You might not expect Dr. Seuss and Jekyll & Hyde to be invoked in oral arguments before the Delaware Supreme Court on the question of whether shareholder derivative breach-of-duty claims against corporate directors can survive a merger when that merger is allegedly the result of the directors’ misconduct. But indeed they were, amid discussion of slippery, transmogrified claims that left four Delaware justices (as well as lawyers on both sides) searching for analogies.
If I had to proffer a prediction, I’d guess that the Supreme Court will adopt the Jekyll & Hyde model – finding that shareholders have a surviving claim under the fraud exception Delaware justices already carved out in the court’s seminal 1984 decision in Lewis v. Anderson – rather than create a new, Seussian “quasi-derivative” cause of action. Either way, I think that oral arguments, which I was able to watch live courtesy of Courtroom View Network, boded well for shareholders trying to revive a derivative suit against Countrywide’s directors and officers, and not so well for Countrywide, despite the best efforts of its counsel Brian Pastuszenski of Goodwin Procter.
As it happens, the shareholder derivative suit came to the Delaware Supreme Court by way of the 9th Circuit Court of Appeals, which certified a question to the state justices in January: “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.” The 9th Circuit said it needed an answer from Delaware in order to decide whether to reanimate a years-old shareholder suit against Countrywide’s board that had been dismissed by a district judge in Los Angeles after Bank of America acquired the mortgage lender.
Under Delaware precedent in Lewis v. Anderson, shareholders lose standing to pursue derivative claims on behalf of the corporation when a merger eliminates their ownership interest. The only exception noted in Anderson is when the entire merger is a fraud intended only to protect the board, which BofA’s acquisition of Countrywide was not. But in dicta in a 2011 ruling in a tangentially related case against Countrywide, the Delaware Supreme Court had mused about whether shareholders should still have a cause of action when the merger that deprived them of standing was actually the inevitable result of corporate malfeasance. That dicta led the 9th Circuit to seek additional instruction from the Delaware court.
In the 2011 decision, the Delaware justices didn’t specify any particular vehicle for hypothetically surviving shareholder derivative claims, but at oral arguments on Wednesday, Stuart Grant of Grant & Eisenhofer, arguing on behalf of the Arkansas Teacher Retirement System and other onetime Countrywide shareholders, said the form of the suit was a matter of mere labeling. He quoted the court’s strong language about Countrywide’s conduct back to the four justices sitting on the bench (Chief Justice Myron Steele, who wrote the 2011 opinion, was absent) and paraphrased Dr. Seuss: “I said what I said and I meant what I meant, Delaware is faithful 100 percent.” Grant urged the justices to abide by their dicta and permit shareholders with derivative claims to hold directors accountable for their breaches of duty.