M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, July 3, 2013

Countrywide arguments

Thanks to our friends at Courtroom View Network, I'll be watching the arguments before the Delaware Supreme Court in the Countrywide litigation.  I'm not exactly liveblogging cause I just walked out of a meeting, but I'm "almost live blogging."  Is that a thing.  

OK, we're off.  Looks like the Chief Justice will be watching this feed later too.  He's wrapped up in a meeting with Governor and will catch up later. 


OK, right out of the box, "noted legal scholar Theodore Geisel" gets quoted.  Who is he?  I didn't know either, but then came the quote: "I meant what I said and I said what I meant, And an elephant's faithful, one hundred per cent!"  Yeck...starting with Dr. Suess references and bad puns... all down hill from here?

Thankfully, it gets better.  Justice Jacobs is looking for Stuart Grant to help him understand whether a derivative claim that is eliminated because of loss of standing following closing might proceed as a direct claim.  

In the absence of the Lewis fraud exception, is there a direct claim - based on a theory that the value of derivative claims was not included in the merger consideration - that survives closing?  Grant thinks no.


Where the economic reality is that the damage caused by the defendants drove the stock price into the ground for the benefit of the managers because the inevitable result is that the claims should survive through the Lewis fraud exception - paraphrasing Grant.

 "Just because some liar...I mean lawyer tries to be creative..."  [audible chuckles from the bench following the Freudian slip.] OK, back to more serious argument.

No damage to the surviving entity, BoA, so they would never seek to pursue these claims.  Unless the claim survives for Countrywide shareholders, the defendants may never face any justice in this case.  That's pretty compelling. 

 Grant still talking the fraud exception -- the merger was the inevitable result of the ongoing fraud.  The fraud gave rise to the merger, so in this set of facts the Lewis fraud exception should be applicable.  The fraud necessitated the merger.  No alternative to the merger other than bankruptcy, therefore Grant argues, the Lewis exception applies. 

Grant wants to call the surviving claim a "quasi-derivative claim" - not direct or derivative, but a new animal without the baggage that accompanies both direct or derivative.... references to quantum mechanics brings Grant's argument to an end.

Countrywide up next.


OK, so this guy wants no part of any 'newfangled' quasi-derivative anything.  The concept of a quasi-derivative claim has no underpinning under Delaware law.  Tooley says there are only two types of claims.  That's it.  The existing structure is fine.

Countrywide is arguing that if anything is left after closing, it's a direct claim, but since those claims weren't made previously, the shareholders can't bring them now.

The Justices seem to like Grant's idea of a new quasi-derivative claim.   


Berger is looking for Countrywide to explain to her why Grant's concept of a new quasi-derivative class of claims is a bad idea.

Countrywide counsel warns against crafting an exception that swallows the rule -- no quasi-derivative litigation, please. He warns of decades of litigation should this new class of claims be adopted.  Suggests that going with Grant would be a judicial re-writing of Sec 259.  

Stuart Grant back to the podium.  Arguing that Countrywide's previous shareholders, rather than BoA shareholders should be the recipient of any damages - why? Well, because BoA shareholders weren't ever damaged (in fact they benefited!), while the Countrywide shareholders were.  Shouldn't they be compensated? The quasi-derivative action ensures the benefit goes to the shareholders, not the suriving corporation.  Grant says - call it what you want, but make sure the benefit of any of these cases goes to the people who were damaged - as between old shareholders and the acquiror, damages should go to the former shareholders of the target. 

 And...that's it. Court is in recess. 




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