Reed Smith Client Alerts

With certain limited exceptions, Delaware law generally follows the "contemporaneous ownership rule," where stockholders of Delaware corporations must own their stock at the time of a challenged transaction and maintain that ownership through the litigation in order to have standing to assert derivative claims. In In re SmileDirectClub, Inc., 2021 WL 2182827 (Del. Ch. May 28, 2021), the Delaware Court of Chancery recently declined to extend those limited exceptions to plaintiff-stockholders who became stockholders through the transaction they sought to challenge.


At the same time SmileDirectClub, Inc. (SmileDirect or the Company) went public in September 2019, the Company issued a prospectus that indicated it would use IPO proceeds to fund certain insider transactions if enough money was raised. These insider transactions, the plaintiffs claimed, would dilute public shareholders.

The plaintiffs alleged that more than $696 million in funds that were raised through the IPO were used to pay corporate insiders for the Company’s stock. In addition, the Company’s share price dropped shortly after it went public, allegedly due to certain undisclosed regulatory and financial challenges.

The plaintiffs, who purchased stock and became stockholders as part of the IPO, brought derivative claims for breaches of fiduciary duty against the board of directors (the Board), alleging that these regulatory and financial challenges were known before the Board approved the insider share repurchases at an allegedly inflated IPO price.

The Company moved to dismiss this action, claiming the plaintiffs lacked standing under 8 Del. C. section 327 and the court’s decision in 7547 Partners v. Beck, 682 A.2d 160 (Del. 1996).