Sagarra Inversiones, S. L., v. Cementos Portland Valderrivas, S.A., C.A. No. 6179, J. Jacobs (Del. Dec. 28, 2011)
The Delaware Supreme Court affirmed a Chancery Court decision holding that plaintiff, a stockholder of Cementos Portland Valderrivas, a Spanish corporation (“CPV”), could not assert a derivative action on behalf of a third-tier, Delaware subsidiary of CPV where plaintiff lacked standing, under Spanish law, to bring such an action.

Under Delaware law, a stockholder of a parent corporation may sue derivatively to enforce the claim of a wholly owned corporate subsidiary where the subsidiary and its parent wrongfully refuse to enforce the subsidiary’s claim directly. Spanish law does not permit so called “double” or “triple” derivative actions—in other words, a stockholder may only pursue a derivative action at the parent level. Plaintiff failed to make a demand on the board of the Spanish parent corporation as required, under Spanish law; thus, the Chancery Court dismissed plaintiff’s complaint. Plaintiff advanced three arguments in favor of the application of Delaware law to the action. First, plaintiff argued that Delaware law should be applied because it was suing to enforce a right possessed by a Delaware corporation, not a Spanish corporation. The Court rejected this argument on the basis that plaintiff’s standing to sue derivatively on behalf of a subsidiary must derive from its ownership of shares at the parent level because the parent corporation was the only corporation in which plaintiff owned stock. Second, plaintiff argued that standing was not a principle to which Delaware’s doctrine of internal affairs (which governs choice of law issues) should have been applied. The Court disagreed and found that the pre-suit demand requirement is a matter of internal affairs because it serves a core function of substantive corporation law by allocating, as between directors and stockholders, the authority to sue on behalf of the corporation. Finally, the Court rejected plaintiff’s third argument that public policy favored application of Delaware law. The Court agreed with the plaintiff that Delaware has a strong interest in policing alleged breaches of fiduciary duties, but found that Delaware courts could only fulfill that role where their power to act was first be properly invoked.