Joe W. & Dorothy Dorsett Brown Foundation v. Frazier Healthcare V, L.P.
2012 U.S. Dist. LEXIS 122994
| W.D. Tex. | 2012Background
- Foundations are non-profit stockholders of Ascension Orthopedies, Inc. (Delaware corporation) and held Series A–D preferred stock with merger-related payout issues.
- Bridge financing from Frazier Investors totaling $14.25 million was converted into Series E stock with a 300% return clause; Mayo Clinic and CMC Master Fund also participated.
- Foundations were offered pro rata participation in the E-series issuance but declined; they claim lack of meaningful access and control over debt-financing terms.
- Ascension was sold to Integra Lifesciences; the sale covered the 300% return entitlements for Class E holders but not for Foundations; Foundations received no merger proceeds.
- Foundations’ Second Amended Complaint asserted direct breach of fiduciary duties, oppression, conspiracy, aiding and abetting, and unjust enrichment; Defendants moved to dismiss arguing derivative standing post-merger.
- Court granted motions to dismiss and ultimately dismissed all claims with prejudice; remaining text analyzes whether claims are direct or derivative.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Direct vs. derivative claims under Tooley test | Foundations plead direct harm | Claims are derivative post-merger | Claims treated as derivative; standing not shown |
| Gentile direct claim applicability | Controlling shareholders caused dilutive transaction benefiting exclusive control | No exclusive benefit shown; not direct under Gentile | Gentile not satisfied; claims held derivative |
| Lewis exceptions post-merger standing | Merger fraud or reorganization preserves direct claims | No applicable Lewis exception shown | No Lewis exception established; derivative claims prevail |
| Breach of fiduciary duty and aiding-and-abetting viability | Claims fit Gentile direct/aid-by-association | Claims fail under Gentile and are derivative | Dismissed breach and aiding-and-abetting claims with prejudice |
| Overall dismissal posture and prejudice | All claims dismissed with prejudice; supplemental/surreply grants preserved |
Key Cases Cited
- Gentile v. Rossette, 906 A.2d 91 (Del. 2006) (direct claims when controlling stockholder manipulates ownership and value)
- Feldman v. Cutaia, 956 A.2d 644 (Del.Ch. 2007) (exclusive-benefit analysis in direct-dilution claims; post-merger standing)
- Lewis v. Anderson, 477 A.2d 1040 (Del. 1984) (merger generally ends derivative claims absent exceptions)
- Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (two-part test for direct vs derivative claims (harm and benefit))