Delaware's Evolving Equity Dilution Standing Rules

In a recent decision from the Delaware Court of Chancery, Vice Chancellor J. Travis Laster provided what seems to be an important step towards reconciling two strands of Delaware law, addressing the distinction between direct and derivative claims, that have been in subtle conflict for years. That decision, Carsanaro v. Bloodhound Technologies, Inc., has already been recognized as an important development in the law governing the relationship between company founders and venture capitalists. The Vice Chancellor held that cashed-out stockholders had standing to bring direct, as opposed to derivative, claims alleging that a group of venture capital funds with majority representation on the Board inequitably diluted plaintiffs’ equity stake before ultimately selling the company. In addition to expanding the breadth of stockholder rights to bring direct actions, Carsanarois notable as an apparent step toward reconciling the accepted test under Delaware law for distinguishing between direct and derivative claims with one line of cases that has stubbornly stood outside of its ambit. It bears emphasis, however, that Carsanaro is only one step towards such reconciliation, and it remains to be seen whether Delaware law will continue down its path.

About Potter Anderson

Potter Anderson & Corroon LLP is one of the largest and most highly regarded Delaware law firms, providing legal services to regional, national, and international clients. With more than 100 attorneys, the firm’s practice is centered on corporate law, corporate litigation, intellectual property, commercial litigation, bankruptcy, labor and employment, and real estate.