This is an interlocutory appeal from an Opinion and Order of the Court of Chancery holding that Appellees/Cross-Appellants, former stockholders of TerraForm Power, Inc. ("TerraForm"), have direct standing to challenge TerraForm's 2018 private placement of common stock to Appellant/Cross-Appellees Brookfield Asset Management, Inc. and its affiliates, a controlling stockholder, for allegedly inadequate consideration. The trial court held that Plaintiffs did not state direct claims under Tooley v. Donaldson, Lufkin & Jennette, Inc.,1 but did state direct claims predicated on a factual paradigm "strikingly similar" to that of Gentile v. Rossette,2 and that Gentile was controlling here. Appellants contend that Gentile is inconsistent with Tooley and that this Court's decision in Gentile has created confusion in the law and therefore ought to be overruled.
Overruling a precedent of this Court should only occur after a full and fair presentation and searching inquiry has been made of the justifications for such judicial action. Having now engaged in such inquiry after a full and fair presentation of the issues by the parties, and for the reasons set forth herein, we now overrule Gentile. Accordingly, we REVERSE the judgment below, not because the Court of Chancery erred, but rather, because the Vice Chancellor correctly applied the law as it existed, recognizing that the claims were exclusively derivative under Tooley, and that he was bound by Gentile.
I. Relevant Facts and Procedural Background3
A. The Parties
Nominal Defendant Below TerraForm Power, Inc. ("TerraForm" or the "Company") was, at the time of the proceedings below, a publicly traded Delaware corporation with its principal place of business in New York City. TerraForm acquired, owned, and operated solar and wind assets in North America and Western Europe.4 The Company's common stock traded on the NASDAQ Stock Market under the ticker symbol "TERP."
Appellant Brookfield Asset Management, Inc. ("Brookfield") is a Canadian corporation headquartered in Toronto. Brookfield is an alternative asset manager that primarily conducts business through subsidiaries.5 At the time the Complaint was filed, Brookfield and its affiliates beneficially owned 61.5 percent of TerraForm.
Appellant Orion US Holdings 1 L.P. ("Orion Holdings") is a Delaware limited partnership and an affiliate of Brookfield through which Brookfield has held beneficial voting and dispositive power over Brookfield's TerraForm shares.
Defendant Below Brookfield BRP Holdings (Canada) Inc. ("BRP Holdings") is a Canadian corporation and an affiliate of Brookfield. BRP Holdings's sole purpose appears to be holding TerraForm stock. In June 2018, in connection with the Private Placement, BRP Holdings along with Orion Holdings, joined a Governance Agreement with TerraForm. The Governance Agreement establishes certain rights and obligations of TerraForm and Brookfield related to the Company's governance.
Appellants Brian Lawson, Harry Goldgut, Richard Legault, and Sachin Shah served as directors of TerraForm. Lawson is a Senior Managing Partner and the Chief Financial Officer ("CFO") of Brookfield. Goldgut is Vice Chair of Brookfield's Renewable Group and Brookfield's Infrastructure Group. Legault is Vice Chairman of Brookfield. Shah is a Managing Partner of Brookfield. He also serves as Chief Executive Officer ("CEO") of Brookfield Renewable Partners and BRP Holdings.
Appellant John Stinebaugh was TerraForm's CEO and was appointed as TerraForm's CEO by Brookfield. He is employed as a Managing Partner of Brookfield and receives no direct compensation from TerraForm for his service as CEO. Instead, he receives his compensation solely from Brookfield.
Appellees Martin Rosson ("Rosson") and City of Dearborn Police and Fire Revised Retirement System (Chapter 23) ("Dearborn," and collectively with Rosson, "Plaintiffs") were holders of TerraForm Class A common stock prior to a merger in July 2020.6
B. Brookfield's Investment in Terraform
In October 2017, Brookfield became Terraform's controlling stockholder, owning through Brookfield's affiliates 51 percent of Terraform's outstanding Class A common stock. Brookfield had the power to appoint Terraform's CEO, CFO, and General Counsel pursuant to a Master Services Agreement and governance agreement. Pursuant to TerraForm's certification of incorporation (the "Charter") and its majority holdings, Brookfield had the right to designate four of Terraform's seven directors and used that power to designate four members of Brookfield's senior management, namely, Defendants Lawson, Goldgut, Legault, and Shah, to Terraform's Board.
The Charter required that the TerraForm Board have a Conflicts Committee composed of the three non-Brookfield directors (the "Conflicts Committee").7 The Conflicts Committee was responsible for reviewing and approving material transactions and matters in which a conflict may exist between TerraForm and Brookfield (and its affiliates). Additionally, TerraForm's Charter contained a supermajority voting provision, requiring an affirmative vote of at least two-thirds of the outstanding shares of common stock to amend certain Charter provisions.
C. Terraform Seeks to Finance a Buyout of Saeta Through an Equity Offering
Around January 2018, Brookfield approached TerraForm regarding an opportunity to acquire for $1.2 billion Saeta Yield, S.A. ("Saeta"), a publicly-traded Spanish company that owned and operated wind and solar energy assets (the "Saeta Acquisition"). TerraForm had the debt capacity and cash to fund most, if not all, of the Saeta Acquisition. Notwithstanding this debt capacity, Brookfield recognized the substantial upside associated with the Saeta Acquisition and steered TerraForm towards funding it with a backstopped equity offering that, according to Plaintiffs, allowed Brookfield to increase its ownership percentage of TerraForm at a discount to TerraForm's anticipated fair value.
On January 23, 2018, Brookfield and TerraForm informed the Conflicts Committee that, in addition to funding the Saeta Acquisition with debt, TerraForm would raise approximately $600-$700 million of equity in the public markets. Brookfield indicated that in addition to participating up to its pro rata portion of the equity offering (i.e., 51 percent), it was willing to backstop part of the equity offering. At this time, the Conflicts Committee decided not to retain an independent financial advisor and relied on advice from Barclays Capital, Inc. ("Barclays"), which was serving as TerraForm's financial advisor.
The Conflicts Committee met on January 26, 2018 and again on January 29. At the end of the meeting on the 29th, it determined that the proposed backstop was advisable and in TerraForm's best interests. The Conflicts Committee still had not engaged or consulted with a financial advisor. Instead, it relied on the members of TerraForm's management and Brookfield representatives for advice.
