Del. judge cites new investor lawsuit test in tossing Brookfield case

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REUTERS/Brendan McDermid

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  • Judge dismisses shareholder lawsuit because she says majority of board was impartial enough to pursue it on the company's behalf
  • The opinion cites Delaware Supreme Court's 2021 Zuckerberg ruling, another Brookfield case

(Reuters) - A Delaware Chancery judge cited two high-profile state court decisions from 2021 in her dismissal of a GrafTech International Ltd shareholder's derivative lawsuit filed against the company's board and its major shareholder Brookfield Asset Management Inc over a repurchase of $250 million in shares from the investment firm.

Chancellor Kathaleen McCormick of the Delaware Chancery Court tossed the lawsuit on Friday, which was filed against Brookfield and GrafTech's board. She pointed to recent rulings that require claims of overpayment and shareholder dilution to be brought on behalf of the company and make it harder for plaintiffs to bring such suits.

Attorneys for the shareholder, Brookfield and GrafTech did not immediately respond to requests for comment on Monday.

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GrafTech said it had agreed to repurchase the shares from Brookfield in December 2019, according to Friday’s opinion. Brookfield made the decision after learning that the company's forecasted revenue was below expectations, the opinion said.

In an October 2020 complaint, a shareholder accused Brookfield of structuring the transaction to maintain its control of the company and alleged that GrafTech’s board failed to negotiate terms that were in the company and shareholders’ best interests.

In Friday’s opinion on motions to dismiss the suit, McCormick said that because the investor alleged that GrafTech overpaid and its minority shareholder’s stakes were diluted, the shareholder had to show that asking GrafTech’s board to pursue litigation on the company’s behalf would have been futile.

This is in accordance with a September Delaware Supreme Court ruling in another case filed against Brookfield.

Using a recently adopted demand futility test known as the Zuckerberg ruling, McCormick determined that the majority of the board would have been impartial enough to pursue litigation, meaning the shareholder should have asked the board to do so before filing a lawsuit himself.

The new test appears to have raised the bar for shareholders seeking to bring this type of litigation.

At least nine other opinions on motions to dismiss have cited the Zuckerberg ruling, with seven of those opinions calling for the lawsuits to be completely dismissed, according to a Jan. 13 review of the Chancery Court’s website.

The case is Simons v. Brookfield Asset Management Inc, Delaware Court of Chancery, No. 2020-0841.

For Simons: Brian Robbins and Gregory Del Gaizo of Robbins

For Brookfield: Lawrence Portnoy of Davis Polk & Wardwell

For GrafTech: Geoffrey Ritts and Marjorie Duffy of Jones Day

Read more:

Four Delaware rulings from 2021 that could shape M&A litigation

Del. Supreme Court ditches dicey precedent on shareholders’ direct claims

Dela. Supreme Court tightens test for demand futility in derivative lawsuits

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Sierra Jackson reports on legal matters in major mergers and acquisitions, including deal work, litigation and regulatory changes.