A new Delaware Supreme Court case, Gatz v. Ponsoldt, raises a narrow and highly specialized issue of whether a shareholder lawsuit must be brought derivatively on behalf of the entity (with all the procedural obstacles that entails) or may be brought directly. On that issue, the court reaffirms earlier holdings that "where: (1) a stockholder having 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 stockholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders," the suit may be brought both directly and derivatively, as there is an inury to both the corporate entity and the individual shareholders." (HT: Pileggi)
Of more general interest, however, is the court's statement that:
It is the very nature of equity to look beyond form to the substance of an arrangement. “Equity will not permit one to evade the law by dressing what is prohibited in substance in the form of that which is permissible.” ... In our view, that difference in form, which is a product of transactional creativity, should not affect how the law views the substance of what truly occurred, or how the public shareholders’ claim for redress should be characterized. [Citing in a footnote: "See Griffiths v. Helvering, 308 U.S. 355, 358 (1939) (holding that liability cannot be escaped by anticipatory arrangements and contracts however skillfully devised); Minn. Tea Co. v. Helvering, 302 U.S. 609, 613 (1938) (“A given result at the end of a straight path is not made a different result because reached by following a devious path.”).
How are we to square such statements with the "equal dignity doctrine"? In Orzeck v. Englehart, 195 A.2d 375 (Del 1963), the Supreme Court noted "the uniform interpretation given the Delaware Corporation Law over the years to the effect that action taken in accordance with different sections of that law are acts of independent legal significance even though the end result may be the same under different sections" and further explained that:
In speaking of the sale of assets statute and the merger statute, we said: 'They are, so to speak, of equal dignity, and the framers of a reorganization plan may resort to either type of corporate mechanics to achieve the desired end. This is not an anomalous result in our corporation law.'
The problem of when Delaware courts will elevate substance over form and when it will not is a most vexing one, as there doesn't seem to be a truly certain and predictable metric (and, after all, certainty and predictability are the lifeblood of transactional practice!). I commend to your attention in this regard two papers by distinguished Delaware jurists The Uneasy Truce Between Law and Equity in Modern Business Enterprise Jurisprudence, by Supreme Court Justice Jack Jacobs, and If Corporate Action Is Lawful, Presumably There Are Circumstances In Which It's Equitable To Take That Action: The Implicit Corollary To The Rule Of Schnell v. Chris-Craft, by Delaware Vice Chancellor Leo Strine, both of which were published in the UCLA Occasional Paper Series Series. Jacobs suggests that at in the early 1990s the Delaware supreme court "was sending a clear message that if there is a conflict between equitable principles and clear, brightline rules of corporate law, law trumps equity." If it is in fact "obviously important that the Delaware corporate law have stability and predictability," Harff v. Kerkorian, 324 A.2d 215, 220 (Del. Ch. 1974), the Delaware courts would be well advised to, at a minimum, stick to Jacob's formulation.
In Gatz, we are dealing with a remedy (the derivative suit) created by equity, so a reference to the equities of the situation may have been appropriate. Perhaps more important, however, the discussion of equity, form, and substance was really quite superfluous. The dual nature of the cause of action follows logically from the conclusion that the conduct in question directly and separately injured both the shareholders and the corporation.