Citigroup Inc. v. AHW Investment Partnership, MFS, Inc.

IN THE SUPREME COURT OF THE STATE OF DELAWARE

CITIGROUP INC., CHARLES §
PRINCE, VIKRAM PANDIT, §
GARY CRITTENDEN, ROBERT §
RUBIN, ROBERT DRUSKIN, § No. 641, 2015
THOMAS G. MAHERAS, §
MICHAEL STUART KLEIN, and § Certification of Question of Law
DAVID C. BUSHNELL, § from the United States Court of
§ Appeals for the Second Circuit
Defendants Below-Appellants, §
§ C.A. Nos. 13-448-cv(L) and
v. § 13-4504-cv(XAP)
§
AHW INVESTMENT §
PARTNERSHIP, MFS, INC., and §
ANGELA H. WILLIAMS, as §
Trustee of the Angela H. Williams §
Grantor Retained Annuity Trust §
UAD March 24, 2006, the Angela §
Williams Grantor Retained Annuity §
Trust UAD April 17, 2006, the §
Angela Williams Grantor Retained §
Annuity Trust UAD May 9, 2006, §
the Angela Williams Grantor §
Retained Annuity Trust UAD §
November 1, 2007, the Angela §
Williams Grantor Retained Annuity §
Trust UAD May 1, 2008, the Angela §
Williams Grantor Retained Annuity §
Trust UAD July 1, 2008, and the §
Angela Williams Grantor Retained §
Annuity Trust UAD November 21, §
2008, §
§
Plaintiffs Below-Appellees. §

Submitted: April 27, 2016
Decided: May 24, 2016
Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, and
SEITZ, Justices, constituting the Court en Banc.

Certification of question of law from the United States Court of Appeals for the
Second Circuit. Question answered.

Stephen P. Lamb, Esquire, Matthew D. Stachel, Esquire, Paul, Weiss, Rifkind,
Wharton & Garrison LLP, Wilmington, Delaware; Brad S. Karp, Esquire, Walter
Rieman, Esquire (Argued), Susanna M. Buergel, Esquire, Paul, Weiss, Rifkind,
Wharton & Garrison LLP, New York, New York, for Appellants.

Kevin G. Abrams, Esquire, J. Peter Shindel, Jr., Esquire, Abrams & Bayliss LLP,
Wilmington, Delaware; Steven F. Molo, Esquire, Robert K. Kry, Esquire,
MoloLamken LLP, New York, New York; Jeffrey A. Lamken, Esquire (Argued),
Hassan A. Shah, Esquire, MoloLamken LLP, Washington, D.C.; Jacob H.
Zamansky, Esquire, Zamansky LLC, New York, New York, for Appellees.

Paul J. Lockwood, Esquire, Elisa M.C. Klein, Esquire, Skadden, Arps, Slate,
Meagher & Flom LLP, Wilmington, Delaware; Jay B. Kasner, Esquire, Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York, Amicus Curiae for
Securities Industry and Financial Markets Association.

Thad J. Bracegirdle, Esquire, Wilks, Lukoff & Bracegirdle, LLC, Wilmington,
Delaware; Alan L. Rosca, Esquire, Colin R. Ray, Esquire, Peiffer Rosca Wolf
Abdullah Carr & Kane, Cleveland, Ohio, Amicus Curiae for Public Investors Bar
Association.

STRINE, Chief Justice:
 I.

The U.S. Court of Appeals for the Second Circuit has certified to this Court

the following question of law arising from an appeal from a decision issued by the

U.S. District Court for the Southern District of New York:

Are the claims of a plaintiff against a corporate defendant alleging
damages based on the plaintiff‘s continuing to hold the corporation‘s
stock in reliance on the defendant‘s misstatements as the stock
diminished in value properly brought as direct or derivative claims? 1

The answer to that question, as explained below, is that the holder claims in

this action are direct. This is because under the laws governing those claims—

those of either New York or Florida—the claims belong to the stockholder who

allegedly relied on the corporation‘s misstatements to her detriment. Under those

state laws, the holder claims are not derivative because they are personal to the

stockholder and do not belong to the corporation itself.

The familiar two-pronged test we articulated in Tooley v. Donaldson, Lufkin

& Jenrette, Inc.2 is not relevant to the analysis of whether the holder claims at issue

here are direct or derivative. Rather, Tooley and its progeny deal with the narrow

issue of whether a claim for breach of fiduciary duty or otherwise to enforce the

corporation‘s own rights must be asserted derivatively or directly. Before

evaluating a claim under Tooley, ―a more important initial question has to be

1
AHW Inv. P’ship v. Citigroup, Inc., 806 F.3d 695, 705 (2d Cir. 2015).
2
845 A.2d 1031 (Del. 2004).
1
answered: does the plaintiff seek to bring a claim belonging to her personally or

one belonging to the corporation itself?‖3 Because the holder claims at issue here

belong to the holding stockholders under the state laws that govern the claims, and

are not fiduciary duty claims or claims otherwise belonging to the corporation,

Tooley does not affect our answer to this certified question.

II.

In answering recent certifications of questions of law, we have explained the

need for a certification to be accompanied by a stipulated set of facts.4 In lieu of a

stipulated set of facts, the Second Circuit explained that ―the factual setting for

addressing the question presented is certain: It is set by the amended complaint.‖5

In some situations, we suppose that referring us to a complaint as the required

factual context would be sufficient. Here, however, we note that our referring

courts have struggled with defining the contours of the plaintiffs‘ claims. In fact,

3
NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 118 A.3d 175, 180 (Del. 2015).
4
See Culverhouse v. Paulson & Co., Inc., 133 A.3d 195, 196 (Del. 2016) (―We reiterate the need
for a stipulated set of facts to accompany certified questions of law to avoid confusion over
disputed and undisputed facts.‖); Espinoza v. Dimon, 124 A.3d 33, 36 (Del. 2015) (―The
Delaware Supreme Court rule that governs our consideration of certified questions of law is
Rule 41. Because this tool can cause more harm than benefit if not used with precision,
Rule 41(b) contemplates that a certification will pose a specific question of law, based on a
stipulated set of facts. This approach allows us to focus on a relevant question of Delaware law
against the backdrop of established facts, which are not the subject of dispute among the parties.
The certification request before us is not tailored in that way. As a result, we will endeavor to be
as helpful as we can be without risking giving overbroad and potentially misleading guidance
because of the absence of stipulated facts, against which a precisely tailored question is framed.‖
(citations omitted)); see also Supr. Ct. R. 41(b) (―A certification will not be accepted if facts
material to the issue certified are in dispute.‖).
5
AHW Inv. P’ship, 806 F.3d at 705.
2
the parties before us even disagree about the scope of the certified question and

whether it encompasses not only a holder claim based on principles of common

law fraud, but also a holder claim for negligent misrepresentation. Indeed, one of

the parties offered to file additional papers regarding the claim—or claims, as they

would have it—before us. We declined that invitation, as it hazards litigation over

what should have been clearly settled by the parties before the referral to us.

