Miller v. Brightstar Asia, Ltd.

Background

Tyler Miller and Omar Elmi formed Harvestar Solutions Limited in August 2016. Harvestar purchases used mobile telephones, refurbishes them, and sells them to distributors and retailers. On April 9, 2018, Brightstar Asia, Ltd., an affiliate of Brightstar Corporation, purchased a 51% controlling stock interest in Harvestar from Miller and Elmi. Miller and Elmi each retained a 24.5% minority stock interest.

Harvestar, Brightstar Asia, Miller, and Elmi executed a shareholder agreement. The agreement required transactions between Brightstar Asia or its affiliates and Harvestar or its subsidiaries to be on terms no less favorable to Harvestar or its subsidiaries than those available in a comparable arm’s-length transaction.

Miller alleged that Brightstar Asia mismanaged Harvestar through self-dealing and conflict transactions. He alleged that Brightstar Asia caused Harvestar to repair more than 200,000 mobile devices for $50 less per device than could have been obtained in an arm’s-length transaction, which contributed to declines in Harvestar’s revenue and earnings before interest and taxes.

Miller asserted four causes of action: two claims for breach of contract, one claim for breach of the implied covenant of good faith and fair dealing, and one claim for breach of fiduciary duty.

Motion and Magistrate Judge’s Report

Brightstar Asia moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), which concerns the court’s subject-matter jurisdiction, and Rule 12(b)(6), which concerns whether a complaint states a legally sufficient claim. Brightstar Asia argued that Miller’s claims were derivative under Delaware law, meaning that the claims belonged to Harvestar and had to be brought on Harvestar’s behalf. Brightstar Asia therefore argued that Miller lacked standing and that the court lacked subject-matter jurisdiction.

Magistrate Judge James L. Cott recommended granting the motion to dismiss for lack of subject-matter jurisdiction. Miller timely objected, and Brightstar Asia responded.

Standing Analysis

The court explained that Delaware law determines whether a shareholder’s claim is direct or derivative by asking two questions: who suffered the alleged harm, and who would receive the benefit of any recovery or other remedy.

The court rejected Miller’s argument that the Delaware Supreme Court’s decision in El Paso Pipeline GP Co. v. Brinckerhoff applied only to “constitutive contracts,” such as agreements that establish a business entity. The court concluded that El Paso applies when a claim involves a contractual duty owed to the company, including claims arising from a shareholder agreement.

The court held that Counts I, II, and III involved alleged breaches of duties owed to Harvestar rather than duties owed to Miller individually. The shareholder agreement required covered transactions to be no less favorable to “the Company,” meaning Harvestar. The court also held that Miller’s fiduciary-duty claim in Count IV was derivative under the same analysis.

The alleged injuries—unfavorable transactions, mismanagement, lower revenue, and decreased earnings—were injuries to Harvestar directly. Any decrease in the value of Miller’s shares was an indirect effect of the alleged harm to Harvestar. The court also concluded that any remedy, including an injunction, contract changes, or damages, would benefit Harvestar rather than Miller directly.

Ruling

The court adopted Magistrate Judge Cott’s report and recommendation and overruled Miller’s objections. It granted Brightstar Asia’s motion to dismiss. The court concluded that Miller lacked standing to bring the derivative claims and that the court therefore lacked subject-matter jurisdiction. The clerk was directed to close the motion and the case.