It is well-settled in Delaware that a stockholder seeking to pursue derivative claims must own shares at the time of the wrong and continuously through the life of any litigation. Similarly, direct claims based on injury to the shares generally pass to a buyer. These principles, in combination with the public policy against issuing advisory opinions, mean that stockholders who sell all their shares and any right, title and interest in those shares after initiation of litigation generally will lose their standing to assert claims based on injury sustained as a shareholder or to those shares. The Delaware Court of Chancery applied those principles in Urdan v. WR Capital, C. A. No. 2018-0343-JTL (Del. Ch. August 19, 2019), and dismissed claims of breach of fiduciary duty and self-dealing because the stockholder-plaintiffs sold all of their shares after initiation of the litigation and thus lost standing to pursue their claims both derivatively and directly.  What makes this case particularly interesting was how the court determined that plaintiffs’ effort through a settlement agreement to preserve at least the direct claims by contract was ineffective due to the failure to incorporate by reference that preservation of rights in a companion Repurchase Agreement by which plaintiffs in fact sold their shares.

Two aspects of the parties’ repurchase agreement were fatal to the plaintiffs’ claim. First, no language in the repurchase agreement incorporated by reference the language in the settlement agreement in which the parties agreed that nothing in the settlement agreement “shall affect any claims any of the Delaware plaintiffs may have against any of the [identified defendants] or the defenses or counterclaims that any of the [identified defendants] may have to the claims of the Delaware plaintiffs.” Moreover, the repurchase agreement contained an integration clause that provided that in the event of any inconsistency between the repurchase agreement and the settlement agreement, “the terms and provisions in the body of [the repurchase agreement] shall control.” The court found that the contention that “the settlement agreement withheld litigation rights associated with the shares conflicts with the all-encompassing transfer of rights contemplated by the repurchase agreement.” Similarly, the court held that language limiting the effect of the releases the parties exchanged in the settlement agreement “did not address the scope of the rights that the plaintiffs transferred when they sold their shares pursuant to the repurchase agreement. “