Chester County Employees' v. New Residential Investment Corp.
11058-VCMR
| Del. Ch. | Oct 7, 2016Background
- Plaintiff Chester County Employees’ Retirement Fund sued New Residential, its directors, manager FIG LLC (and FIG’s owner FOE I), and Fortress, alleging the board overpaid for HLSS assets to benefit Fortress affiliates and increase FIG/Fortress fees, incentive compensation, and option awards.
- New Residential acquired HLSS assets in April 2015 for cash plus ~28.3M New Residential shares; total alleged purchase price ≈ $1.44 billion. HLSS then sold many shares in a public offering that increased paid-in capital.
- As a result of the deal and related public offerings, FOE I received ~8.54M options, FIG’s annual management fee rose (allegedly by $6.5M), and FIG’s incentive compensation allegedly increased materially after account recharacterizations and a retroactive amendment to the management agreement.
- Plaintiff alleges the board was dominated or beholden to Fortress and that certain charter and contract provisions purport to limit fiduciary duties and FIG’s liability. Plaintiff seeks derivative and direct claims for breach of fiduciary duty and declaratory relief invalidating those protections.
- Defendants moved to dismiss under Rule 23.1 and Rule 12(b)(6), arguing the claims are derivative (corporate overpayment), demand was required and not excused, Fortress/affiliates did not owe fiduciary duties to New Residential, and declaratory claims are unripe. The Court addressed demand futility and ripeness.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the HLSS-related overpayment/dilution claim is direct or derivative | The share issuance and dilution injured shareholders individually and benefitted Fortress affiliates, so a direct claim exists | The claim is a classic corporate overpayment and therefore derivative | Court treated claim as derivative for Rule 23.1 purposes and applied demand analysis (derivative) |
| Whether demand on the board was excused (demand futility) | Board was beholden to Fortress; at least half the directors lacked independence, so demand is excused | Fortress’s interest in the transactions wasn’t alleged to be material; directors not disablingly conflicted | Plaintiff failed to plead particularized facts of Fortress’s material interest; demand not excused; Counts I–II dismissed with leave to replead |
| Whether alleged side benefits to Fortress (options, fees, proceeds) were sufficient to show Fortress interest/materiality | The options, increased fees, incentive payments, and stock-sale proceeds show Fortress materially profited and was interested | The complaint does not allege materiality relative to Fortress (no percentages or financial context); benefits may have flowed to FIG/FOE I but not shown material to Fortress | Allegations insufficient to show materiality to Fortress; cannot infer disabling interest; independence doubts as to some directors acknowledged but overall demand not excused |
| Ripeness of declaratory judgment claims (charter, management agreement, termination agreement) | Charter & agreements purport to limit fiduciary duties and FIG liability; plaintiff seeks declaration they are invalid as applied and/or facially invalid | Defendants have not invoked those provisions as defenses; adjudication would be advisory | Facial challenge to charter article is ripe and survives dismissal; as-applied challenge to charter and challenges re: Management Agreement and Termination Agreement are unripe — dismissed without prejudice |
Key Cases Cited
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (test for whether a claim is direct or derivative: who suffered the harm and who would benefit from recovery)
- Gentile v. Rossette, 906 A.2d 91 (Del. 2006) (corporate overpayment claims are typically derivative; dual-natured claims arise when a controller’s stake increases at minority’s expense)
- Feldman v. Cutaia, 956 A.2d 644 (Del. Ch. 2007) (limits Gentile’s reach—direct claims require a controlling stockholder who orchestrated the transaction)
- Carsanaro v. Bloodhound Technologies, Inc., 65 A.3d 618 (Del. Ch. 2013) (board’s lack of independence can support individual standing for dilution claims absent a formal controller)
- In re El Paso Pipeline P’rs, L.P. Derivative Litig., 132 A.3d 67 (Del. Ch. 2015) (treat dual-natured claims as derivative for demand-rule purposes but allow direct characterization post-merger; endorses applying Rule 23.1 to overpayment cases)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (two-prong test for demand futility: director disinterest/independence and validity of business judgment)