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MONTH-IN-BRIEF (Jun 2021)

Business Litigation

Delaware Court of Chancery Applies Direct/Derivative Distinction In Voting Context

By Lewis H. Lazarus, R. Eric Hacker and Tyler O’Connell of Morris James LLP

The disenfranchisement of an investor with voting or consent rights often is considered to be a direct harm, thus permitting the investor to bring direct claims.  Sometimes, however, the alleged harm from the violation of voting rights is to the company, and it does not directly affect the investor.  The Court of Chancery’s recent decision in Clifford Paper, Inc. v. WPP Investors, LLC, 2021 WL 2211694 (Del. Ch. Jun. 1, 2021), illustrates that, in such instances, a court applying Delaware law may treat those claims as derivative.

Plaintiff Clifford Paper, Inc. ("CPI") formed World Pac Paper, LLC ("WPP" or "Company") with the defendants.  CPI and the defendants shared management duties, and CPI separately performed services for the Company.  CPI withdrew from the Company in 2018 after asserting that the defendants had breached the Company's operating agreement in numerous ways, including by taking unilateral action on matters where CPI had voting or veto rights, and that the defendants had breached their fiduciary duties.

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