Likewise, much of the briefing before us by the defendants seems to be addressed

to the subject of whether Delaware should say that no such thing as a holder claim

exists.6 The problem with that is, as we discuss below, that the District Court and

the Second Circuit did not find, and the parties do not contend, that the plaintiffs‘

claims arise under the substantive law of Delaware.7

The extent of uncertainty about the nature of the claim—or claims—before

us is inconsistent with the nature of the important, but carefully circumscribed role

that we play under Article 4, § 11 of our Constitution.8 The extent of disagreement

between the parties about the scope of the question before us, and the underlying

nature of the claims, highlights why a stipulation of facts is essential.

Nevertheless, we wish to be as helpful as possible to our distinguished judicial

6
See, e.g., Opening Br. at 30–33.
7
See infra note 62 and accompanying text.
8
See Del. Const. art. IV, § 11.
3
colleagues and have done our best to isolate the undisputed parts of the record and

use them to frame the issue before us as we best understand it.

But before we can answer the certified question, we need to identify what

the plaintiffs‘ claims before us are and what they are not. This requires a deep

exploration of the underlying record, and the back and forth between the parties

before the District Court and Second Circuit.

A.

The plaintiffs are all affiliates of Arthur and Angela Williams, who owned

stock in Citigroup. The defendants are Citigroup and eight of its officers and

directors, which we collectively refer to for the sake of brevity as ―Citigroup.‖ The

basic events leading to the Williamses‘ claims are as follows. In 1998, Citicorp

and Travelers Group, Inc. merged, forming Citigroup. At that point, Arthur

Williams‘s shares in Travelers Group were converted into 17.6 million shares of

Citigroup common stock, which were valued at the time of the merger at $35 per

share. In 2007, the Williamses had these shares transferred into AHW Investment

Partnership, MFS Inc., and seven grantor-retained annuity trusts, all of which the

Williamses controlled. For the sake of simplicity, we refer to the various related

plaintiffs—including AHW, MFS, and the trusts—as ―the Williamses.‖

According to the Williamses, they and their financial advisors developed a

plan in May 2007 to sell their 17.6 million Citigroup shares. On May 17, 2007, the

4
Williamses sold one million shares at $55 per share. But, the Williamses halted

their plan to sell all of their Citigroup stock because, based on Citigroup‘s filings

and financial statements, they concluded that there was little downside to retaining

their remaining 16.6 million shares. The Williamses allegedly held those shares

for the next twenty-two months, finally selling them on March 18, 2009 for $3.09

per share, which is much less than $55 per share.

B.

After selling their 16.6 million shares, the Williamses sued Citigroup in the

U.S. District Court for the Southern District of New York. The theory of the

Williamses‘ amended complaint is that their decision not to sell all of their shares

in May 2007, and their similar decisions to hold on at least three later dates, were

due to Citigroup‘s failure to disclose accurate information about its true financial

condition from 2007 to 2009. Their complaint alleged:

Had Williams received truthful and honest disclosures from Citigroup
about the true state of its financial health, its subprime mortgage
exposure and its related risks, he would have sold all of his shares in
May 2007 at $55 per share and diversified into safer investments. . . .
He also considered selling out his remaining 16.6 million shares on
three other separate occasions—at $33 per share, $17.50 per share and
$8.50 per share—in an effort to minimize his losses. He delayed
doing so in continued reliance on the Company‘s misrepresentations
and omissions.9

9
App. to Opening Br. at 25 (Compl. ¶¶ 48–49).
5
 The Williamses pled two counts: ―negligent misrepresentation‖ and

―common law fraud.‖10 Although the Williamses filed their complaint in New

York, they asserted that Florida law applied to both claims. In pleading the

negligent misrepresentation theory, the Williamses alleged:

Defendants had a duty, as a result of a special relationship, i.e., the
issuer of shares to public investors, to give accurate information. . . .
Defendants occupied a special position of confidence and trust such
that Plaintiffs’ reliance on their public statements was justified. Put
another way, Defendants had a duty to speak with care in these
circumstances, where the relationship is such that in morals and good
conscience Plaintiffs had the right to rely on Defendants for
information. Defendants made multiple false representations that they
should have known were incorrect. Defendants knew that Plaintiffs
desired the information supplied in the representations for a specific
purpose, i.e., to decide whether to hold or sell their shares in
Citigroup.11

As to the common law fraud count, the Williamses alleged:

Plaintiffs were personally defrauded by Citigroup, as that cause of
action is delineated by the common law in the State of Florida.
Plaintiffs were the recipients of multiple misrepresentations and
omissions of material fact. Defendants knew that their statements to
Plaintiffs concerning Citigroup‘s subprime exposure were false at the
time they were made. . . . Defendants knowingly made multiple
misrepresentations and omissions of material fact . . . for the purpose
of inducing [the Williamses] to hold their Citigroup shares, which
they in fact did.12

For both the negligent misrepresentation and common law fraud claims, the

Williamses‘ theory of damages is identical. The Williamses alleged that had

10
See id. at 83, 92 (Compl. at 72, 81).
11
Id. at 83–84 (Compl. ¶¶254–62) (emphasis added).
12
Id. at 93 (Compl. ¶¶ 290–94).
6
Citigroup informed the market in real time of the deepening problems at Citigroup,

the Williamses would have acted on those disclosures and sold all 17.6 million of

their shares at $55 on May 17, 2007. Because they, however, allegedly relied on

the disclosures, the Williamses say that they held 16.6 million of their shares until

March 2009—a time when the severe depth of Citigroup‘s subprime mortgage

exposure was fully evident—and therefore sold those shares at $3.09. Thus, they

seek $809,950,000, or the difference between what they otherwise would have

received for each share they held and the $3.09 they collected.13 Alternatively, the

Williamses demand $532,897,000, which is based on the $35 value of Citigroup

shares at the time of the 1997 merger.14

C.

Citigroup moved to dismiss under Federal Rule 12(b)(6), arguing that (1) the

Williamses lack standing because their claims are derivative; and (2) New York

law, not Florida law, applied. On October 13, 2013, the District Court granted

Citigroup‘s motion and dismissed the amended complaint.

In its decision, the District Court did not begin by analyzing the nature of the

Williamses‘ claims or discussing whether the claims were ones that belonged to

the Williamses—as the holding stockholders—or somehow Citigroup as the issuer.