On February 6, 2018, without any assistance from an independent financial advisor, the Conflicts Committee approved a support agreement with Brookfield (the "Support Agreement"), pursuant to which Brookfield contracted to backstop up to 100 percent of a $400 million public equity offering (the "Backstop") if the offering price equaled TerraForm's five-day volume weighted average price ending February 6, 2018, which was $10.66 per share.8
Brookfield's Backstop obligations were contingent on the successful commencement of a tender offer for Saeta (the "Tender Offer") under applicable Spanish law and on the prior effectiveness of the TerraForm registration statement, if required. TerraForm and Brookfield agreed that the pricing, size, and timing of the Equity offering, including the decision to use the Backstop, would be subject to prior review and approval of the Conflicts Committee, together with any other necessary approvals. It was also agreed in the Support Agreement that TerraForm and the Conflicts Committee would retain an independent financial advisor (meaning independent from Brookfield) to provide advice regarding the Equity Offering. However, the Conflicts Committee waited until late May 2018 to begin consulting with its own financial advisor, Greentech Capital Advisors Securities, LLC ("Greentech").
On February 7, 2018, TerraForm publicly disclosed its intention to acquire all outstanding shares of Saeta via the Tender Offer. TerraForm announced its expectation to fund the $1.2 billion acquisition with $800 million in available liquidity and the $400 million Equity Offering. On May 3, 2018 TerraForm commenced the Tender Offer, and on May 10, 2018, TerraForm filed its definitive proxy statement with the SEC seeking stockholder approval for the issuance of up to 61 million shares of Class A Common Stock in connection with the planned Equity Offering. TerraForm's stockholders approved the share issuance on May 23, 2018 at TerraForm's annual meeting.
D. Brookfield Steers Terraform into the Private Placement, which Increases Brookfield's Economic Interest and Voting Power in Terraform
Minutes after the stockholders approved the Share Issuance at the annual meeting, the full Board met to discuss the Equity Offering and backstop. Stinebaugh proposed to the Board that TerraForm raise $650 million, rather than $400 million, through the sale of equity because "the market expect[ed] a $650 million total equity offering and that the impact to the returns on the Saeta transaction would not be material."9 Shah indicated that Brookfield would be prepared to increase the size of the backstop from $400 million back up to $650 million. By that point, the Tender Offer to acquire Saeta was scheduled to expire in only a few weeks, and TerraForm had little time to finalize its financing plan. Stinebaugh then proposed that if the Equity Offering presented too much market risk, the full amount be offered to Brookfield through a private placement at $10.66 per share. At the conclusion of the meeting, TerraForm's Board determined that the Conflicts Committee should consider Brookfield's proposal to increase the size of the Backstop to $650 million.
After the full Board meeting on May 23, 2018, the Conflicts Committee met to discuss the information that had just been presented. There was no discussion of the proposed private placement and only a discussion of the proposed increase to the equity offering (to $650 million) and commensurate increase in Brookfield's Backstop.
The Conflicts Committee's first meeting with its financial advisor, Greentech, occurred less than an hour after the May 23, 2018 Board meeting ended. Greentech's written presentation to the Conflicts Committee contemplated that Brookfield would backstop the full $650 million even though, according to meeting minutes, Brookfield first suggested the increased Backstop only a few hours earlier. The Conflicts Committee directed Greentech to coordinate with Barclays. It then met again the following day. At that meeting, Greentech reviewed with the Conflicts Committee the materials provided the previous day. These materials revealed that a $650 million equity offering would "significantly reduce returns" and accretion from the Saeta Acquisition relative to a $400 million offering. Nonetheless, Greentech advised the Conflicts Committee that it would be "difficult to predict the price at which the Equity Offering could be executed (and whether it could be executed at a price above [$10.66])."10 Greentech also noted that a backstop covering the full amount of the Equity Offering "was very beneficial."11 The Committee approved increasing the Backstop to $650 million and an amendment to the Support Agreement reflecting such increase. As with the previous day's meeting, there was no discussion of a private placement.
During the period after May 24, 2018, the Conflicts Committee received no advice concerning whether a private placement with TerraForm's controller was fair or superior to TerraForm's financing alternatives. Nearly all information provided to the Conflicts Committee in the ensuing two-week period was geared toward convincing it to abandon the Equity Offering in favor of a $650 million private placement exclusively with Brookfield.
On June 4, 2018, after receiving a single slide deck from Greentech, and relying largely on the advice of Brookfield, TerraForm management, and Barclays, the Conflicts Committee approved exercising the $650 million Backstop in lieu of the Equity Offering. TerraForm management recommended doing away with the public offering aspect and instead simply selling the entire amount of the proposed offering directly to Brookfield. Despite the fact that the Conflicts Committee never received advice concerning a private placement with Brookfield, the Conflicts Committee accepted TerraForm management's recommendations and approved full exercise of the Backstop-that is, a private placement of $650 million of TerraForm stock with Brookfield at $10.66 per share.
On June 7, 2018, the Board authorized the sale of 60,975,609 shares of TerraForm common stock to Brookfield for $650 million using the $10.66 per share Backstop price, (i.e., the "Private Placement"). The Private Placement proceeds were used to fund the Tender Offer along with $471 million of TerraForm's available liquidity. The Private Placement increased Brookfield's economic interest in and voting power over TerraForm from 51 percent to 65.3 percent.
With the $650 million received from Brookfield, along with the available liquidity, TerraForm acquired approximately 95 percent of Saeta's shares for an aggregate of $1.12 billion on June 12, 2018. Following the tender offer, TerraForm completed a squeeze-out under Spanish law for the remaining shares of Saeta that were not tendered.
TerraForm's stock price increased in the aftermath of the Saeta Acquisition and by June 25, 2018, TerraForm's stock was trading at $11.77 per share, 10.4 percent above the $10.66 per share Private Placement price, representing an unrealized profit of $68 million to Brookfield. On January 23, 2020, prior to the Complaint's filing, TerraForm's stock closed at $17.30 a share, representing $400 million in unrealized profit to Brookfield since the Private Placement.
In October 2019, TerraForm conducted a $250 million public offering for 14,907,573 shares of common stock at a price of $16.77 per share, a price 60 percent greater than Brookfield paid in the Private Placement. Concurrently, Brookfield entered into a second private placement purchasing 2,981,514 shares of common stock for $16.77 per share. Brookfield's equity percentage thereby decreased from 65.3 percent to 61.5 percent.
E. Proceedings in the Court of Chancery
On September 19, 2019, Rosson filed a verified derivative and purported class action complaint against Brookfield, Orion, and BRP Holdings for breach of fiduciary duties.12 On January 11, 2020, after Rosson filed his complaint and Dearborn demanded TerraForm's books and records, Brookfield-affiliate BR Partners proposed to acquire all of TerraForm's public shares.13 Dearborn then filed a verified derivative and purported class action complaint against all Defendants for breach of fiduciary duty on January 27, 2020. The trial court consolidated the two actions and designated the Complaint filed by Dearborn as the operative complaint in the consolidated action.14 The Complaint alleges that Brookfield caused TerraForm to issue its stock in the Private Placement for inadequate value, diluting both the financial and voting interest of the minority stockholders. The Complaint also alleges that the Company was damaged as a result.15
Defendants moved to dismiss Plaintiffs' direct claims on the basis that they are entirely derivative. The Motion to Dismiss was argued on July 16, 2020.
