## Facts

- Paxson Communication Corporation was a public company in which Lowell “Bud” Paxson held roughly 75% of the voting power.
- Fox made an all-cash acquisition proposal that would have paid shareholders a premium.
- Paxson’s board declined the Fox proposal and instead approved a transaction with NBC.
- The NBC transaction involved NBC purchasing convertible preferred stock and obtaining rights that could increase NBC’s equity and voting position upon conversion.
- Minority shareholders filed a class action challenging (i) the NBC transaction as dilutive to minority shareholders’ economic and voting interests and (ii) the rejection of the Fox proposal as a lost opportunity to receive a premium.
- Plaintiffs pursued the claims as direct fiduciary-duty claims and did not make a pre-suit demand or plead demand futility as in a derivative action.

## Issues

1. Whether claims alleging (a) equity/voting dilution from issuance of convertible preferred stock and (b) loss of a premium from rejecting an all-cash acquisition proposal are direct stockholder claims or derivative claims belonging to the corporation.
2. Whether an alleged failure to pursue the best available value in response to a premium bid (a Revlon theory) may be asserted directly without satisfying derivative-action prerequisites.

## Decision

- The Court of Chancery granted defendants’ motion to dismiss.
- The court held the dilution allegations were derivative because any dilution affected stockholders proportionally and did not impose a distinct injury on a subset of stockholders.
- The court held the lost-premium theory based on rejecting the Fox offer was derivative because the alleged harm was a foregone corporate opportunity that would have benefited all stockholders pro rata.
- Because the claims were derivative, plaintiffs’ failure to comply with derivative-suit procedural requirements required dismissal.

## Legal Principles

- The direct/derivative inquiry turns on the nature of the alleged harm and who would receive the benefit of any recovery, not on how the plaintiff labels the claim.
- A claim is derivative when the alleged injury is to the corporation (with any stockholder injury flowing indirectly through share value).
- Stock issuance dilution claims are generally derivative where the dilutive effect is shared proportionally across the stockholder base; direct standing is more likely when a controller or others receive a non-ratable benefit causing a distinct minority injury.
- Allegations that directors caused stockholders to lose a premium by rejecting a potential sale transaction state a derivative claim when the premium would have been received by all stockholders pro rata.
- When a claim is derivative, stockholders must satisfy derivative-action prerequisites (including demand or demand-futility pleading) to proceed.

## Conclusion

The court treated both the asserted dilution harm from the NBC convertible preferred investment and the alleged loss of a premium from rejecting Fox’s cash offer as corporate-level injuries affecting all stockholders ratably, making the claims derivative and subject to derivative-suit procedural requirements; because plaintiffs did not meet those requirements, the complaint was dismissed.


In re Paxson Commc'n Corp. S'holders Litig., 2001 Del. Ch. LEXIS 95 (Del. Ch. 2001)