Instead, the District Court first analyzed whether the Williamses‘ claims are direct

13
See id. at 55–56 (Compl. ¶¶ 171–72).
14
See id. at 56 (Compl. ¶ 173).
7
or derivative without any consideration of that predicate issue.15 It reasoned ―that

Delaware law determines whether claims against Citigroup are direct or derivative

because Citigroup is incorporated in Delaware.‖16 The court then concluded that

the Williamses‘ claims are direct under Tooley because (1) the Williamses ―‗can

prevail without showing an injury to‘ Citigroup because the nature of the allegation

is that the misstatements and omissions concealed damage to Citigroup‘s assets

that had already been done‖; and (2) ―any remedy will go directly to [the

Williamses], not to Citigroup.‖17

It was only after the District Court determined that the Williamses‘ claims

were direct that it then went on to decide what state‘s substantive law governed

their claims and whether those claims survived Citigroup‘s Rule 12(b)(6) motion.

The District Court ultimately determined that New York substantive law applied to

the Williamses‘ claims because New York had a greater interest in the case than

Florida.18 In the course of this analysis, the District Court summarily analyzed the

amended complaint‘s negligent misrepresentation count as a run-of-the-mill claim

under state common law.19 The District Court apparently did not find that the fact

that the Williamses‘ damages theory was based on a holder theory posed any

special difficulties. The District Court then dismissed the Williamses‘ negligent
15
See AHW Inv. P’ship v. Citigroup, Inc., 980 F. Supp. 2d 510, 516–18 (S.D.N.Y. 2013).
16
Id. at 516.
17
Id. at 517.
18
See id. at 522–24.
19
See id. at 519.
8
misrepresentation claim, noting that ―New York law requires ‗the existence of a

special privity-like relationship‘ between the plaintiff and defendant for a

successful negligent misrepresentation claim,‖20 and reasoning that ―because

Citigroup is an issuer of shares to public investors, defendants are not in a special

privity-like relationship with the investing public, or with actual purchasers.‖21

Although the District Court did not construe the negligent misrepresentation

count as a holder claim, the court referred to the common law fraud count

explicitly as a ―holder claim.‖22 In addressing this reality, the District Court

focused on the less-than-universal acceptance of common law fraud based on a

theory that a stockholder held, rather than purchased, stock in a corporation: ―The

parties agree that the basic elements of common law fraud in New York and

Florida are substantially equivalent [and] agree that the states differ in their

treatment of holder claims.‖23 The District Court compared New York and Florida

law on holder claims, foregoing any discussion of the more typical common law

fraud elements.24 The court then dismissed the common law fraud claim,

reasoning that it is ―impermissibly speculative‖ because the Williamses ―do not

allege how long thereafter Williams cancelled the remaining sales, nor when he

20
Id. at 524 (quoting Mandarin Trading Ltd. v. Wildenstein, 944 N.E.2d 1104, 1109 (N.Y.
2011)).
21
Id.
22
Id. at 519.
23
Id.
24
See id. at 519–21.
9
had planned to execute the sales before the alleged misstatements caused him to

reverse course.‖25 The District Court also observed that the Williamses ―claim as

damages the difference between the price they estimate would have prevailed on

May 17, 2007 and the price they received in March 2009. And yet, by [the

Williamses‘] own telling, they would have sold the 16.6 million shares at issue

here at some point after May 17, 2007.‖26 Finally, the District Court noted that

New York precedent prohibits the court from hypothesizing about whether the

Williamses would have sold their Citigroup shares absent the alleged

misrepresentation.27

D.

The Williamses appealed, arguing ―that the District Court erred by applying

New York, not Florida, law to their claims, and that, even applying New York law,

their fraud and negligent misrepresentation claims were sufficient to withstand a

motion to dismiss.‖28 Citigroup cross-appealed, asserting that the trial court erred

because the Williamses‘ ―claims are properly considered derivative rather than

direct.‖29 Rather than decide whether the District Court properly determined that

25
Id. at 526 (internal quotation marks omitted).
26
Id. (internal citation omitted).
27
See id.
28
AHW Inv. P’ship, 806 F.3d at 699.
29
Id.; see also id. at 697 (―Defendants cross-appeal, arguing that the District Court erred by
addressing the adequacy of plaintiffs‘ substantive claims as ‗holders‘ of the shares during a
period of decline in share value: According to defendants, Delaware law mandates that such
10
New York substantive law applied to the Williamses‘ claims, the Second Circuit

focused on the cross-appeal, reasoning that ―[i]f we accept defendants‘ argument,

then the District Court lacked jurisdiction to adjudicate the sufficiency of

plaintiffs‘ claims, and we must affirm the dismissal of the amended complaint

without further considering plaintiffs‘ claims. The lack of prudential standing

would present an independent basis for dismissing the complaint.‖30

Then, like the District Court had, the Second Circuit decided that Tooley

might determine whether the Williamses‘ claims were derivative before discussing

the nature of the claims or whether the claims could possibly belong to Citigroup.

The Second Circuit agreed with the District Court that Delaware law governs

whether the claims were direct or derivative because Citigroup is incorporated in

Delaware: ―Under New York law, we look to the law of the state of incorporation

when adjudicating whether a claim is direct or derivative. Because Citigroup is

incorporated in Delaware, Delaware law controls whether plaintiffs‘ claims are

properly characterized as direct or derivative.‖31 The Second Circuit also agreed

with the trial court that ―Tooley suggests that the Williamses have stated direct

claims.‖32 But, the Second Circuit explained that ―[s]ubsequent developments in

the Delaware courts‘ application of Tooley give us pause‖ and ―suggest that the

claims be brought in a shareholder derivative action, not as direct claims (as plaintiffs have
done).‖).
30
Id. at 699 (citation omitted).
31
Id. (citations omitted).
32
Id. at 701.
11
two-part Tooley test may now have evolved and that the Williamses‘

claims . . . might not be correctly treated as direct under Delaware law.‖33 Because

of this apparent confusion, the Second Circuit sought our guidance as to whether

what it called a ―holder claim‖ is direct or derivative.34

The Second Circuit then briefly discussed the nature of the Williamses‘

claims. Like the District Court, the Second Circuit recognized that the Williamses

pled counts of negligent misrepresentation and common law fraud.35 But, the

Second Circuit classified the Williamses‘ claims—without distinguishing between

those for negligent misrepresentation and common law fraud—as ―holder claims‖

because those claims ―alleg[e] harm based on the retention of stock in reliance on a

defendant‘s statements.‖36 That is, although the District Court appeared to treat

only the common law fraud claim as a holder claim and not the negligent

misrepresentation claim, the Second Circuit deemed both to be holder claims

because the Williamses‘ damages theory for both claims was identical, and was

based on the alleged decision to hold the stock in reasonable reliance on

Citigroup‘s public disclosures.