On March 16, 2020, BR Partners and BR Corp agreed to acquire all TerraForm stock not held by Brookfield (i.e., the "Merger"). On July 31, 2020, Brookfield affiliates acquired all outstanding TerraForm shares not already owned by Brookfield. In light of the Merger, the trial court granted an order dismissing the derivative counts of the Complaint. Following the Merger, TerraForm's public stockholders ceased to have any interest in TerraForm, and all of TerraForm's assets, liabilities, rights and causes of action became the property of TerraForm's acquirer.16
The Court of Chancery issued a thoughtful Opinion denying the Motion to Dismiss on October 30, 2020.17 In its Opinion, the Court of Chancery rejected Plaintiffs' arguments that they have standing to pursue direct claims against the Defendants under Tooley v. Donaldson, Lufkin & Jennette, Inc. The Court of Chancery explained that under Tooley, dilution claims are classically derivative, i.e., "the quintessence of a claim belonging to an entity: that fiduciaries, acting in a way that breaches their duties, have caused the entity to exchange assets at a loss."18 The court explained further that the claims are still derivative, and that "[t]his rationale extends even where a controlling stockholder allegedly causes a corporate overpayment in stock and consequent dilution of the minority interest."19 Thus, it held that "under Tooley alone, the Plaintiffs' overpayment claims neatly fall into the derivative category."20
Notwithstanding its conclusion that the Plaintiffs had failed to state direct claims under Tooley, the court nevertheless found that Plaintiffs had stated direct claims because the claims were predicated on facts similar to those presented in Gentile v. Rossette.21 In fact, the Court of Chancery observed that "[t]he facts alleged in the Complaint fit Gentile's transactional paradigm to a T."22 In Gentile, this Court determined that "the plaintiffs pled two independent harms arising from the transaction: (1) that the corporation was caused to overpay (in stock) for the debt forgiveness, and (2), the minority stockholders lost a significant portion of the cash value and voting power of the minority interest."23 Regarding Gentile, the Court of Chancery observed that the current law is, as a matter of doctrine, unsatisfying.24 But it concluded that it was "not free to decide cases in a way that deviates from binding Supreme Court precedent."25 Accordingly, it held that
[c]onsistent with Gentile, the Plaintiffs have made a sufficient pleading that Brookfield is TerraForm's controller, that Brookfield caused TerraForm to issue excessive shares of its stock in exchange for insufficient consideration, and that the exchange caused an increase in the percentage of the outstanding shares owned by Brookfield, and a corresponding decrease in the share percentage owned by the public (minority) stockholders. Such a pleading is sufficient, under controlling Supreme Court precedent, to withstand the Defendant's Motion to Dismiss the Plaintiffs' direct claims.26
Bound by this Court's decision in Gentile, the Court of Chancery determined that Plaintiffs had standing to assert direct claims and denied the Defendants' Motion to Dismiss.
Finally, the Court of Chancery held that Plaintiffs' "entrenchment" claims could not withstand dismissal because they did not satisfy the "reasonably conceivable" pleading standard.
On November 9, 2020, Defendants submitted an application to the trial court for certification of an interlocutory appeal of the Court of Chancery's decision denying their motion to dismiss. The trial court granted Defendants' application on November 24, 2020, finding that the appeal could end the litigation and would serve considerations of justice "by clarifying an area of law that appears to be in a state of flux."27 It held that, "in light of case law questioning the continued vitality of Gentile at the trial court level, and in light of criticism at the Supreme Court level," the matter should be available for review by the Supreme Court at this Motion to Dismiss stage in the interests of justice.28
Defendants filed a timely Notice of Appeal on November 30, 2020. This Court accepted the interlocutory appeal on December 14, 2020.
F. Contentions on Appeal and Cross Appeal
First, Appellants contend that the Plaintiffs' claims are exclusively derivative under Tooley and that the Supreme Court's decision in Gentile deviated from, and is doctrinally inconsistent with, the "simple analysis" set forth in Tooley. Second, Appellants assert that, because Gentile contradicts and undermines long-standing case law, complicates real-world commercial transactions, and is superfluous given existing legal remedies, that stare decisis is inapplicable, and that Gentile should be overruled.
Appellees contend on cross-appeal that the Court of Chancery erred in holding that they had failed to plead reasonably conceivable direct claims for voting power dilution.
II. Standard of Review
The Delaware Supreme Court exercises de novo review when evaluating a trial court's decision to deny a motion to dismiss.29 Additionally, the Delaware Supreme Court reviews questions relating to standing under the de novo standard of review.30
A. Standing is a Threshold Question
In El Paso, we explained that "`[t]he concept of standing, in its procedural sense, refers to the right of a party to invoke the jurisdiction of a court to enforce a claim or redress a grievance.'"31 Thus, "`[a]s a preliminary matter, a party must have standing to sue in order to invoke the jurisdiction of a Delaware court.'"32 Standing is therefore properly viewed as a threshold issue "to `ensure that the litigation before the tribunal is a "case or controversy" that is appropriate for the exercise of the court's judicial powers.'"33
We explained further in El Paso that "[d]erivative standing is a `creature of equity' that was created to enable a court of equity to exercise jurisdiction over corporate claims asserted by stockholders `to prevent a complete failure of justice on behalf of the corporation.'"34 A plaintiff may lose standing in a variety of ways during the progress of litigation. In corporate derivative litigation, for example, a plaintiff's standing is extinguished as a result of loss of plaintiff's status as a stockholder.35 Once standing is lost, "the court lacks the power to adjudicate the matter, and the action will be dismissed as moot unless an exception applies."36 Thus, the question of derivative standing is "`properly a threshold question that the [c]ourt may not avoid.'"37
B. The Test for Derivative Standing: Tooley and Gentile's Carve-Out
1. First, the Tooley Test for Direct Versus Derivative Standing
A derivative suit enables a stockholder to bring a suit on behalf of the corporation for harm done to the corporation.38 Because a derivative suit is brought on behalf of the corporation, any recovery must go to the corporation. However, a stockholder who is directly injured retains the right to bring an individual action for injuries affecting his or her legal rights as a stockholder.39 "Such a claim is distinct from an injury caused to the corporation alone."40 In such individual suits, "the recovery or other relief flows directly to the stockholders, not to the corporation."41 Classification of a particular claim as derivative or direct can be difficult.42 Further, "[t]he decision whether a suit is direct or derivative may be outcome-determinative."43 Such is the case here as the central question is whether Plaintiffs have direct standing to pursue their claims or whether their claims are entirely derivative. If the latter, then their claims were extinguished in the Merger, and they lack standing to pursue them.
