A Fifth Circuit panel wanted to know why investors should get another shot at a direct class action alleging that McDermott International Inc. made misrepresentations about a $6 billion merger, asking Monday if the case before the court was "analogous" to a case alleging the company overpaid for the merger.

The investors claim McDermott deprived them of their federal right to a fully informed vote on the merger between McDermott and Chicago Bridge & Iron NV that contributed to McDermott's bankruptcy, but U.S. Circuit Judge Irma Carrillo Ramirez asked if their suit was "analogous" to one alleging that McDermott overpaid in its acquisition of CB&I. Overpayment claims are derivative, meaning that the shareholders would lose the ability to bring direct class action claims against the company.

"Don't we end up at the same place?" Judge Ramirez asked. "Either there would not have been a merger, or McDermott wouldn't have paid as much."

The investors' attorney, John Rizio-Hamilton of Bernstein Litowitz Berger & Grossmann LLP, told the court that "we don't end up in the same place at all" as a case alleging that McDermott overpaid for the merger.

The investors did not come to the court asking for damages equivalent to the entire amount of market cap McDermott lost as subsequent information about the transaction became public, Rizio-Hamilton said.

"If we were seeking overpayment damages, I promise you, they would be much, much larger than the damages we're seeking on these four corrective disclosure days," he said. "The four days represent just a handful of days when McDermott's stock was in free fall."

McDermott merged with CB&I in 2018. The investors allege that McDermott overstated the amount of due diligence it had done on CB&I's four largest construction projects, which CB&I had internally forecast would generate at least $1 billion in additional, undisclosed costs, according to briefing from the parties.

Just a few months after the merger wrapped up, McDermott had to declare bankruptcy in no small part due to those same construction projects, the investors alleged.

The lower court got it wrong by finding that the investors' damages theory "somehow transformed our direct claim into a derivative one," Rizio-Hamilton said. When plaintiffs such as the investors assert an individual right, that claim is direct when it is brought outside the fiduciary duty context, he said, citing both the 2015 decision in NAF Holdings LLC v. Li & Fung Trading Ltd. and the 2016 decision in Citigroup Inc. v. AHW Investment Partnership by the Delaware Supreme Court.

U.S. Circuit Judge Dana Douglas pointed out that opposing counsel claimed the investors did not bring that argument before the lower court.

The Delaware Supreme Court created a two-prong test for direct versus derivative claims, in a case called Tooley v. Donaldson Lufkin & Jenrette Inc. It is true that the investors did not say that Tooley does not apply under Citigroup and NAF, but both of those latter cases are subsequent precedents by the Delaware Supreme Court interpreting and limiting Tooley, Rizio-Hamilton said.

The Fifth Circuit's precedent allows for a party to present subsequent authority on the issue of categorizing a claim as derivative or direct to the appellate court, he said.

McDermott's attorney, Anthony Lucisano of Baker Botts LLP, told the court that the damage arising from a misleading proxy statement to a shareholder flows from the damage done to a corporation. Because the harm stems from damage to the corporation, the claims must be derivative, he said.

U.S. Circuit Judges Edith Brown Clement, Dana M. Douglas and Irma Carrillo Ramirez sat on the panel for the Fifth Circuit.

The investors are represented by John Rizio-Hamilton, Katherine M. Sinderson, Aasiya F. M. Glover and Jonathan G. D'Errico of Bernstein Litowitz Berger & Grossmann LLP and Chet B. Waldman and Matthew Insley-Pruitt of Wolf Popper LLP.

McDermott is represented Angela C. Zambrano, Mason Parham and Phillip Shaverdian of Sidley Austin LLP and David D. Sterling, Amy Pharr Hefley, J. Mark Little, Anthony J. Lucisano and Frank Mace of Baker Botts LLP.

The case is Local 813 Insurance Trust Fund et al. v. McDermott International et al., case number 25-20147, in the U.S. Court of Appeals for the Fifth Circuit.