In this en banc opinion, the Supreme Court of Delaware (the “Supreme Court”) answered a certified question of law submitted by a federal district court concerning the nature of double derivative actions. The Supreme Court held that, under Delaware law, plaintiffs suing in a double derivative action who were pre-merger stockholders in the acquired company and who are current stockholders, by virtue of a stock-forstock merger, in the post-merger parent company, are not required to demonstrate for purposes of standing that, at the time of the alleged wrongdoing at the acquired company, (i) plaintiffs owned stock in the acquiring company, or (ii) the acquiring company owned stock in the acquired company.
The certified question of law was submitted to the Supreme Court by the United States District Court for the Southern District of New York (the “Southern District”), and arose out of two double derivative actions pending before the Southern District asserted on behalf of Bank of America (“BofA”) and its wholly-owned subsidiary, Merrill Lynch & Co. (“Merrill Lynch” or the “company”). Plaintiffs originally filed “standard” derivative actions on behalf of Merrill Lynch to recover losses suffered as a result of a breach of fiduciary duties by Merrill Lynch officers and directors prior to BofA’s acquisition of the company in a stock-for-stock merger. In connection with the merger, the company became a wholly-owned subsidiary of BofA and plaintiffs’ Merrill Lynch stock was converted to shares of BofA. After the merger, plaintiffs amended their complaints to take the form of double derivative actions. Defendants then moved to dismiss the double derivative actions for lack of standing, arguing that plaintiffs were required to show that (i) plaintiffs were BofA stockholders both post-merger and at the time of the pre-merger wrongdoing complained of, and (ii) BofA was a Merrill Lynch stockholder at the time of such pre-merger conduct. The Supreme Court assumed, for purposes of its analysis, that at least one plaintiff’s ownership of BofA stock was not contemporaneous with the conduct complained of, and that BofA was not a Merrill Lynch stockholder during the time of the wrongdoing alleged by plaintiffs.
In determining whether the procedural requirements proposed by defendants are mandated under Delaware law, the Court first examined defendants’ “flawed” conceptual model, whereby a double derivative action represents “two lawsuits in one,” consisting of both a standard derivative action by BofA (through plaintiffs), asserting a claim on Merrill Lynch’s behalf, and a “superimposed” action asserting the same claim derivatively on BofA’s behalf as the new owner. Under such a model, the Court noted, the procedural requirements for bringing each derivative claim independently would need to be satisfied.
The Court then explained four flaws in defendants’ proposed conceptual model. First, the procedural requirements posed by defendants would render double derivative lawsuits “virtually impossible” to bring, contradicting Delaware precedent affirming the validity of such actions in cases where standing to bring a derivative claim is lost as the result of an intervening merger. Second, by presuming that BofA was required to proceed derivatively against the Merrill Lynch directors, defendants misinterpreted Delaware case law, which holds that BofA may enforce such a claim directly, by virtue of its 100 percent ownership interest in Merrill Lynch. Third, defendants’ argument that plaintiffs were required to own BofA stock at the time of the alleged misconduct at Merrill Lynch misapplied the contemporaneous ownership requirement contained in DGCL Section 327, which entitles plaintiffs to “stand in the shoes” of BofA in a double derivative action, and to enforce BofA’s post-merger right to pursue Merrill Lynch’s pre-merger claim. Finally, the Court determined that a double derivative action is not a de facto continuation of a pre-merger derivative action, but instead represents a “new, distinct action” in which plaintiffs’ standing to sue rests upon a failure by the BofA board, post-merger, to prosecute plaintiffs’ pre-merger claim against Merrill Lynch.
Finally, the Supreme Court dismissed defendants’ argument that the Court of Chancery’s 2004 decision in Saito v. McCall, 2004 WL 3029876 (Del. Ch. Dec. 20, 2004) (“Saito”), provided legal support for defendants’ proposed procedural requirements, finding that Saito addressed the requirements for a double derivative claim in a “conclusory” fashion as a result of the procedural posture of the case. The Supreme Court also concluded that to the extent Saito is inconsistent with the Supreme Court’s reasoning and conclusions in the instant case, it is overruled.
The full opinion is available here.