The parties themselves have dickered over whether the ―claims‖ referred to

in the question certified to us encompass both the negligent misrepresentation and
33
Id.; see also id. at 703 (―Delaware cases post-Tooley complicate our analysis and suggest that
the Williamses may lack standing to pursue their claims against defendants.‖).
34
Id.
35
See id. at 698.
36
Id. at 703 (emphasis omitted).
12
common law fraud theories. Because the question uses the plural and both claims

are holder claims,37 we read the question as referring to both of the Williamses‘

claims. Thus, we refer to the Williamses‘ negligent misrepresentation and

common law fraud claims as their ―Holder Claims.‖

E.

We empathize with the struggle our federal judicial colleagues have had

with the Williamses‘ claims. At one mundane level, that of definition, a holder

claim seems simple enough: ―a cause of action by persons wrongfully induced to

hold stock instead of selling it.‖38 But, our referring courts‘ struggle to identify the

precise nature of the Williamses‘ claims is not surprising given the lack of uniform

recognition of holder claims,39 and more specific to this case, the Williamses‘

shifting attempts at clarifying their claims, which have continued during this

appeal. A reading of the amended complaint and our referring courts‘ opinions,

37
See supra note 1 and accompanying text.
38
Small v. Fritz Cos., Inc., 65 P.3d 1255, 1256 (Cal. 2003) (emphasis in original); see also Grant
Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 926 (Tex. 2010) (―In a ‗holder‘
claim, the plaintiff alleges not that the defendant wrongfully induced the plaintiff to purchase or
sell stock, but that the defendant wrongfully induced the plaintiff to continue holding his stock.
As a result, the plaintiff seeks damages for the diminished value of the stock, or the value of a
forfeited opportunity, allegedly caused by the defendant‘s misrepresentations.‖); Lauren A.
Demanovich, Holding Out for a Change: Why North Carolina Should Permit Holder Claims, 92
N.C. L. REV. 988, 992 (2014) (―A holder claim is a suit brought for damages based on the fact
that an individual shareholder suffered financial loss after retaining stock for longer than he or
she otherwise would have as a consequence of an officer‘s or director‘s misrepresentation.‖).
39
See Grant Thornton, 314 S.W.3d at 927–28 (―[A] number of courts have rejected [holder]
claims. Conversely, courts in several states (including California, Massachusetts, New Jersey,
and New York) have recognized holder claims.‖ (citations omitted)); Demanovich, supra note
38, at 999–1005 (surveying the controversial status of holder claims in various states).
13
which do not reference state securities laws, indicates that the Williamses

originally framed their claims as Florida common law claims. Then, in their brief

to us, the Williamses couched their Holder Claims as state securities law claims,

which is how holder claims have often been treated.40 A holder claim could

theoretically be implied under New York‘s Martin Act41 or the Florida Securities

and Investor Protection Act,42 and the Williamses‘ brief explains that ―[w]hether to

allow holder claims is a question of substantive state securities law,‖43 and that

they ―are pursuing tort claims for securities fraud.‖44 At oral argument, however,

the Williamses retreated from this position, asserting once again that they ―are

relying on actually, in fact, just common law fraud—the standard fraud under the

Restatement.‖45

A certified question of the kind we have accepted is not a proper vehicle in

which to explore what the claims in the underlying action are. That sort of

40
See, e.g., CONSTANCE E. BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT: STRATEGIES
FOR THE 21ST CENTURY 693 (8th ed. 2016) (―Certain states, under their blue sky laws, permit
so-called holder claims by investors who allege that they did not sell their securities because of
the defendant‘s fraud.‖ (emphasis omitted)); Eric L. Talley, Cataclysmic Liability Risk Among
Big Four Auditors, 106 COLUM. L. REV. 1641, 1668 (2006) (explaining that holder claims are a
type of state securities law claim); Demanovich, supra note 38, at 997 (same).
41
See N.Y. General Business Law §§ 352–53 (McKinney 2016).
42
See Fla. Stat. §517.301 (2016).
43
Answering Br. at 2.
44
Id. at 25; see also id. at 14 (―It cannot be that, when a corporation defrauds a shareholder, the
only remedy is a derivative suit in which the corporation keeps any recovery. That ‗remedy‘ is
no remedy at all: It would effectively eliminate this category of securities fraud claims
altogether.‖ (emphasis added)).
45
Video: Oral Argument before the Delaware Supreme Court, at 30:45 (Citigroup v. AHW
Investment, No. 641, 2015, Apr. 27, 2016), archived at http://livestream.com/Delaware
SupremeCourt/events/5272320/videos/121185340 [hereinafter ―Oral Argument at __‖].
14
fundamental issue should ordinarily be agreed to by the parties and stipulated to in

the stipulation of facts upon which we are to base our answer to the certified

question. Consistent with our desire to be helpful, however, we will set forth what

we understand to be the nature of the Williamses‘ Holder Claims, and how that

bears on our answer to the question we have been asked.

We start with noting that the reductive term ―holder claims‖ was reasonably

used by the Second Circuit because the Williamses‘ negligent misrepresentation

and common law fraud claims have identical elements, but for one element that is

irrelevant to whether their claims are fundamentally based on their alleged decision

to hold stock in reliance on the defendants‘ alleged failure to make timely

disclosures necessary to ensure that Citigroup‘s public disclosures about its

condition were materially accurate. That element is an important one—whether

the defendants had to act with scienter or merely with a lack of reasonable care 46—

but it does not change the cause of action from one that would colloquially be

regarded by a securities lawyer as a holder claim. A holder claim based on a

negligent misrepresentation claim is simply easier for a plaintiff to prove, because

46
See Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 762 (Del. Ch. 2014) (―[N]egligent
misrepresentation is essentially a species of common law fraud with a lesser state of mind
requirement—i.e., scienter is replaced with negligence.‖); see also 37 C.J.S. Fraud § 75
(Westlaw 2016) (―The tort of negligent misrepresentation does not require scienter or an intent to
defraud; it is not necessary to show that the defendant had any intent to deceive the victim, and
that he or she generally did not demonstrably know that what he or she said was false.‖).
15
that plaintiff, unlike a plaintiff bringing a holder claim under a common law fraud

theory, need not prove scienter.

This is not to say that this distinction does not potentially have important

implications for cases like these. We are troubled by the shifting nature of the

Williamses‘ approach to their negligent misrepresentation claim for a reason that

relates to, but is somewhat differently grounded than, our referring courts‘ concern

whether the holder claims are direct or derivative. Our referring courts wanted to

make sure that the Williamses were not asserting a claim that belonged to

Citigroup rather than themselves personally, and were not thereby intruding on the

Citigroup board‘s ability to control its own legal causes of action. But, the

Williamses‘ Holder Claims raise another sensitive concern: Whether their claims

are ones that under the internal affairs doctrine are governed by Delaware law, and

not the law of any other state.