In Tooley, this Court undertook to create a simple test of straightforward application to distinguish direct claims from derivative claims. Under the Tooley test, the determination of whether a stockholder's claim is direct or derivative "must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?"44
In explaining its test further, the Tooley Court cited with approval the analysis set forth by Chancellor Chandler in Agostino v. Hicks,45 and adopted his suggestion that part of the inquiry should be whether the stockholder has demonstrated that he or she has suffered an injury that is not dependent on an injury to the corporation:
In the context of a claim for breach of fiduciary duty, the Chancellor articulated the inquiry as follows: "[l]ooking at the body of the complaint and considering the nature of the wrong alleged and the relief requested, has the plaintiff demonstrated that he or she can prevail without showing an injury to the corporation?" We believe that this approach is helpful in analyzing the first prong of the analysis: what person or entity has suffered the alleged harm? The second prong of the analysis should logically follow.46
In announcing this simplified test, this Court retreated from "our confusing jurisprudence on the direct/derivative dichotomy."47 It concluded that the trial court's analysis had been "hindered ... because it focused on the confusing concept of `special injury' as the test for determining whether a claim is derivative or direct."48 It then unequivocally abandoned the "special injury" concept in stating:
In our view, the concept of "special injury" that appears in some Supreme Court and Court of Chancery cases is not helpful to a proper analytical distinction between direct and derivative actions. We now disapprove the use of the concept of "special injury" as a tool in that analysis.49
It expressly disapproved "both the concept of `special injury' and the concept that a claim is necessarily derivative if it affects all stockholders equally."50 Instead, "the tests going forward should rest on those set forth in" its opinion.51
2. The Gentile Carve-Out from the Tooley Test
Two years after deciding Tooley, this Court decided Gentile. Gentile involved a controlling stockholder and transactions that resulted in an improper transfer of both economic value and voting power from the minority stockholders to the controlling stockholder. There, a corporation's CEO and controlling stockholder forgave a portion of the company's $3 million debt to him in exchange for additional equity. The applicable contractual conversion rate was $0.50 of debt per share, but the CEO and the company's board of directors (which included himself and one other person) agreed to $0.05 of debt per share. Without disclosing the underlying transaction, the board secured a stockholder vote authorizing the shares needed to issue the additional equity.
The share issuance increased the CEO's equity position from 61.19 percent to 93.49 percent. The minority stockholders suffered a corresponding decrease in their interest from 38.81 percent to 6.51 percent. When the CEO later negotiated a merger between the corporation and its only competitor, the CEO received a generous put agreement that was not disclosed to the other stockholders. The trial court dismissed the ensuing stockholders litigation after concluding that the claims were exclusively derivative and that the plaintiff stockholders' standing had been extinguished following the merger.
This Court reversed and allowed the plaintiffs to proceed with direct claims. The Court reasoned that there were two independent aspects of the plaintiffs' claims, namely, the overpayment claim and the minority's significant loss of cash value and voting power. These claims constituted "a species of corporate overpayment claim" that was "both derivative and direct in character."52 Accordingly, this Court held that "[u]nlike the typical overpayment transaction,"53 a dual-natured claim arises where:
(1) a stockholder having a majority or effective control causes the corporation to issue "excessive" shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and (2) the exchange causes an increase in the percentage of the outstanding shares owned by the controlling shareholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders.54
The Court in Gentile clearly recognized that allowing direct standing to assert a corporate dilution/overpayment claim was a deviation from the norm:
Normally, claims of corporate overpayment are treated as causing harm solely to the corporation and, thus, are regarded as derivative. The reason (expressed in Tooley terms) is that the corporation is both the party that suffers the injury (a reduction in its assets or their value) as well as the party to whom the remedy (a restoration of the improperly reduced value) would flow. In the typical corporate overpayment case, a claim against the corporation's fiduciaries for redress is regarded as exclusively derivative, irrespective of whether the currency or form of overpayment is cash or the corporation's stock. Such claims are not normally regarded as direct, because any dilution in value of the corporation's stock is merely the unavoidable result (from an accounting standpoint) of the reduction in the value of the entire corporate entity, of which each share of equity represents an equal fraction. In the eyes of the law, such equal "injury" to the shares resulting from a corporate overpayment is not viewed as, or equated with, harm to specific shareholders individually.55
The Gentile panel addressed the tension with Tooley by acknowledging that "[a]lthough the corporation suffered harm (in the form of a diminution of its net worth), the minority shareholders also suffered a harm that was unique to them and independent of any injury to the corporation."56 Focusing on the identity of the alleged wrongdoer, the Court stated that, the harm to the minority plaintiffs "resulted from a breach of a fiduciary duty owed to them by the controlling shareholder, namely, not to cause the corporation to effect a transaction that would benefit the fiduciary at the expense of the minority shareholders."57 Thus, in Gentile the Court held that the value represented by the corporate overpayment is "an entitlement that may be claimed by the public shareholders directly and without regard to any claim the corporation may have."58
3. Plaintiffs Have Standing Under Gentile but Not Tooley
In this case, the Vice Chancellor determined that Plaintiffs' Complaint "does not state direct claims without Gentile, but that it does state direct claims under Gentile's rationale."59 In other words, that the Complaint does not state direct claims under "a classic Tooley analysis,"60 but that it does under Gentile. We agree.
As noted above, to plead a direct claim under Tooley, a "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."61 We do not think Plaintiffs can prevail without showing an injury to the corporation. The claim is derivative because they allege an overpayment (or over-issuance) of shares to the controlling stockholder constituting harm to the corporation for which it has a claim to compel the restoration of the value of the overpayment. Clearly, the gravamen of the Complaint is that the Private Placement was unfair and that TerraForm suffered harm.62 Further, they seek rescissory damages on behalf of TerraForm.63
If the Private Placement was for inadequate consideration, the worth of the stockholder's interest is reduced to the extent TerraForm was harmed — as the Vice Chancellor put it, "a classic derivative claim." The alleged economic dilution in the value of the corporation's stock is the unavoidable result of the reduction in the value of the entire corporate entity, of which each share of equity represents an equal fraction. Dilution is a typical result of a corporation's raising funds through the issuance of additional new shares. As the Court in Gentile recognized, normally such equal "injury" to the shares resulting from a corporate overpayment is not equated to specific, individual harm to stockholders. Here, the economic and voting power dilution that allegedly harmed the stockholders flowed indirectly to them in proportion to, and via, their shares in TerraForm, and thus any remedy should flow to them the same way, derivatively via the corporation.64
That is why in El Paso we suggested that Gentile "can be read as undercutting the traditional rule that dilution claims are classically derivative."65 We think that when a corporation exchanges equity for assets of a stockholder who is already a controlling stockholder for allegedly inadequate consideration, the dilution/overpayment claim is exclusively derivative. Carving out an exception to the Tooley test and allowing for a separate, direct claim in such circumstance presents both practical and doctrinal difficulties as we discuss herein. To the extent the corporation's issuance of equity does not result in a shift in control from a diversified group of public equity holders to a controlling interest, (a circumstance where our law, e.g., Revlon,66 already provides for a direct claim), holding Plaintiffs' claims to be exclusively derivative under Tooley is logical and re-establishes a consistent rule that equity overpayment/dilution claims, absent more, are exclusively derivative.67 Because we agree with the Vice Chancellor that Plaintiffs' claims do fit precisely into the Gentile paradigm, we now explain why Gentile should be overruled.
