Monday, July 1, 2013
For those of you paying attention to these kinds of things, the Delaware Supreme Court will take up an important case this Wednesday before the holiday. The issue for the court in the Countrywide litigation relates to whether and how and under what circumstances derivative litigation can survive the closing of a merger. You'll remember that DGCL Sec. 327 requires that a stockholder plaintiff in any derivative litigation maintain standing. One way to eliminate standing is to close a merger. Of course, there are limits. One can't undertake a fraudulent merger solely to deprive stockholders of standing in any derivative litigation (Lewis v Anderson). Recently, in Primedia, Vice Chancellor Laster ruled that plaintiffs whose standing to pursue derivative insider trading claims had been extinguished by merger had standing to challenge directly the entire fairness of that merger based on a claim that the target board of directors failed to obtain sufficient value in the merger for the pending derivative claims.
On Wednesday, the Delaware Supreme Court will take on the issue again, this time in the form of a certified question from the Ninth Circuit. Delaware is one of the few state supreme courts that accepts certified questions. The court is permitted to hear certified questions under Article 11, Section 8 of the Delaware State Constitution:
8) To hear and determine questions of law certified to it by other Delaware courts, the Supreme Court of the United States, a Court of Appeals of the United States, a United States District Court, the United States Securities and Exchange Commission, or the highest appellate court of any other state, where it appears to the Supreme Court that there are important and urgent reasons for an immediate determination of such questions by it. The Supreme Court may, by rules, define generally the conditions under which questions may be certified to it and prescribe methods of certification.
The Delaware Supreme Court used this power in CA, Inc. v. AFSCME Employees Pension Plan in 2008 when it ruled on the validity of proposed bylaws in response to a certified question from the SEC. On Wednesday, the court will hear arguments relating to a question certified to it by the Ninth Circuit:
Whether, under the “fraud exception” 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.
It will be interesting to see how the court approaches the Countrywide questions. Arguments are going to be streaming online so I'll keep you updated.