The Williamses have been hard to pin down on the nature of what they are

alleging. As to their negligent misrepresentation claim, the Williamses alleged in

their complaint that the scienter requirement of common law fraud was

inapplicable because the Citigroup‘s officers and directors had ―a duty of candor‖

to the Williamses because of their special relationship with Citigroup‘s

stockholders.47 Then, in their briefs to us, the Williamses went out of their way to

47
See App. to Opening Br. at 83 (Compl. ¶ 256).
16
distance themselves from any hint that their negligent misrepresentation claim was

based on the fiduciary relationship that exists between a corporation‘s managers

and its investors. To do that, the Williamses stated that they ―are not pursuing

claims for breach of fiduciary duty,‖48 and that ―[w]hether Citigroup‘s officers

breached fiduciary duties to the company is totally irrelevant to the harm the

Williamses suffered.‖49 And at oral argument, the parties agreed that no breach of

fiduciary duty claim is at issue.50

Consistent with their approach before us, in oral argument, the Williamses

argued that Florida law governed their claim for negligent misrepresentation and

that Florida law allows a wide-open cause of action on any speaker for negligent

misrepresentation, regardless of any special relationship of trust between the

speaker and the plaintiff. This, of course, is more than a tad in tension with their

prior arguments before our referring courts. Whatever one would ultimately see

after piercing this fog, we note the following: If the Williamses were asserting a

holder claim in which they were alleging that Citigroup‘s officers and directors

48
Answering Br. at 25.
49
Id. at 15; see also id. at 16 (―The harm the Williamses suffered was Citigroup‘s violation of
that tort-law duty. That harm is separate from any injury Citigroup may have suffered from
fiduciary breaches by its managers.‖); id. at 16 n.1 (―That reasoning applies a fortiori in a case
like this, where plaintiffs are asserting, not a breach of fiduciary duty, but garden-variety tort
claims for securities fraud.‖).
50
See Oral Argument at 10:20 (―Now these claims of course could have been brought as breach
of fiduciary duty claims. As a pleading matter, they were brought as fraud claims or negligent
misrepresentation claims.‖); id. at 28:12 (acknowledging that the Williamses disavowed any
reliance on a fiduciary-based theory and ―are proceeding under common law fraud and common
law misrepresentation‖).
17
were their fiduciaries and owed them a heightened duty, that claim would be an

internal affairs claim for breach of fiduciary duty. In that case, under the

Commerce Clause51 and the Full Faith and Credit Clause,52 Delaware law would

apply to the merits and we would have to decide whether that holder claim was

cognizable at all and, if so, whether it was derivative or not. 53 Likewise, any

argument—such as the one the Williamses made explicitly in the amended

complaint—that an issuer of stock owes special duties to the holders of its stock is

just another way of arguing that the investors in a corporation are owed fiduciary

duties by those who manage it. In other words, it is a way of saying that because

of the relationship between the governed and the governors of a corporation, a

special cause of action ought to exist. That kind of claim is governed by the laws

of the state of incorporation exclusively under the internal affairs doctrine.54

Furthermore, the way that the Williamses have pled both the negligent

misrepresentation and common law fraud claims is troubling for another reason

51
U.S. Const. art. I, § 8.
52
Id. art. IV, § 1.
53
See McDermott Inc. v. Lewis, 531 A.2d 206, 216–17 (Del. 1987) (explaining the relationship
between the internal affairs doctrine and the Commerce Clause and the Full Faith and Credit
Clause); Rosenmiller v. Bordes, 607 A.2d 465, 468 (Del. Ch. 1991) (―The internal affairs
doctrine requires that the state that has created the corporation be the only state whose law
controls the relationships among the corporate entity, directors, officers and stockholders. This
concept implicates federal due process, commerce clause and full faith and credit clause
considerations because in the absence of such a rule, a corporation would be subject to the risk of
inconsistent judgments by virtue of its being amenable to service of process in different
jurisdictions.‖); see also VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108,
1112–13 (Del. 2005).
54
See VantagePoint, 871 A.2d at 1112–13.
18
that bears on whether the internal affairs doctrine might govern their claims. That

is that the Williamses have not sued only Citigroup. They have also sued its

officers and directors, as if this were a claim for breach of fiduciary duty. On this

limited record and without focus on this issue from the parties, we are loath to say

more. But, we do think it is important to note that the Williamses‘ complaint

contained no claim for veil-piercing, and it seems, shall we say, improbable to

think that Citigroup would be a good candidate for veil-piercing. In discussing

holder claims, the U.S. Supreme Court has explained ―that a misrepresentation

which leads to a refusal to purchase or to sell is actionable in just the same way as

a misrepresentation which leads to the consummation of a purchase or sale.‖55

Why is it, then, that the Williamses have sued the directors and officers of

Citigroup when the corporation itself is the typical defendant in a securities fraud

claim regarding the purchase or sale of securities,56 such as an implied cause of

action under SEC Rule 10b-5?57 After all, a common situation when federal claims

55
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 744 (1975); see also infra notes 76–79
and accompanying text.
56
See In re Parmalat Sec. Litig., 594 F. Supp. 2d 444, 451 (S.D.N.Y. 2009) (―The typical
defendant in a Section 10b-5 or other Exchange Act case is a corporation.‖).
57
See Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142–43 (2011) (―For
purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority
over the statement, including its content and whether and how to communicate it. Without
control, a person or entity can merely suggest what to say, not ‗make‘ a statement in its own
right. One who prepares or publishes a statement on behalf of another is not its maker. And in
the ordinary case, attribution within a statement or implicit from surrounding circumstances is
strong evidence that a statement was made by—and only by—the party to whom it is attributed.
This rule might best be exemplified by the relationship between a speechwriter and a speaker.
Even when a speechwriter drafts a speech, the content is entirely within the control of the person
19
under Rule 10b-5 are filed is for parallel derivative actions to be filed.58 The

theory of those actions is normally that if the corporation is liable to the class in the