C. Gentile Should be Overruled
1. Gentile's Tension with Tooley
Appellants persuasively argue that, "[g]iven the clear conflict between Gentile and Tooley, the confusion Gentile imposes on Tooley's straightforward and easy-to-apply analysis, and the policy reasons for removing the exception ..., this Court should exercise its discretion to overrule Gentile.68 After careful consideration of the relevant doctrinal, practical, and policy considerations, we agree and address these points in turn. We first focus on Gentile's analytical tension with Tooley.
In Gentile, this Court stated that its holding "fits comfortably within the analytical framework mandated by Tooley."69 Based upon that comment, the Vice Chancellor stated that, "to the extent that Gentile can be said to rely on Tri-Star, the Gentile decision itself forecloses any argument that Gentile's citation of Tri-Star renders Gentile irreconcilable with Tooley."70 But our critical self-assessment of Gentile, coupled with subsequent decisions at the trial court level, lead us now to the conclusion that the "fit" is not so "comfortable."
Instead, we agree with Appellants that certain aspects of Gentile are in tension with Tooley.71 One aspect is Gentile's conclusion that the economic and voting dilution was an injury to stockholders independent of any injury to the corporation. A second is Gentile's reliance on Tri-Star, which itself was criticized in Tooley. A third is Gentile's focus on the alleged wrongdoer, here the controller, and the devising of a special rule or Tooley "carve-out" for cases involving controlling stockholders.
As to the first point, in Tooley, this Court stated that "[t]he stockholder's claimed direct injury must be independent of any alleged injury to the corporation."72 In Gentile, this Court acknowledged that the corporation was injured also, but nevertheless, found the plaintiffs' claims to be both derivative and direct:
Because the means used to achieve that result is an overpayment (or "over-issuance") of shares to the controlling stockholder, the corporation is harmed and has a claim to compel the restoration of the value of the overpayment. That claim, by definition, is derivative.73
It went on to find a "separate, and direct, claim arising out of that same transaction."74 The direct claim was "an improper transfer—or expropriation—of economic value and voting power from the public shareholders to the majority or controlling stockholder."75
The gravamen of Plaintiffs' Complaint is that the Private Placement allegedly harmed the Company by issuing shares to Brookfield for an unfairly low price and harmed the stockholders indirectly through economic and voting power dilution proportional to their shareholdings. Thus, the harm to the stockholders was not independent of the harm to the Company, but rather flowed indirectly to them in proportion to, and via their shares in, TerraForm. We agree with the Vice Chancellor that under Tooley, this alleged corporate overpayment in stock and consequent dilution of minority interest falls "neatly" into Tooley's derivative category.
Gentile's second point of tension with Tooley is its reliance upon Tri-Star. In Gentile, the plaintiffs argued that their case was "functionally indistinguishable from, and thus [was] controlled by Tri-Star."76 In Gentile, this Court summarized their argument:
Their argument runs as follows: even if the SinglePoint shares had value, the debt conversion was a self-dealing corporate transaction with a significant stockholder, that increased the voting and economic value of that significant stockholder's interest in SinglePoint, at the expense and to the corresponding detriment of the minority shareholders. The plaintiffs claim that the Court of Chancery erred by reading into Tri-Star a requirement that for such a transaction to give rise to a direct claim, the loss of voting power must be `material,' i.e., that it must reduce the public stockholders' voting power from majority to minority status.77
This Court then "conclude[d] that the plaintiffs are correct and that Tooley and Tri-Star, properly applied, compel the conclusion that the debt conversion claim was both derivative and direct."78 In fact, it held that "[t]his case is ... functionally indistinguishable from Tri-Star, and Tri-Star's governing rule should control."79
Plaintiffs argue on appeal that "Tooley noted that Tri-Star addressed the special injury concept that was being discarded but did not discuss or overrule Tri-Star's result."80 They argue further that Gentile did not specifically discuss the "special injury" test, and that its reference to Tri-Star "merely recognizes that the special injury analysis partially concerns the same issue as Tooley's first prong — i.e., whether stockholders were directly harmed."81 They also point out that Gentile cites to Kramer which Tooley had cited with approval.
Some historical perspective may be useful in explaining the confusion that Tooley sought to eliminate, and why there is support for the view that Gentile is doctrinally in tension with Tooley. The phrase "special injury" was first used by the Court of Chancery in Elster v. Am. Airlines, Inc.82 There, the plaintiff asserted a direct claim for dilution, alleging that a stock issuance to senior management was for inadequate consideration. The court rejected plaintiff's claim, in part, because
[a]ny injury which plaintiff may receive by reason of the dilution of his stock would be equally applicable to all the stockholders of defendant, since plaintiff holds such a small amount of stock in proportion to the amount of stock outstanding that the control or management of defendant would not be affected by the granting of these options, and, further, since there is no averment that the pre-emptive rights of plaintiff as a stockholder are affected by their issuance.83
The Court of Chancery, in setting forth the "special injury" test, identified three categories of direct injury. It also recognized that stockholders could be harmed indirectly as a result of harm to the corporation and that such claims would be derivative:
There are cases ... in which there is injury to the corporation and also special injury to the individual stockholder. In such case a stockholder ... may proceed on his claim for the protection of his individual rights rather than in the right of the corporation. The action would then not constitute a derivative action ... Here the wrong of which plaintiff complains is not a wrong inflicted upon him alone or a wrong affecting any particular right which he is asserting, —such as his pre-emptive rights as a stockholder, rights involving control of the corporation, or a wrong affecting the stockholders and not the corporation,— but is an indirect injury as a result of the wrong done to the corporation.84
But later decisions in this class of cases omitted Elster's reference to "indirect injury" in describing derivative claims. In Bokat v. Getty Oil Co.,85 a stockholder sought "money damages for improper management of [the corporation]."86 Thus, the Bokat Court classified the claims as belonging to the corporation and not its stockholders. But it reached that result by reasoning that, "[w]hen an injury to corporate stock falls equally upon all stockholders, then an individual stockholder may not recover for the injury to his stock alone, but must seek recovery derivatively on behalf of the corporation."87
Similarly, in Moran v. Household Int'l. Inc.,88 the Court of Chancery inquired whether the plaintiffs had suffered an "injury distinct from that suffered by other shareholders."89 There the Court of Chancery held that the adoption of a shareholder rights plan was not subject to an individual challenge unless shareholders were actively engaged in a proxy fight that the rights plan would thwart. It reasoned that the claims were derivative, "[b]ecause the plaintiffs are not engaged in a proxy battle, they suffer no injury distinct from that suffered by other shareholders as a result of this alleged restraint on the ability to gain control of [the company] through a proxy contest."90 Moran cited Elster but did not refer to the "special injury" concept. Instead, Moran set forth the following test for ascertaining the nature of the claim:
