- Interesting Dicta from Delaware Supreme Court Regarding Whether Plaintiffs in Derivative Suits Lose Standing After Merger
- July 26, 2010 | Author: T. Timothy Wang
- Law Firm: Alston & Bird LLP - Atlanta Office
In Arkansas Teacher Retirement System v. Anthony Caiafa, the Supreme Court of Delaware followed case law holding that a stockholder-plaintiff loses standing in a derivative suit when the corporation-defendant merges with another company, but suggested in dicta a broadening of the fraud exception to such case law.
The court affirmed the Vice Chancellor’s determination that the plaintiffs’ derivative claims had no value, as well as his approval of a settlement in a class action related to the merger of Countrywide Financial Corp. with Bank of America. The court followed its decision, however, with a hypothetical discussion on whether the plaintiffs would have maintained post-merger standing if the plaintiffs had claimed that the merger was fraudulent.
The court began with the well-established premise that, “[o]ther than in instances of fraud or reorganization, a plaintiff loses standing to maintain a derivative suit where the corporation, in which the plaintiff holds stock, merges with another company.” Delaware courts have narrowly interpreted the fraud exception to mean those instances where “the merger itself is the subject of a claim of fraud, being perpetrated merely to deprive stockholders of the standing to bring a derivative action.” The plaintiffs in Arkansas Teacher did not make a claim under the fraud exception and, according to the court, likely would not have succeeded on such a claim as there was insufficient evidence in the record to prove there was any fraud connected to the merger. The court noted, however, that the fraudulent activity of the target company’s board prior to merger made such merger at a depressed price a fait accompli, and suggested that such circumstances may be adequate for a plaintiff to maintain standing under the fraud exception.
While stopping short of stating that a stockholder-plaintiff may maintain standing in a derivative suit post-merger through the fraud exception in circumstances where a board of directors’ bad actions necessitate merger, the Court seemed to open the door for similar test cases in the future.