10b-5 action, then the directors and officers are liable for breach of fiduciary duty

in causing the corporation to make false and misleading disclosures, and should

make the corporation whole for any damages it must pay to the class in the 10b-5

action. This is not a situation where the Williamses had face-to-face negotiations

with any Citigroup director or officer, who said something directly to them. 59

Rather, the Williamses are suing over the failure of Citigroup itself to make timely

and materially accurate public disclosures. When one considers this reality along

who delivers it. And it is the speaker who takes credit—or blame—for what is ultimately said.‖);
City of Pontiac Policemen’s and Fireman’s Ret. Sys. v. UBS AG, 752 F.3d 173, 185 n.53 (2d Cir.
2014) (affirming District Court‘s dismissal of individual defendants ―on the grounds that under
Janus, the individual defendants . . . must have actually made the statements . . . to be held liable
under Section 10(b)‖ (internal citation omitted) (internal quotation marks omitted)); Fezzani v.
Bear, Stearns & Co. Inc., 716 F.3d 18, 25 (2d Cir. 2013) (―Under . . . Janus, only the person who
communicates the misrepresentation is liable in private actions under Section 10(b).‖ (internal
citation omitted)); In re Smith Barney Transfer Agent Litig., 884 F. Supp. 2d 152, 166 (S.D.N.Y.
2012) (explaining that for purposes of determining the proper defendants for 10(b)-5 purposes,
―[a]s a general matter, ‗officer or director status alone does not constitute control‘‖ (quoting In re
Global Crossing, Ltd. Sec. Litig., 2005 WL 1907005, at *12 (S.D.N.Y. Aug. 8, 2005))); In re
Coinstar Inc. Sec. Litig., 2011 WL 4712206, at *10 (W.D. Wash. Oct. 6, 2011) (dismissing
10(b)-5 claim against corporation‘s directors under Janus because they did not ―ultimately ha[ve]
authority over a false statement or omission‖); see also 5 BROMBERG & LOWENFELS ON SEC.
FRAUD § 7:306.55 (2d ed. 2015) (compiling additional cases that used Janus as a means of
shielding directors from liability under Rule 10b-5).
58
See 6 BROMBERG & LOWENFELS ON SEC. FRAUD § 8:12 (2d ed. 2015) (recognizing that there
are often state law cases that accompany 10b-5 claims in federal court); 69A AM. JUR. 2D Sec.
Regulation § 1019 (Westlaw 2016) (same).
59
The Williamses do allege that their so-called ―Financial Advisors‖ had some meetings with
unidentified senior officers at Citigroup. See App. to Opening Br. at 61 (Compl. ¶ 188). This
thin gruel does not sustain any personal claim of fraud under traditional principles, and there is
no indication that any meetings were in any way intended to influence buy and sell decisions by
the Williamses.
20
with the Williamses‘ earlier attempts to base a scienter-free claim against directors

and officers on the grounds that the issuer of securities owes special duties to its

investors, there emerges a concern that the Williamses are pressing a cause of

action that, if viable, has to be governed by the laws of the state in which Citigroup

is incorporated.

A related concern arises from state law holder claims more generally. When

a public corporation such as Citigroup has shares in the market, it will have

investors from all around the world, and certainly in virtually every state in our

nation. For investors to be able to sue not only under federal law, but purport to

sue under their own state‘s bespoke laws, subjects corporations to potential

inconsistencies, inefficiencies, and unfairness. This is another issue we do not

delve into, but given the Williamses‘ attempt to subject Citigroup, a Delaware

corporation with its shares listed on the New York Stock Exchange, to claims

under Florida law because they assert that Florida law allows for a recovery

without any need to prove scienter, we note this as another concern raised if state

law holder claims are broadly recognized.

Of course, there are other ways in which a state other than the state of

incorporation could create a cause of action that would intrude on the important

21
space that must be exclusively occupied by the state of incorporation.60 For

example, at oral argument, counsel for Citigroup suggested that a state could create

a cause of action allowing a group of stockholders to sue and recover damages for

the harm to the corporation from mismanagement that was not disclosed. If a

cause of action were created that involved having damages belonging to the

corporation—because that sort of breach of fiduciary duty claim would ordinarily

belong to the harmed corporation itself—awarded to a class of stockholders, that

would be problematic, not only because it would usurp the corporation‘s own

claim, but because it would usurp the state of incorporation‘s exclusive right to

govern the internal affairs of the corporation. But, the certified question before us

asks only about holder claims, which are not of that kind. Rather, the Williamses

here seek damages on a theory that is the obverse of a typical securities purchaser

claim. Whether or not this sort of a holder claim should be cognizable is a separate

question from whether it is one that could ever plausibly be said to belong to the

issuer rather than the holder.

The defendants have asked us to delve into the first issue even though that is

not posed in the narrow question put to us. We will not be tempted by them into

overstepping our bounds. Our answer to this certified question does not signal our

60
See Rosenmiller, 607 A.2d at 468 (―It is well settled that, under the internal affairs doctrine,
the state of incorporation has the paramount interest in having disputes of internal corporate
governance resolved according to its own laws.‖).
22
view as to whether states should recognize a holder claim such as those at issue

here, as either a matter of statutory or common law. Our opinion about that

topic—which is an important and difficult one given the numerous policy and

proof problems raised by holder claims—has not been sought and is not necessary

to answer the question we have been asked.61

For the purpose of answering this certified question, what matters is that the

Williamses‘ Holder Claims are governed by either New York or Florida law—a

fact about which the parties, and as important, our referring courts, agree62—and

that although neither the Florida Supreme Court nor the New York Court of

Appeals have addressed whether holder claims are permitted under their respective

states‘ law,63 other courts in those states have suggested that their highest courts

would recognize holder claims64 and would conclude, consistent with their very

61
See Chaplake Holdings, LTD. v. Chrysler Corp., 766 A.2d 1, 4–5 (Del. 2001) (explaining that
we address only the question presented in the certified question).
62
See AHW Inv. P’ship, 806 F.3d at 698–99; AHW Inv. P’ship, 980 F. Supp. 2d at 514; Opening
Br. at 13; Answering Br. at 10.
63
See AHW Inv. P’ship, 980 F. Supp. 2d at 519–20 (reviewing decisions from the Florida
District Court of Appeal and the U.S. District Court for the Northern District of Florida, and
―predict[ing] that Florida would adopt California‘s approach to recognizing holder claims‖
subject to ―heightened pleading standards‖); id. at 520–21 (reviewing decision from the New
York Appellate Division—which ―has significantly narrowed the scope of cognizable damages
for holder claims‖ by imposing strict limitations specific to holder claims—and reasoning that
―New York‘s appellate courts are the best predictors of how the New York Court of Appeals
would decide such a contentious issue‖).
64
See Mantana v. Merkin, 989 F. Supp. 2d 313, 323–24 (S.D.N.Y. 2013) (―[T]his Court cannot
predict that the New York Court of Appeals would preclude holder claims altogether. No New
York state court has so held, or even so stated in dicta. The Court instead is compelled to
predict . . . that the New York Court Appeals today would still recognize a limited set of holder
claims . . . .‖); Rogers v. Cisco Sys., Inc., 268 F. Supp. 2d 1305, 1313 (N.D. Fla. 2003)
23
name, that if such claims are cognizable, they belong to the holder and that the

primary defendant would be the issuer corporation.65 There is no hint in the

authorities cited that a holder claim could somehow belong to the issuer

corporation itself. Having done our best to understand the nature of the Holder

Claims at issue, we now answer the specific question posed to us.

