NAF Holdings, LLC v. Li & Fung (Trading) Ltd.
118 A.3d 175
| Del. | 2015Background
- NAF Holdings, LLC (NAF), sole owner of two newly formed NAF Subsidiaries, contracted with Li & Fung to be a sourcing agent for Hampshire, a target company NAF sought to acquire; Li & Fung allegedly repudiated that contract.
- NAF claims Li & Fung’s breach caused loss of third‑party financing, preventing the Subsidiaries from closing a merger with Hampshire and causing NAF a $30 million diminution in the value of its subsidiaries’ stock.
- The NAF Subsidiaries (not NAF) signed the merger agreement with Hampshire and later settled with Hampshire, releasing claims arising from the transaction.
- NAF sued Li & Fung in federal court for breach of the contract between NAF and Li & Fung, seeking direct damages for NAF’s lost equity value in the subsidiaries.
- The district court dismissed, holding NAF’s claim was derivative (i.e., belonged to the Subsidiaries) under Delaware’s Tooley test; the Second Circuit certified the question to the Delaware Supreme Court.
- The Delaware Supreme Court answered that a party to a commercial contract may bring a direct action to enforce its contractual rights even if the contract benefits a corporation in which the plaintiff owns stock and the plaintiff’s loss is derived from harm to that corporation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a promisee‑plaintiff may sue directly on a commercial contract that benefits a third‑party corporation of which the plaintiff owns stock | NAF: Tooley (direct/derivative fiduciary context) does not apply; NAF has its own contractual rights and may sue directly | Li & Fung: NAF’s injury is derivative of its subsidiaries’ harm; Tooley requires derivative treatment | Held: A signatory to a commercial contract can bring a direct action to enforce its own contractual rights; Tooley’s direct/derivative framework governs fiduciary/derivative claims, not ordinary contract enforcement |
| Whether ownership of the beneficiary corporation (100% ownership) compels derivative treatment | NAF: Ownership does not convert a party’s contractual right into a corporate right | Li & Fung: NAF’s 100% ownership shows the injury is to the subsidiaries and thus derivative | Held: Ownership alone does not require derivative suit; analysis turns on whether the plaintiff seeks to enforce its own contractual rights or rights belonging to the corporation |
| Whether the Subsidiaries’ settlement releasing related claims prevents NAF’s direct suit | NAF: The settlement’s effect on NAF’s independent contract claim is a merits question | Li & Fung: The settlement barred claims and indicates the Subsidiaries’ rights were extinguished, making NAF’s claim derivative and barred | Held: The court did not decide the merits or preclusive effect; those are merits issues distinct from whether the claim is derivative in form |
| Whether Tooley’s “must prevail without showing injury to the corporation” language applies to commercial contract claims generally | NAF: That language was intended for fiduciary/derivative cases and should not be generalized to contract claims | Li & Fung: Tooley’s formulation is a general test for direct vs derivative injury | Held: Tooley addresses fiduciary/derivative suits; it was not intended to convert ordinary contractual claims into derivative actions |
Key Cases Cited
- Tooley v. Donaldson, Lufkin & Jenrette, 845 A.2d 1031 (Del. 2004) (establishes test distinguishing direct and derivative claims in fiduciary‑duty context)
- Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971) (derivative‑action principles and parent/subsidiary duties)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (demand‑futility and derivative suit procedures)
- Blaustein v. Lord Baltimore Capital Corp., 84 A.3d 954 (Del. 2014) (applications of Tooley in subsequent Delaware decisions)