Document: Horbal, et al. v. Three Rivers Holdings, Inc., et al. Del. Ch., C.A. No. 1273-N (March 10, 2006)
The complaint alleges that these co-investors then abused their positions by siphoning off tens of millions of dollars from the HMO in the form of disguised salaries, bonuses and corporate perquisites or, as the plaintiffs prefer to them, “de facto dividends”. Plaintiffs alleged breaches of the defendants’ fiduciary duties. Plaintiffs also alleged they were improperly denied their right to a Section 220 inspection. Plaintiffs’ de facto dividend claim centers on allegations of director self-dealing. Plaintiffs alleged the director defendants used wholly-owned subsidiaries under their control to siphon off millions of dollars in the form of excessive salaries, bonuses and corporate perquisites. Plaintiffs ask the Court to treat this excessive compensation as constructive or “de facto” dividends to which plaintiffs, as shareholders, have a right to share in equally. With their de facto dividends theory, plaintiffs attempted to apply to corporate law a concept borrowed from tax law. No Delaware Court has ever recast executive compensation as a constructive dividend. Plaintiffs’ claim in this case implicated a classic allegation of self-dealing or waste. Because plaintiffs had not adequately pled a duty of loyalty claim, the Court dismissed, without prejudice, plaintiffs’ purported claim for breach of fiduciary duty. With respect to plaintiffs’ de facto dividends claim, the Court dismissed such claim with prejudice. Plaintiffs were improperly denied their right to a Section 220 inspection of TR Holdings’ books and records.