III.

The answer to the certified question that we have accepted from the Second

Circuit is that the Williamses may assert their Holder Claims against Citigroup

directly if those claims are otherwise cognizable. But, this is not an answer we

reach by analyzing such a claim under the two-part test established in Tooley and

applied in later cases. Rather, the Holder Claims are direct claims because they

belong to the holders and are ones that only the holders can assert, not claims that

could plausibly belong to the issuer corporation, Citigroup.

(reasoning that because Florida has adopted provisions of the Restatement (Second) of Torts,
Florida courts would likely recognize holder claims).
65
See Starr Found. v. Am. Int’l Grp., Inc., 901 N.Y.S.2d 246, 251–52 (N.Y. App. Div. 2010)
(explaining that a holder claim is asserted by a stockholder who allegedly relied on the
misrepresentations to its detriment, and that damages are specific to that plaintiff‘s reliance);
Rogers, 268 F. Supp. 2d at 1314 (explaining that Florida courts would require specific
allegations of reliance in a complaint asserting a holder claim because those claims are specific
to the plaintiff asserting them); see also Grant Thornton, 314 S.W.3d at 930 (concluding that
under Texas law, ―holder claims, to the extent they are viable, must involve a direct
communication between the plaintiff and the defendant‖).
24
 As this Court and the Court of Chancery have explained, determining

whether a claim is direct or derivative depends on the nature of the claim itself.66

In NAF Holdings, LLC v. Li & Fung (Trading) Limited,67 a case in the commercial

contract context, we explained that ―[t]he case law under Tooley . . . and its

progeny deal with the distinct question of when a cause of action for breach of

fiduciary duty or to enforce rights belonging to the corporation itself must be

asserted derivatively.‖68 We then elaborated:

Tooley and its progeny do not, and were never intended to, subject
commercial contract actions to a derivative suit requirement. That
body of case law was intended to deal with a different subject:
determining the line between direct actions for breach of fiduciary
duty suits by stockholders and derivative actions for breach of
fiduciary duty suits subject to the demand excusal rules set forth in
§ 327 of the Delaware General Corporation Law, Court of Chancery
Rule 23.1, and related case law.69
66
See, e.g., Agostino v. Hicks, 845 A.2d 1110, 1122 n.54 (Del. Ch. Mar. 11, 2004) (―Since the
fiduciary duty of officers and directors runs to the corporation and the shareholder, the
shareholder will always be able to assert a breach of duty owed to it, but plainly not all fiduciary
duty claims are individual claims. As such, in the context of fiduciary duty claims, the focus
should be on the nature of the injury. In other contexts, the focus upon to whom the relevant
duty is owed will allow the segregation of derivative claims.‖ (internal citation omitted)); see
also Tooley, 845 A.2d at 1036 (explaining that Agostino followed the proper inquiry for
determining whether a claim is direct or derivative ―[i]n the context of a claim for breach of
fiduciary duty‖); Allen v. El Paso Pipeline GP Co, L.L.C., 90 A.3d 1097, 1104 (Del. Ch. 2014);
supra note 70 and accompanying text.
67
118 A.3d 175.
68
Id. at 176; see also Agostino, 845 A.2d at 1122 (―In other words, the inquiry should focus on
whether an injury is suffered by the shareholder that is not dependent on a prior injury to the
corporation. In the context of a complaint asserting breaches of fiduciary duty—duty that under
Delaware law runs to the corporation and the shareholder—the test may be stated as follows:
Looking 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?‖ (emphasis in original)).
69
NAF Holdings, 118 A.3d at 179; see also Tooley, 845 A.2d at 1036 (―In the context of a claim
for breach of fiduciary duty, the Chancellor articulated the inquiry as follows: ‗Looking at the
25
After explaining that Tooley was designed for determining whether fiduciary duty

claims are direct or derivative, we rejected the defendant‘s assertion that Tooley

was ―intended to be a general statement requiring all claims, whether based on a

tort, contract, or statutory cause of action . . . , to be brought derivatively whenever

the corporation of which the plaintiff is a stockholder suffered the alleged harm.‖ 70

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?‘‖ (quoting Agostino, 2004 WL 443987, at *7) (emphasis added)); In re El Paso
Pipeline Partners, L.P., 132 A.3d 67, 99 (Del. Ch. 2015) (―[T]he two-part test that the Delaware
Supreme Court created in Tooley does not apply to contract rights. It deals with a different
subject: ‗determining the line between direct actions for breach of fiduciary duty suits by
stockholders and derivative actions for breach of fiduciary duty suits subject to demand excusal.‘
This case did not involve any claims for breach of fiduciary duty, the Post-Trial Opinion did not
address breaches of fiduciary duty, and the Liability Award does not rest on a breach of fiduciary
duty.‖ (quoting NAF Holdings, 118 A.3d at 179) (internal citation omitted)); Allen, 90 A.3d at
1105 (―Pre-Tooley cases recognized that a stockholder could assert a direct claim if the cause of
action involved ‗a contractual right of shareholders that is independent of the corporation‘s
rights.‘ . . . Tooley did not overrule these cases or alter the longstanding principle that a
stockholder suffers injury when its contractual rights are breached.‖ (internal citation omitted));
NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 772 F.3d 740, 745 (2d Cir. 2014) (noting that
―each of the many precedents of shareholder litigation that the Tooley opinion reviewed was also
based on an allegation of breach of a fiduciary (or other similar) duty implied in law arising from
the status of the defendant in relation to the corporation‖ and that ―each of the subsequent cases
in which the Delaware Supreme Court has cited Tooley has also involved similar claims of
breach of fiduciary (or like) duties‖); DEBORAH A. DEMOTT & DAVID F. CAVERS, SHAREHOLDER
DERIVATIVE ACTIONS: LAW AND PRACTICE § 2.3 (2015) (―Influential though Tooley has been, its
scope of applicability is also significant.‖ (citing NAF Holdings, 118 A.3d 175)); Corporate
Litigation/Breach of Contract/Shareholder Litigation, 27 BUS. TORTS REP. 82 (2015) (―Tooley—
and the prior cases discussed therein by the Delaware Supreme Court on the subject of derivative
versus direct claims—dealt solely with alleged fiduciary breaches by defendant boards.‖).
70
NAF Holdings, 118 A.3d at 180; see also id. (―Reading Tooley to convert direct claims
belonging to a plaintiff into something belonging to another party would, we confess, be alien to
our understanding of what was at stake in that case, or in the cases after Tooley that relied on
it.‖); In re El Paso, 132 A.3d at 86 (―[T]he General Partner errs by treating Tooley as if its
holding required all claims, whether sounding in tort, contract, or a statutory cause of action, to
be brought derivatively whenever an entity in which the plaintiff is an investor can be said to
have suffered harm such that some component of the plaintiff‘s loss could be framed as having
been suffered indirectly. . . . [T]hat position overstates Tooley‘s reach.‖).
26
We take this opportunity to reaffirm our explanation in NAF Holdings of Tooley‘s

limited scope.

