to hear questions certified to it from other state and federal courts. In 2007, the Delaware legislature amended the Delaware Constitution to include questions certified from the Securities and Exchange Commission. To effect its constitutional mandate, the Delaware Supreme Court adopted Rule 41(b), which provides that the Court may, in its discretion, accept questions certified from eligible tribunals “only where there exist important and urgent reasons for an immediate determination by this Court.” To meet Rule 41(b)’s stringent requirements, the parties may not dispute any material facts and the Court must consider whether the case involves a novel question of Delaware law, conflict in trial court decisions, or an unsettled question involving a Delaware statute or contractual provision.
Since the adoption of the “Certified Question” amendment, the Delaware Supreme Court has considered 25 certified questions and answered 23 of them. Consistent with the Court’s preferences, nearly all of these certified questions originated from non-Delaware tribunals. (The Delaware Supreme Court prefers to address questions of first impression from its own courts on a fully developed record or through an interlocutory appeal.) NAF Holdings was no exception. The NAF Holdings decision demonstrates how the Delaware Supreme Court’s authority to hear questions certified to it creates efficiency by allowing for timely resolution of critical questions of Delaware law.
The NAF Decision
In NAF Holdings, the Second Circuit asked the Delaware Supreme Court to consider whether, under Delaware law, a plaintiff who
has secured a contractual commitment of its contracting counterparty, the defendant, to render a benefit to a third party, and the counterparty breaches that commitment, may the promissee-plaintiff bring a direct suit against the promisor for damages suffered by the plaintiff resulting from the promisor’s breach, notwithstanding that (i) the third-party beneficiary of the contract is a corporation in which the plaintiff-promissee owns stock; and (ii) the plaintiffpromisee’s loss derives indirectly from the loss suffered by the third-party beneficiary corporation; or must the court grant the motion of the promisor-def