To set out an individual action, the plaintiff must allege either an injury which is separate and distinct from that suffered by other shareholders, or a wrong involving a contractual right of a shareholder, such as the right to vote, or to assert majority control, which exists independently of the corporation.91
This Court affirmed the decision but did not specifically address the Court of Chancery's holding that the claims were derivative.92
The following year, this Court addressed the direct/derivative distinction in Lipton v. News Int'l, Plc.93 In its analysis, Lipton compared the passages from both Moran and Elster quoted above. But in doing so, Lipton failed to mention the third situation in Elster giving rise to "special injury," namely, when "a wrong affected the stockholders and not the corporation:"
In comparing the two-pronged test of Moran with the definition of "special injury" in Elster, it appears that the term encompasses both prongs of the Moran test. That is, a plaintiff alleges a special injury and may maintain an individual action if he complains of an injury distinct from that suffered by other shareholders or a wrong involving one of his contractual rights as a shareholder. Moreover, while Moran serves as a useful guide, the case should not be construed as establishing the only test for determining whether a claim is derivative or individual in nature. Rather, as was established in Elster, we must look ultimately to whether the plaintiff has alleged "special" injury, in whatever form.94
In 1988, this Court again addressed the direct/derivative distinction in Kramer v. Western Pacific Industries, Inc.95 Surprisingly, Kramer did not rely on Lipton, although it cited it. Nor did it refer to "special injury." There plaintiffs challenged certain corporate insiders' receipt of stock options and golden parachutes in a merger transaction. In determining that the claims amounted only to "waste" and were derivative, the Court articulated the direct/derivative test as:
[T]o have standing to sue individually, rather than derivatively on behalf of the corporation, the plaintiff must allege more than an injury resulting from a wrong to the corporation. ... "[T]o set out an individual action, the plaintiff must allege either `an injury which is separate and distinct from that suffered by other shareholders,' or a wrong involving a contractual right of a shareholder... which exists independently of any right of the corporation." For a plaintiff to have standing to bring an individual action, he must be injured directly or independently of the corporation.96
In 1993, this Court next addressed the direct/derivative analysis in Tri-Star. There we relied on Lipton and the "special injury" test without ever citing to the more recent decision in Kramer. Tri-Star stated the "special injury" test as follows:
It is well settled that the test used to distinguish between derivative and individual harm is whether the plaintiff suffered `special injury.' A special injury is established where there was a wrong suffered by the plaintiff that was not suffered by all the stockholders generally or where the wrong involves a contractual right of the stockholders, such as the right to vote.97
Like Lipton, Tri-Star omits Elster's third category of special injury "when the wrong affects the stockholders and not the corporation."
But then three years later, in Grimes v. Donald,98 this Court, in distinguishing between direct and derivative claims, relied almost exclusively on Kramer and Moran but did not mention either Lipton or Tri-Star. Nor did it mention the "special injury" concept:
"Although tests have been articulated many times, it is often difficult to distinguish between a derivative and an individual action." ... The distinction depends upon "`the nature of the wrong alleged' and the relief, if any, which could result if plaintiff were to prevail."... To pursue a direct action, the stockholder-plaintiff "must allege more than an injury resulting from a wrong to the corporation." ... The plaintiff must state a claim for "`an injury which is separate and distinct from that suffered by other shareholders,' ... or a wrong involving a contractual right of a shareholder... which exists independently of any right of the corporation."99
Then came our decision in Parnes v. Bally Entertainment Corp.,100 where the plaintiff alleged that the Chairman and CEO of Bally wrongfully required that corporate assets be transferred to him in order to obtain his consent in proceeding with a merger. This Court concluded that such allegations directly challenged the fairness of the process and the price in the merger.101 Citing only to Kramer and avoiding the term "special injury," it stated simply that "[a] derivative claim is one that is brought by a stockholder, on behalf of the corporation, to recover for harms done to the corporation."102 By contrast, "[s]tockholders may sue on their own behalf (and, in appropriate circumstances, as representatives of a class of stockholders) to seek relief for direct injuries that are independent of any injury to the corporation."103
In 2004, this Court in Tooley sought to bring clarity to this confusing area of the law by discarding the "special injury" test and announcing a simple test that would be easier to apply. It is important to identify precisely which part of Tri-Star's analysis was discarded by Tooley. The answer lies in the refocused Tooley test itself and in Tooley's statement that
two confusing propositions have encumbered our caselaw governing the direct/derivative distinction. The "special injury" concept, applied in cases such as Lipton, can be confusing in identifying the nature of the action. The same is true of the proposition that stems from Bokat — that an action cannot be direct if all stockholders are equally affected or unless the stockholder's injury is separate and distinct from that suffered by other stockholders.104
The problem with Lipton, according to Tooley, was that the trial court had found a "special injury" because the board's manipulation of certain transactions "worked an injury upon the plaintiff-stockholders unlike the injury suffered by other stockholders."105 That was because the plaintiff-stockholder was actively seeking to gain control of the defendant corporation. According to Tooley, the court could have reached the same correct result by simply concluding that the manipulation directly and individually harmed the stockholders, without injuring the corporation.
The problem with this Court's decision in Bokat, according to Tooley, was different. Though the Tooley Court agreed that the Bokat matter was derivative, it explained that Bokat's concept that a suit "must be maintained derivatively if the injury falls equally upon all stockholders" was both "confusing" and "inaccurate."106 It was inaccurate because "a direct, individual claim of stockholders that does not depend on harm to the corporation can also fall on all stockholders equally, without the claim thereby becoming a derivative claim."107 It was "confusing" because the "equal injury" concept appeared to be intended to address the fact that an indirect stockholder injury flowing derivatively through the corporation diminishes each share of stock equally.108 But the relevant factor was not that all stockholders could equally assert the claim — it was that the claim "does not arise out of any independent or direct harm to the stockholders, individually."109
The Tooley Court then noted that "[t]he proper analysis has been and should remain that stated in Grimes, Kramer, and Parnes. That is, a court should look to the nature of the wrong and to whom the relief should go."110
Further, Gentile, by focusing on whether one group of stockholders (a controller) was impacted differently from another group (the public or minority holders), arguably relied on one aspect of Tri-Star's special injury concept, i.e., focusing on whether a wrong suffered by plaintiff was not suffered by all stockholders generally.111 We note that, if this were the proper focus and requirement for finding a direct injury as opposed to whether a stockholder suffered an injury independent of any injury suffered by the corporation, then that would seem to preclude a class of all stockholders asserting a direct claim. Tooley's first prong instead properly focuses on who suffered the alleged harm and requires that the stockholder demonstrate that he or she has suffered an injury that is not dependent on an injury to the corporation.
