## Facts

- Metro-Goldwyn-Mayer, Inc. (MGM) had issued 5% convertible subordinated debentures due 1993 under a 1968 indenture with a trustee bank.
- Philip and Stephanie Harff owned the debentures but were not MGM stockholders.
- Kirk Kerkorian was a director and the controlling stockholder of MGM; the remaining defendants were MGM and its directors.
- On November 21, 1973, MGM’s board declared a $1.75 per share cash dividend, its first cash dividend since 1969.
- The debenture holders alleged the dividend (1) harmed MGM by depleting capital and endangering future prospects and (2) harmed debenture holders by impairing the conversion feature and reducing market value of the debentures.
- Plaintiffs alleged the dividend was declared improvidently and for Kerkorian’s financial benefit as controlling stockholder.
- Plaintiffs asserted (1) a derivative claim seeking repayment to MGM of the dividend amount plus damages for loss of use of the funds, with a requested constructive trust for debenture holders, and (2) a class claim seeking direct money damages for debenture holders.
- Defendants moved to dismiss both the derivative and class claims.

## Issues

1. Whether non-stockholder holders of convertible debentures have standing to bring a shareholder derivative action challenging a dividend declaration.
2. Whether debenture holders may recover directly (as a class) for alleged injury from a dividend decision where their rights arise from an indenture and no indenture breach is pleaded.
3. Whether plaintiffs could adequately represent a debenture-holder class while simultaneously seeking derivative relief for the corporation and direct damages from the corporation.

## Decision

- The court dismissed the derivative claim for lack of standing because plaintiffs were not stockholders.
- The court entered summary judgment for defendants on the debenture-holders’ class claim.
- The court treated debenture holders’ remedies as primarily contractual under the indenture and found no viable noncontract claim on the pleaded facts.

## Legal Principles

- Derivative standing to sue on corporate claims is limited to stockholders; debenture holders, as creditors, generally cannot assert corporate-right claims derivatively.
- Debenture holders’ rights and remedies are ordinarily defined and limited by the indenture; absent a pleaded breach of the indenture (or comparable special circumstances), they cannot convert dissatisfaction with board decisions (including dividend policy) into fiduciary-duty damages claims.
- Dividend decisions fall within directors’ discretionary management authority subject to statutory and traditional creditor-protection doctrines; creditors must generally rely on contract protections and creditor remedies rather than shareholder fiduciary theories.

## Conclusion

The court held that convertible debenture holders could not sue derivatively because they were not stockholders and could not obtain direct class-wide damages for a dividend declaration absent a pleaded indenture breach or other recognized basis for noncontract liability, resulting in dismissal of the derivative action and summary judgment for defendants on the class claim.


Harff v. Kerkorian, 324 A.2d 215 (Del. Ch. 1974)