The Delaware Supreme Court assuaged fears of a shift in power favouring the plaintiffs' bar in its recent response to a certified question from the Ninth Circuit relating to Bank of America's rescue merger of Countrywide Financial in 2008. The Ninth Circuit asked the Delaware Supreme Court to opine the following question of law:
"Whether, under the 'fraud exemption' to Delaware's continuous ownership rule, shareholder plaintiffs may maintain a derivative suit after a merger that divests them of their ownership interest in the corporation on whose behalf they sue by alleging that the merger at issue was necessitated by, and is inseparable from, the alleged fraud that is the subject of their derivative claims."
The answer was that such claims do not survive.
The sole exception to the rule that shareholders' rights to assert derivative breach-of-duty claims terminates with their stock ownership remains, as established in Lewis v Anderson (477 A2d 1040 (Del April 18 1984)), when sham mergers are used specifically for the purpose of terminating liability.
Before this ruling, it was feared that a contrary result could have generated a costly shift in the balance of power in which shareholders would have had more leverage in, and incentive to pursue, derivative strike suits against corporate boards. Direct claims, of course, continue to survive a merger (Ark Teacher Ret Sys v Countrywide Fin Corp, 14 2013, 2013 WL 4805725 (Del September 10 2013)).
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