## Facts

- Two individuals formed two closely held businesses: one engaged in catalog sales/fulfillment and a second engaged in credit-card processing for catalog sales.
- Ownership in each entity was split so that Waters held two-thirds and Litle held one-third; Waters supplied capital while Litle managed operations.
- The catalog business required significant capital infusions, provided largely through loans from Waters or entities he controlled; the credit-card processing business was profitable.
- The shareholders caused the profitable credit-card processing business to elect Subchapter S status, shifting income taxation from the entity to the shareholders regardless of cash distributions.
- Litle alleged he agreed to the S-corporation election based on an oral assurance that the company would distribute enough cash to cover shareholders’ resulting tax liabilities; he did not allege that this assurance was reflected in corporate governing documents or any writing.
- After a restructuring that placed the profitable business into a Delaware corporation in which Litle retained a one-third equity interest, Waters remained the controlling stockholder and controlled the board.
- Litle alleged the corporation used available funds to repay loans benefiting Waters (as creditor/insider) while paying no dividends, leaving Litle with substantial pass-through tax liabilities without distributions to fund them.
- Litle sued the controlling stockholder and directors, alleging fiduciary breaches and related misconduct; defendants moved to dismiss under Rule 12(b)(6) and, to the extent fraud was alleged, under Rule 9(b).

## Issues

1. Whether the complaint stated a claim for breach of fiduciary duty where controllers allegedly withheld dividends while using corporate funds to benefit the controller as creditor, burdening the minority with S-corporation pass-through taxes without distributions.
2. Whether any fraud-based allegations were pleaded with sufficient particularity under Rule 9(b).
3. Whether an alleged oral promise to make “tax distributions,” absent written corporate authorization, supported an independent enforceable claim.

## Decision

- The court denied dismissal in substantial part, holding the complaint adequately alleged fiduciary-duty claims against the controlling stockholder/directors based on self-interested distribution and repayment decisions disadvantaging the minority stockholder.
- The court granted dismissal in part as to claims resting solely on an alleged unwritten “tax distribution” promise as an independent contractual or enforceable right.
- The court granted dismissal in part under Rule 9(b) to the extent the complaint asserted fraud without pleading the time, place, and content of misrepresentations with the required particularity.
- The surviving case proceeded primarily on an equitable fiduciary-duty theory, not on standalone contract or inadequately pleaded fraud theories.

## Legal Principles

- On a Rule 12(b)(6) motion, well-pleaded allegations are taken as true and all reasonable inferences are drawn for the plaintiff; dismissal is improper if the plaintiff could prove facts entitling relief.
- Although dividend decisions generally fall within board discretion and are ordinarily reviewed under business judgment, fiduciary-duty claims may proceed where a plaintiff pleads a coherent pattern of self-dealing or unfair treatment by controllers using dividend/repayment policy to benefit themselves and harm the minority.
- In a closely held corporation, allegations that controllers redirected corporate value to themselves through insider payments (including loan repayments) while denying comparable access to cash returns can state a loyalty-based claim.
- In an S-corporation, pass-through tax consequences may be relevant context for assessing alleged unfairness in distribution policy, but an oral understanding to make tax-covering distributions, without corporate formalities or writings, may be insufficient as a standalone enforceable obligation.
- Fraud must be pleaded with particularity under Rule 9(b); conclusory allegations of misrepresentation are insufficient even if related fiduciary claims may proceed under ordinary notice pleading.

## Conclusion

The court permitted the minority shareholder’s core fiduciary-duty claims to go forward where he alleged that controllers withheld dividends and used corporate funds to repay insider loans, shifting economic burdens to the minority in an S-corporation, while dismissing standalone contract and inadequately pleaded fraud theories tied to an unwritten “tax distribution” promise.


Litle v. Waters, 18 Del. J. Corp. L. 315 (Del. Ch. 1992)