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Karen Clarke

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Karen E. Clarke is a senior associate in the Litigation Department.

Karen has more than 20 years of experience representing public and private corporations, banks, and officers and directors in a variety of commercial litigation and arbitration matters. She has litigated in state and federal courts in New York, New Jersey, Delaware, and Florida, as well as in FINRA and other arbitral forums. Karen's practice includes shareholder litigation, SEC and receivership litigation, consumer actions, contract and executive compensation disputes, business torts, law firm defense, and trust and estate litigation. Karen also assists companies with internal investigations and responses to SEC and FINRA investigations and enforcement matters.

Seal_of_the_Supreme_Court_of_Delaware_svgAs previously reported, in NAF Holdings, LLC v. Li & Fung (Trading) Limited, 772 F.3d 740 (2d Cir. 2014), the Second Circuit certified to the Delaware Supreme Court an unusual question regarding whether the direct vs. derivative test for stockholder claims would bar a direct breach of contract claim by a parent corporation whose subsidiary was injured. The Delaware Supreme Court has now given its answer: the direct vs. derivative analysis for fiduciary breach claims does not apply and the parent company may sue directly to enforce its own contracts, regardless of its status as stockholder of an injured subsidiary.

The issue arose following a failed acquisition transaction. The proposed acquirer, NAF, contracted directly with defendant Li & Fung to provide services to the target company. NAF then formed two wholly-owned subsidiaries to effectuate the acquisition. Li & Fung allegedly repudiated its agreement, causing NAF to lose the financing it needed to fund the acquisition, which resulted in injury to the subsidiaries. Li & Fung argued that, under the test established in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1036 (Del. 2004), NAF’s contract claim could only be brought derivatively because NAF was a stockholder of the injured subsidiaries. In Tooley, addressing a typical minority stockholder claim of breach of fiduciary duty, the Delaware Supreme Court instructed that determining whether a stockholder’s claim is derivative or direct turns on “[w]ho suffered the alleged harm – the corporation or the suing stockholders individually – and who would receive the benefit of the recovery or other remedy?” 845 A.2d at 1035. To maintain a direct claim, “[t]he stockholder’s claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.” Id. at 1039.

In NAF Holdings, LLC v. Li & Fung (Trading) Limited, 2014 WL 6462825 (2d Cir. Nov. 19, 2014), the Second Circuit considered, but did not decide, whether the usual direct/derivative analysis governing minority stockholder claims against corporate fiduciaries should also apply to bar a contract claim against an unaffiliated outsider.  Finding itself unable to resolve this issue of first impression under applicable Delaware law, the Second Circuit certified the question to the Delaware Supreme Court.

This unusual question arose after a planned acquisition fell through.  NAF, a Delaware LLC, planned to acquire Hampshire.  NAF entered into a buying agent agreement with Li & Fung, which promised to serve as sourcing agent for Hampshire post-acquisition.  Thereafter, as is commonly done in M&A transactions, NAF formed two wholly-owned subsidiaries to effectuate the acquisition, and they entered into the merger agreement with Hampshire.  As NAF alleged in its complaint for breach of contract, Li & Fung wrongfully repudiated the buying agent agreement, which caused NAF to lose the financing commitments it needed to fund the subsidiaries’ acquisition of the Hampshire shares.  The acquisition thus could not be completed, resulting in a $30 million loss.