C.A. No. 3464-VCN (Del. Ch. Mar. 31, 2009)
In this memorandum opinion, the Court of Chancery denied the parties’ application to certify a class and approve a proposed settlement of claims brought by former Countrywide stockholders in connection with the company’s 2008 acquisition by Bank of America (“BOA”).
Asserting that the Countrywide board had, among other things, failed to obtain fair and adequate consideration in the merger transaction, failed adequately to value pending derivative claims when entering into the merger agreement, and made false and misleading disclosures in its preliminary proxy statement, Plaintiffs had moved to preliminarily enjoin the stockholder vote on the transaction pending additional disclosures but, within days of that motion, the parties agreed to a settlement. The settlement required certain additional disclosures but no additional monetary consideration. The Countrywide stockholders subsequently approved the merger with a nearly unanimous vote and, soon thereafter, the transaction closed.
The proposed settlement met with objections from several groups. The Court rejected those made by former company stockholders who, prior to the merger’s announcement, had commenced a derivative action against the company’s directors alleging breach of fiduciary duties for, among other things, imprudent lending practices. Although the objectors lost standing to pursue derivative claims as a consequence of the merger and their suit was dismissed, and the proposed settlement expressly carved out from its reach the release of any such derivative claims (now held by BOA and, derivatively, its stockholders as a result of the merger), the objectors argued they had also suffered direct harm from the board’s failure to protect the value of the derivative claims on behalf of Countrywide’s stockholders. The objectors argued that, when negotiating the merger, the directors should have either valued the claims and obtained additional consideration for them or preserved the claims’ value by selling them, or by assigning them to a litigation trust. The objectors contended that the proposed settlement improperly compromised those direct claims, but the Court rejected their objection as based on an unsuccessful attempt to repackage derivative claims for which they had lost standing, and which, in the Court’s estimation, were “functionally worthless” anyway, as direct. (Mem. Op. at 24.)
The Court accepted the objection brought by SRM Global Fund Limited Partnership (“SRM”), which claimed it had maintained a significant investment in Countrywide after announcement of the merger only because of fraudulent misrepresentations made by BOA chairman and CEO, Kenneth Lewis. In a speech to the Delaware State Chamber of Commerce shortly after announcement of the merger, Lewis dismissed rumors of Countrywide’s impending bankruptcy and affirmatively stated that Countrywide had a “very impressive” liquidity plan and credit lines in place. (Id. at 11.) SRM asserted that its continued ownership of Countrywide stock in reliance on those statements caused it losses totaling $80 million, supporting a common law fraud, “holder” claim under New York law. Finding SRM’s “holder” claim uniquely individual in nature, relying as it would upon a demonstration of SRM’s justifiable reliance on Lewis’s statements, the Court held class-wide treatment of the claim and its inclusion in the proposed settlement’s release improper. On that basis, the Court refused to certify the class and approve the settlement, noting that the parties now had three options: (i) amend the class structure to allow stockholders such as SRM the right to opt out, (ii) amend the release to carve out fraud claims based on Lewis’s statements, or (iii) abandon settlement and push on with the litigation.
The full opinion is available here.