In sum, Gentile's statements that Tri-Star "created the analytical framework for this issue," that Gentile "was functionally indistinguishable from Tri-Star," and that it applied Tri-Star and Tooley in determining the debt conversion claim was both derivative and direct,112 detracts from Tooley's stated goal of adding clarity to a difficult and important area of our law. Although Gentile does not expressly discuss the "special injury" test, it creates confusion by heavily relying on Tri-Star's analysis,113 which in turn relies on Lipton and the "special injury test" that Tooley rejected. By expressly stating that it had "applied" Tooley and Tri-Star, Gentile blurred Tooley's clear rejection of the "special injury" test.114
The third area of tension is Gentile's focus on the wrongdoer. Gentile is premised on the presence of a controlling stockholder that allegedly used its control to "expropriate" and extract value and voting power from the minority stockholders. Controlling stockholders owe fiduciary duties to the minority stockholders, but they also owe fiduciary duties to the corporation.115 The focus on the alleged wrongdoer deviates from Tooley's determination, which turns solely on two central inquiries of who suffered the harm and who would receive the benefit of any recovery. That shift has led to doctrinal confusion in our law. The presence of a controller, absent more, should not alter the fact that such equity overpayment/dilution claims are normally exclusively derivative because the Tooley test does not turn on the identity of the alleged wrongdoer.116
Because of this shift in focus, the Vice Chancellor aptly observed that "[p]ost-Gentile, Delaware courts have struggled to define the boundaries of dual-natured claims."117 Understandably, cases decided soon after Gentile assumed that direct standing was only available in circumstances involving a controlling stockholder or, by implication, a functionally equivalent control group.118
Thereafter, however, courts construed Gentile more expansively to logically extend to non-controller issuances involving participating insiders. In Carsanaro v. Bloodhound Tech, Inc.,119 for example, the Court of Chancery held that Gentile also applied to self-interested stock issuances effectuated by a board lacking a disinterested and independent majority. The Court of Chancery reasoned that "the core insight of dual injury applies to non-controller issuances in which insiders participate."120
Similarly, in In re Nine Sys. Corp. S'holders. Litig.,121 the Court of Chancery found direct standing with respect to a dilutive recapitalization transaction in which the directors and their affiliated funds participated. The court commented that "it makes little sense to hold a controlling stockholder to account to the minority for improper expropriation after a merger but to deny standing for stockholders to challenge a similar expropriation by a board of directors after a merger."122 The court asked why Delaware law should hold controlling stockholders to a higher standard than the board of directors when, after all, the board has exclusive authority to manage the business and affairs of the corporation, which includes the power to issue stock.123 We agree that there is no principled reason to allow dilution/overpayment claims to proceed directly against controllers when the law rightly refuses to permit such claims to proceed directly in non-controller dilution cases.
This expanded application of Gentile was subsequently curtailed by this Court's opinion reversing the Court of Chancery in El Paso.124 The challenged transaction in El Paso did not fall squarely under the Gentile paradigm as the entity involved was a limited partnership and the alleged harm involved economic dilution where the limited partner conceded that he had proved only expropriation of economic value, and not any dilution of voting rights. Understandably, the defendants in El Paso did not argue on appeal that Gentile should be overruled. Thus, this Court was not asked — and did not reconsider — Gentile at that time. However, in El Paso we expressly "decline[d] the invitation to further expand the universe of claims that can be asserted `dually' to hold here that the extraction of solely economic value from the minority by a controlling stockholder constitutes direct injury."125 Thus, we made clear that Gentile should be read narrowly because any other interpretation would swallow the general rule that equity dilution claims are solely derivative and cast doubt on the Tooley framework.126
The Court of Chancery in Sciabacucchi observed our guidance that "the reasoning of El Paso, applied here, means that Gentile must be limited to its facts, which involved a dilutive stock issuance to a controlling stockholder."127 However, it noted that limiting Gentile to controller situations rather than expanding it to non-controller dilution cases, or overruling it entirely is, as a matter of doctrine, unsatisfying, because there is no reason to permit direct dilution claims against controllers while prohibiting direct claims in other contexts.128
Chief Justice Strine's concurrence in El Paso agreed that the facts presented did "not require us to consider Gentile's ongoing viability in the corporate law context," and that it was "[s]ufficient for today" that "we refuse to extend Gentile further, to a situation where a limited partnership was already firmly under the control of a general partner and where the transaction under attack had no effect whatsoever on limited partner voting rights."129 But he more directly questioned Gentile's continued viability as sound law, writing that Gentile "is a confusing decision, which muddies the clarity of our law in an important context,"130 and that it "cannot be reconciled with the strong weight of our precedent."131
It was not until this case that the issue of Gentile's continued viability was squarely presented to this Court.132 The Vice Chancellor appropriately observed that changing settled law by the Supreme Court requires reasoned analysis by this Court. The difficulty courts have had in applying Gentile in a logically consistent way, along with Gentile's erosion of Tooley's simple analysis convinces us that Gentile should be overruled.
2. The Gentile "Carve-Out" is Superfluous
Aside from the doctrinal difficulties discussed above, we see no practical need for the "Gentile carve-out." Other legal theories, e.g., Revlon, provide a basis for a direct claim for stockholders to address fiduciary duty violations in a change of control context.133 And as we observed in El Paso, "equity holders confronted by a merger in which derivative claims will pass to the buyer have the right to challenge the merger itself as a breach of the duties they are owed."134 Such stockholders might claim that the seller's board failed to obtain sufficient value for the derivative claims.135
In addition, Gentile creates the potential practical problem of allowing two separate claimants to pursue the same recovery.136 The double recovery rule prohibits a plaintiff from recovering twice for the same injury from the same tortfeasor.137 In a corporate-overpayment-to-a-controlling shareholder claim, the amount of the overpayment deprives the corporation of assets to which minority shareholders have only a pro rata claim as residual claimants on the corporation's assets. If the corporation recovers the overpaid funds, then the minority shareholders are beneficiaries of that recovery on that same pro rata basis.
As Appellees concede, the double recovery rule does not permit both the direct and derivative claimants to recover for that single injury. Rather, they propose that the Court of Chancery devise a mechanism to "proportion" the recovery for the overpaid funds between the plaintiffs if both derivative and direct shareholders claim it.138 Permitting such "dual" claims unnecessarily complicates fashioning a remedy for such claims. Tooley appropriately sought to simplify the law, not complicate it.
For the foregoing reasons, like the Court of Chancery, we think that the corporation overpayment/dilution Gentile claims, like those present here, are exclusively derivative under Tooley and that Gentile, for all of the reasons identified above, should be overruled. We now explain why stare decisis does not compel our adherence to Gentile.
