(Mar. 2, 2012) The Delaware Supreme Court has ruled that the law of Spain, rather than that of Delaware, applied in a case where a plaintiff corporation brought a shareholder derivative suit on behalf of a Delaware subsidiary of a Spanish parent corporation.
Sagarra Inversiones, S.L. (Sagarra), a Spanish corporation, filed suit in Delaware Chancery Court to rescind the sale, by Cementos Portland Valderrivas (CPV), another Spanish corporation, of Giant Cement Holdings, Inc. (Giant), of which CPV was the majority shareholder. The transaction was arranged by Corporacion Uniland S.A. (Uniland), of which CPV owned the majority of shares and Sagarra owned the remaining minority of shares. Uniland set up a Delaware subsidiary, Uniland Acquisition Corp. (UAC), specifically as a vehicle to acquire Giant. Sagarra filed the lawsuit derivatively on behalf of UAC, claiming that the transaction involved self-dealing and was a breach of the fiduciary duty owed to UAC by UAC's directors, who were aided and abetted by Uniland and CPV.
The Chancery Court dismissed the complaint, ruling that Spanish law applied and that Sagarra failed to satisfy a Spanish procedural standing requirement for such derivative lawsuits. That requirement obliges a plaintiff to request the corporate board to convene a shareholders' meeting to decide whether to bring suit.
Sagarra appealed, arguing that because it sued to enforce a right possessed by UAC, a Delaware corporation, Delaware law should apply. It further argued that even if Delaware law would not normally apply in these circumstances, it should apply as a matter of public policy to prevent Delaware corporations from being used for abusive purposes.
The Delaware Supreme Court affirmed the Chancery Court's dismissal of the case. It ruled that in derivative shareholder lawsuits like this, which involve multiple tiers of derivative relationships, the plaintiff must satisfy the derivative standing requirements that apply to the entity in which the plaintiff owns shares. Here, because Sagarra owned shares only in Uniland, not UAC, Sagarra was required to satisfy the derivative standing requirements that applied to Uniland. It further ruled that because the derivative standing issue involves Uniland's “internal affairs,” the internal affairs doctrine of Delaware corporate law required application of the law of Uniland's place of incorporation, which was Spain. Because Sagarra failed to meet the standing requirement under Spanish law of requesting a meeting of Uniland shareholders to decide whether to bring suit, Spanish law required the lawsuit's dismissal.
The Delaware Supreme Court also rejected Sagarra's public policy argument, stating that the Delaware policy in favor of policing fiduciary breaches by preventing misuse of the Delaware corporate form could not trump the internal affairs doctrine, which the court termed a settled choice-of-law rule governing shareholder derivative lawsuits. The court noted that Sagarra's ownership of Uniland's shares was subject to the legal rights and restrictions conferred by Spanish law and that for a Delaware court to disrupt the internal affairs of a Spanish corporation by displacing Spanish derivative standing rules would violate principles of comity. (Sagarra Inversiones, S.L. v. Cementos Portland Valderrivas, S.A., No. 425 (Del. Dec. 28, 2011).)