September 17, 2013

Delaware Supreme Court Clarifies Post-Merger Derivative Standing Rules

John Grossbauer of Potter Anderson notes: Recently, in Arkansas Teacher Retirement System v Countrywide Financial Corp., the Delaware Supreme Court answered a certified question of law from the Ninth Circuit Court of Appeals that questioned the standing of former Countrywide Financial Corp. stockholders to maintain a derivative action following Countrywide’s acquisition by Bank of America. The Court found standing had ceased, reiterating its holding in Lewis v. Anderson that a stockholder loses standing to maintain a derivative action when the stockholder’s shares are converted into cash or shares of another corporation in a merger, except where (1) the merger itself is subject to a claim of fraud as being “perpetrated merely to deprive shareholders of their standing to bring or maintain a derivative action,” or (2) the merger is “essentially a reorganization that does not affect the plaintiff’s relative ownership in the post-merger enterprise.”

The Court stated that the Lewis v. Anderson fraud exception had not been expanded by dictum in Arkansas Teacher Retirement System v. Caiafa, a previous ruling in a related case. The Court clarified that the “single, inseparable fraud” mentioned in the earlier dictum referenced the possible direct claims stockholders might have brought, and did not expand the category of derivative claims that could be maintained post-merger.

Here’s more on this case from Francis Pileggi…