Just as a Tooley analysis was not needed to determine whether the

commercial-contract claim in NAF Holdings was direct or derivative, it does not

apply here. Because directors owe fiduciary duties to the corporation and its

stockholders,71 there must be some way of determining whether stockholders can

bring a claim for breach of fiduciary duty directly, or whether a particular fiduciary

duty claim must be brought derivatively on the corporation‘s behalf. We

established Tooley‘s two-pronged test as a means of determining whether such

claims are direct or derivative.72

But, as we explained in NAF Holdings, when a plaintiff asserts a claim based

on the plaintiff‘s own right, such as a claim for breach of a commercial contract,

Tooley does not apply.73 Here, the Williamses were the holders of Citigroup stock.

Citigroup itself is not a holder, and at oral argument Citigroup‘s counsel was

unable to identify any authority in New York or Florida law that would suggest

that the issuer of stock should be the plaintiff in a holder claim lawsuit. Nor do the

amended complaint or our referring courts‘ decisions suggest that is the case. That

the holder claims under both New York and Florida law belong to the holder, not

71
See Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989); Aronson v.
Lewis, 473 A.2d 805, 811 (Del. 1984); Guth v. Loft, 5 A.2d 503, 510 (Del. 1939).
72
See supra note 68 and accompanying text.
73
See supra notes 67–70 and accompanying text.
27
the issuer, alone is enough to make the Williamses‘ Holder Claims direct.74

Delaware law cannot convert a direct claim that another state‘s law has granted to

securities holders by deciding that it actually belongs to the corporation that the

securities holder is suing. Thus, because the Holder Claims here could not

possibly belong to the corporation, Delaware law has nothing to do with what type

of claims the Williamses are asserting.75 Their Holder Claims are direct, but a

court need not engage in a Tooley analysis to arrive at that result.

Finally, whatever analytical problems are involved in recognizing the Holder

Claims as a species of common law fraud claim or negligent misrepresentation

claim do not turn those Holder Claims into claims belonging to the issuer who is

the primary defendant, or into claims governed by the internal affairs doctrine. As

discussed above, holder claims are analytically indistinct from seller and purchaser

74
Further, the alleged harm in a holder claim is not shared equally by all stockholders because
not all stockholders will have relied on the corporation‘s misrepresentations and abandoned plans
to sell their shares. See In re Countrywide Corp. S’holders Litig., 2009 WL 846019, at *12 (Del.
Ch. Mar. 31, 2009) (―[H]older claims are individual in nature [because they] require a merits
determination of facts [that are] uniquely individual.‖).
75
We note, however, that other courts have recognized that holder claims are direct under
Delaware law. See, e.g., In re Harbinger Capital Partners Funds Inv’r Litig., 2013 WL
5441754, at *9 (S.D.N.Y. Sept. 13, 2013) (―[T]o the extent that Plaintiffs‘ claims involve the
nondisclosure of information . . . , Delaware cases establish that these so-called ‗holding‘ claims
are direct.‖), vacated in part, 2013 WL 7121186 (S.D.N.Y. Dec. 16, 2013); In re Parkcentral
Global Litig., 2010 WL 3119403, at *6 (N.D. Tex. Aug. 5, 2010) (explaining that because no
special injury is required to assert a direct claim under Delaware law, the plaintiffs could bring
holder claim directly). But see EDWARD P. WELCH ET AL., FOLK ON THE DELAWARE GENERAL
CORPORATION LAW § 327.02[B][6], at 13-68 (6th ed. 2016) (―[F]ederal courts have been split
concerning whether so-called ‗holder‘ claims are direct or derivative under Delaware law.‖)
(compiling cases).
28
claims, which are direct claims that are personal to the holder.76 Purchaser, seller,

and holder claims all involve very difficult questions of proof and damages, and

holder claims just entail proving the additional requirement of inducement. This

admittedly can be said to compound, not just marginally add to, those complex

questions of proof and damages. That is, a holder claim plaintiff must prove that

she would have sold her securities in some particular time period had she had

certain information at that time.77 Because securities holders may decide whether

to hold or sell stock for various reasons, proving inducement is difficult.78 The

speculation arguably inherent in this added element has led states to be rightly

cautious about creating broad causes of action for securities holders, as opposed to

sellers or purchasers, a caution our state law has shared.79 That issue, however,

76
See In re El Paso, 132 A.3d at 88 (―‗Quintessential examples of personal claims would
include . . . a tort claim for fraud in connection with the purchase or sale of shares.‘‖ (quoting In
re Activision Blizzard, Inc. S’holder Litig., 124 A.3d 1025, 1056 (Del. Ch. 2015))); see also
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 88–89 (2006) (holding that the
Securities Litigation Uniform Standards Act preempts state law holder claims brought as class
actions because a ―holder class action . . . is distinguishable from a typical Rule 10b-5 class
action in only one respect: [i]t is brought by holders instead of purchasers or sellers,‖ which is an
―irrelevant‖ distinction in this context); 12B FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE
CORPS. § 5911, at 447 (2002 Supp. 2009) (noting that a claim ―on a fraud affecting the
shareholder directly‖ is a direct claim).
77
See Grant Thorton, 314 S.W.3d at 927–28; Starr Found., 901 N.Y.S.2d at 250.
78
See Star Found., 901 N.Y.S.2d at 249 (―Here, the Foundation seeks to recover the value it
might have realized from selling its shares during a period when it chose to hold, under
hypothetical market conditions for [the defendant corporation‘s] stock (assuming disclosures
different from those actually made) that never existed. A lost bargain more undeterminable and
speculative than this is difficult to imagine.‖ (internal quotation marks omitted)).
79
See Malone v. Brincat, 722 A.2d 5, 12–13 (Del. 1998).
29
does not transmogrify a common law fraud or negligent misrepresentation claim

belonging to the security holder under state law into one belonging to the issuer.

Having answered the certified question, the Clerk is directed to transmit this

opinion to the Second Circuit.

30