Dilution Claim in Which a Controller Received Additional Shares in Exchange for Its Interests, Was Exclusively Derivative

Gentile v. Rossette, 906 A.2d 91, 100 (Del. 2006), held that dilution claims involving a controller can be both derivative and direct. In Gentile, the Delaware Supreme Court found that dilution claims, challenging a controller’s over-issuance of shares to itself in exchange for inadequate consideration to the company, were both derivative because minority stockholders would benefit on a pro-rata basis for a restoration of value to the company caused by the over-issuance of shares, but were also direct based on the unique harm suffered by minority stockholders caused by the redistribution of voting power to the controller. In Brookfield Asset Management v. Rosson, 261 A.3d 1251, 1277 (Del. 2021), the Supreme Court overruled Gentile v. Rossette, rejecting its focus on whether majority stockholders were impacted differently from minority stockholders because Gentile had improperly relied upon the “special injury” concept that the Supreme Court had eliminated in Tooley, i.e., the Supreme Court’s seminal case to determine whether a claim is derivative or direct.

In Siegel v. Cantor Fitzgerald, C.A. No. 2024-0146-LWW (Del. Ch. April 10, 2025), the Delaware Court of Chancery rejected the plaintiff’s attempt to distinguish Brookfield in his dilution claim challenging a reorganization of the BGC Group (BGC). In Cantor Fitzgerald, the Court of Chancery held that the plaintiff’s dilution claims challenging the over-issuance of shares in a corporate reorganization, in which the majority stockholder, Cantor Fitzgerald (Cantor), received additional shares of BGC stock in exchange for its interests in BGC allegedly for inadequate consideration, was exclusively derivative. The plaintiff asserted that minority stockholders suffered a dilution of voting power from the reorganization that was not shared by Cantor, and also suffered a reduction in his voting power by virtue of Cantor increasing its voting control of BGC. The Court found, however, that these arguments mirrored the “dual-natured” claim concept of Gentile that was foreclosed after the Supreme Court’s ruling in Brookfield.  The Court also rejected plaintiff’s argument that unlike Brookfield, the reorganization did not involve an exchange of assets for stock. The Court reasoned that Cantor’s interests were the assets that it relinquished in exchange for additional shares of BGC stock, and thus, plaintiff’s claims depended on whether BGC “gave Cantor too many Class B shares—that is, whether it overpaid Cantor—in exchange for its interests.”

Lastly, the court rejected the plaintiff’s attempt to characterize his dilution claim as direct based on the reorganization being comprised of a series of mergers. In Parnes v. Bally Entertainment, 722 A.2d 1243, 1245 (Del. 1999), the Supreme Court found that stockholder actions challenging the fairness of a merger itself are direct claims. In Brookfield, the Supreme Court confirmed the continued validity of this exception for stockholders, whose derivative-claim standing is extinguished in a merger, to assert direct claims attacking the fairness or validity of a merger. But the court held that the Parnes exception was not applicable to plaintiff’s dilution claim challenging the validity of the reorganization. The court reasoned that while the reorganization was effected through several mergers, BGC was not acquired or sold, and plaintiff (and the BGC minority stockholders) were not “target” stockholders, which was a “crucial distinction from the Parnes line of cases.” The court explained that in the reorganization, “there was no acquiror paying consideration to the minority stockholders.” Instead, the reorganization merely changed BGC’s corporate structure. In short, there was no sale of the company, no change of control, and no diversion of consideration from the minority stockholders. BGC’s public stockholders sold nothing, and retained derivative standing after the reorganization.

In sum, the application of Brookfield confirmed that the plaintiff’s dilution claims challenging the reorganization were exclusively derivative under the Tooley test, and the Parnes exception for direct claims was not available to save plaintiff’s dilution claims. Accordingly, because the plaintiff had not made a pre-suit demand or pleaded demand futility for his derivative claims, the court dismissed the complaint under Rule 23.1.