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NAF Holdings, LLC v. Li & Fung (Trading) Limited

Delaware Supreme Court
118 A.3d 175 (2015)


Facts

NAF Holdings, LLC (plaintiff) sought to acquire another company and contracted Li & Fung (Trading) Limited (defendant) as sourcing agent—a condition necessary to its financing. NAF created two subsidiaries that entered a merger with the target requiring the subsidiaries to purchase the target’s stock. Then Li & Fung allegedly refused to act as sourcing agent, upending NAF’s financing. NAF claimed a $30 million loss as a result. NAF’s subsidiaries settled and released all claims against the target and agreed not to bring or support any action based on the failed merger. Neither NAF itself nor Li & Fung were parties to that settlement and release. NAF then sued Li & Fung for breach of contract. Li & Fung argued NAF had to bring a derivative action on behalf of its subsidiaries, which was barred by the release. The trial court granted summary judgment, reasoning that Delaware case law required NAF to bring a derivative suit because it incurred the losses in its capacity as the 100-percent shareholder of its subsidiaries. NAF appealed to the Second Circuit, arguing that the case law applied only to claims against corporate directors for breach of fiduciary duties, not commercial contract claims. The Second Circuit asked the Delaware Supreme Court to determine the issue.

Rule of Law

Issue

Holding and Reasoning (Strine, C.J.)

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