August 23, 2012
NY adopts Tooley test
Ok, news for corporate law geeks. The Corporate & Securities Law Blog reports this morning that the Appellate Division of the New York Supreme Court in Yudell v Gilbert has discarded its previous case-by-case approach to determining whether shareholder litigation is direct or derivative. Rather, it held that going forward the test to apply is the test announced in the Tooley v. Donaldson, Lufkin & Jenrette (Delaware Supreme Court). The Tooley test asks a court to consider two things: 1) who suffered the harm in question; 2) to the extent there is a remedy, who will receive it. Where the answers to those questions are "the corporation", then the litigation is derivative. Where the answers are "the shareholder", then the litigation is direct.
The question of whether shareholder litigation is direct or derivative is a go-to for law professors at exam time. I guess the beginning of a new academic year is the right time to iron our some of the jurisdictional differences in favor of a more "common sense approach" (NY's words).
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