3. Stare Decisis Presents No Obstacle Here
Plaintiffs argue that "stare decisis" compels this Court to uphold Gentile. No doubt, the development of and adherence to precedent is an essential feature of common law systems,139 and as such, precedent should not be lightly cast aside. The United States Supreme Court has explained that "[s]tare decisis `promotes the evenhanded, predictable, and consistent development of legal principles, fosters reliance on judicial decisions, and contributes to the actual and perceived integrity of the judicial process.'"140 That principle, embodied in the Latin term, "stare decisis,"141 is an important feature of Delaware law and of judicial restraint. As this Court stated in Seinfeld v. Verizon Comm'n, Inc., "[u]nder the doctrine of stare decisis, settled law is overruled only `for urgent reasons and upon clear manifestation of error.'"142
When re-examining a question of law in a prior case, the essential danger is that parties have acted in reliance on the answer that this Court previously gave.143 There is no hard and fast rule for when a decision is or is not immutable, because the nature of reliance interests at play and the importance of improving doctrinal law are highly context-specific inquiries. Thus, the formulation we gave in Seinfeld, (quoting Oscar George v. Potts) though longstanding, is necessarily vague.
Nevertheless, decisions by Delaware and federal courts offer some guideposts by which to measure and weigh these reliance interests. One consideration is the nature of any reliance interests in the decision. Reliance interests flow from a number of sources.144 Because parties have a right to have confidence that long-established rules will be retained, the "antiquity" of the precedent is accorded importance,145 with due consideration for whether the challenged precedent was itself a departure.146 The area of law the precedent addresses is likewise a consideration, since some subjects are more apt to induce reliance than others.147
Clarity and administrability also relate to reliance interests, since reliance can only be created by a ruling which is amenable to consistent, stable, and thus predictable application.148 Thus, a "traditional justification for overruling a prior case is that a precedent may be a positive detriment to coherence and consistency in the law, either because of inherent confusion created by an unworkable decision, or because the decision poses a direct obstacle to the realization of important objectives embodied in other laws."149
Bounded up with reliance interests are institutional considerations of the Court. Precedent should not be overturned by narrow majorities150 and very recent precedent should not lightly be overturned when the only change is the composition of the court,151 because society must be able to "presume that bedrock principles are founded in the law rather than in the proclivities of individuals."152 "Overruling precedent is never a small matter."153 Mere disagreement with the reasoning and outcome of a prior case, even strong disagreement, cannot be adequate justification for departing from precedent or stare decisis would have no meaning.154
This Court decided Gentile fifteen years ago. This is old enough, we think, that we can properly say that the practical and analytical difficulties courts have encountered in applying it reflect fundamental unworkability and not growing pains, but not so old as to carry the weight of "antiquity." Moreover, that gap in time has given us the perspective to see that Gentile is more of a departure from the then-recent Tooley than the continuation we perceived it to be at the time.155 Any reliance is further muted by El Paso, from which parties could rightly anticipate that Gentile's continued viability was in doubt. Finally, in overturning it today we speak unanimously, with the concomitant aid to certainty that provides. Having given all due consideration to the weight of precedent, the circumstances persuade us that we should overrule the Gentile exception to our Tooley test for derivative and direct standing. Accordingly, Gentile should be, and hereby is, overruled.
D. Appellees Cross-Appeal Contention that They Have Direct Standing Regardless of Gentile is Meritless
Appellees also separately argue on cross-appeal that they have direct standing to proceed without Gentile because the transaction consolidated Brookfield's control of the corporate levers of power, and so the Board violated its fiduciary duties by approving the transaction without compensating the minority shareholders for the further diminution of their voting power. Appellees argue that because entrenchment works a disenfranchisement felt by the minority stockholders as voters, they have direct standing apart from Gentile.
At the outset, it is not clear that the cross-appeal is procedurally proper. Unlike Brookfield, Appellees did not present their application for interlocutory appeal to the Court of Chancery,156 and Plaintiffs opposed the defendants' application. Our rules instruct us not to take interlocutory cross-appeals that fail to adhere to procedural requirements.157 But for the sake of efficiency, we address the issue presented.
Appellees' direct disenfranchisement argument is twofold. First, Plaintiffs contend that the Private Placement allowed Brookfield to expand their majority voting control enough that a subsequent sale would not eliminate their majority status (the "Entrenchment Claim").158 Second, the Private Placement brought Brookfield near to supermajority voting control, a threshold that, if they crossed it, would permit them to unilaterally alter certain provisions of the corporate charter without Appellees' consent (the "Supermajority Claim").159 Appellees emphasize that theirs was a substantial loss of voting power.160
The Entrenchment Claim fails because Plaintiffs fail to allege any facts supporting a reasonably conceivable inference that Brookfield, absent the Private Placement, would have permitted a dilution of their equity stake sufficient to relinquish their majority control. Brookfield's stake in TerraForm declined slightly in the 2019 equity issuance because, concurrently with the $250 million October 2019 public offering of close to fifteen million shares at $16.77 per share, Brookfield made a further investment in a private placement (of close to three million shares) at the same price.161 Plaintiffs' theory is that Brookfield entrenched itself in 2018 in anticipation of failing to purchase sufficient stock to maintain control in 2019. In other words, had it not increased its majority interest in 2018 from 51 percent to 65.3 percent, and if it had acted in that hypothetical situation as it did in fact—not participating pro rata in the 2019 offering—Brookfield would have allowed TerraForm to issue stock and decrease its holdings below a majority level without compensation.
We agree that it is not reasonably conceivable that these allegations state a claim. As the Vice Chancellor points out, Plaintiffs fail to allege that anyone knew in June 2018 that TerraForm would conduct an offering in October 2019. Moreover, it would have to be reasonably conceivable that even had the Private Placement not occurred, Brookfield would not have participated on a pro rata basis in the 2019 offering, thereby choosing to forego its majority stake. Because a control premium has value, we agree it is not reasonably conceivable that Brookfield would have declined to participate in the 2019 offering if that would translate into Brookfield forfeiting majority control for no premium.
Nor does the Supermajority Claim hit the mark, again for the reasons the Court of Chancery explained. To overcome the supermajority threshold, Brookfield needed to expand its equity stake to exceed two-thirds of the Company's voting shares. The Private Placement raised Brookfield's share to 65.3 percent only. As the Vice Chancellor found, Brookfield never achieved the level of control necessary to unilaterally remove the supermajority voting rights, and Brookfield never attempted to abrogate the rights through the 2019 offering. For the reasons stated by the Vice Chancellor, we agree that Plaintiffs' entrenchment claims fail.
For the foregoing reasons, this Court overrules Gentile and REVERSES the Court of Chancery's denial of Defendant's Motion to Dismiss for lack of standing.