Fares v. Lankau, 1:14-cv-05289

Background

Plaintiff (a company founder) alleges his ownership was diluted by a stock offering approved by defendants at an allegedly undervalued price; minority shareholders, including plaintiff, were offered the opportunity to purchase pro rata shares but plaintiff did not participate.
The case originated in D. Del.; Judge Robinson initially dismissed the amended complaint for failure to plead a direct Gentile claim and demand futility for a derivative claim, but later granted reconsideration as to the “exchange for assets” prong based on Carsanaro and reinstated the direct claim.
The case was transferred to the Eastern District of New York under a forum-selection clause and reassigned to the present judge, who reconsidered Judge Robinson’s reinstatement.
The core legal question is whether plaintiff stated a direct claim for equity dilution under Gentile v. Rossette when minority shareholders were offered the chance to participate but declined.
The court concluded plaintiff failed to plead a direct claim because defendants did not receive an exclusive benefit unavailable to plaintiff, and also failed to plead demand futility for any derivative claim under Rule 23.1; aiding-and-abetting claim dismissed for lack of an underlying breach.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether facts state a direct equity-dilution claim under Gentile	The issuance of undervalued shares that diluted plaintiff’s percentage harmed him individually and fits Gentile	No direct claim: minority were offered the opportunity to participate; no exclusive benefit to controllers	Dismissed — no direct claim because defendants did not receive a benefit unavailable to plaintiff; dilution resulted from plaintiff’s choice not to participate
Whether sale of stock for cash satisfies Gentile’s “exchange for assets” prong	Cash sale can satisfy Gentile’s asset-exchange requirement (relying on Carsanaro)	Even if first prong satisfied, plaintiff still fails second prong (no exclusive benefit)	Court agreed sale-for-cash can satisfy first prong but found that insufficient here to make claim direct
Whether demand futility is pleaded for a derivative claim (Rule 23.1)	Directors were interested or the transaction was not a valid exercise of business judgment	Directors were not interested; any benefit was available to all shareholders; business-judgment presumption not rebutted	Dismissed — plaintiff failed to allege particularized facts creating reasonable doubt about director disinterest or business-judgment protection
Whether aiding-and-abetting claim survives absent an underlying breach	Aiding-and-abetting alleged alongside fiduciary breach	Predicate breach not adequately alleged	Dismissed — aiding-and-abetting fails without a pleaded underlying breach

Key Cases Cited

Gentile v. Rossette, 906 A.2d 91 (Del. 2006) (articulates narrow circumstances when equity-dilution claims may be direct)
Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618 (Del. Ch. 2013) (held cash-for-stock issuances can satisfy Gentile’s asset-exchange element)
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (distinguishes derivative versus direct stockholder claims)
Rales v. Blasband, 634 A.2d 927 (Del. 1993) (defines director ‘‘interest’’ for demand futility analysis)
Joe W. & Dorothy Dorsett Brown Found. v. Frazier Healthcare V, L.P., 889 F. Supp. 2d 893 (W.D. Tex. 2012) (holds plaintiffs offered the chance to participate cannot state a direct Gentile claim when they declined)