Title: Arkansas Teacher Retirement System, et al. v. Countrywide Financial Corporation, et al.
Citation: N/A
Docket Number: 14, 2013
State: Delaware
Issuer: Delaware Supreme Court
Date: September 10, 2013

IN THE SUPREME COURT OF THE STATE OF DELAWARE 
 
ARKANSAS TEACHER  
 
§ 
RETIREMENT SYSTEM, et al.,  
§ No. 14, 2013 
 
 
 
 
 
 
§ 
 
Plaintiffs Below,  
 
§ Certification of a Question of 
 
Appellants,  
 
 
§ Law From the United States Court 
 
 
 
 
 
 
§ of Appeals for the Ninth Circuit 
 
v. 
 
 
 
 
§ No. 10-56340 
 
 
 
 
 
 
§ D.C. No. 07-CV-06923-MRP-MAN 
COUNTRYWIDE FINANCIAL  
§ 
CORPORATION, et al.,   
 
§ 
 
 
 
 
 
 
§ 
 
Defendants Below, 
 
 
§ 
 
Appellees.  
 
 
§ 
 
 
 
 
 
    Submitted:  July 3, 2013 
 
 
 
 
       Decided:  September 10, 2013 
 
Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and 
RIDGELY, Justices, constituting the Court en Banc. 
 
 
Upon A Certified Question of Law from the United States Court of 
Appeals for the Ninth Circuit.  QUESTION ANSWERED. 
 
Stuart M. Grant, Esquire (argued), Michael J. Barry, Esquire and 
Diane Zilka, Esquire, Grant & Eisenhofer P.A., Wilmington, Delaware, and 
Blair A. Nicholas, Esquire and Niki L. Mendoza, Esquire, Bernstein 
Litowitz Berger & Grossmann LLP, San Diego, California, and Lester L. 
Levy, Esquire, Carl L. Stine, Esquire, Robert Plosky, Esquire, Wolf Popper 
LLP, New York, New York, for appellants, Arkansas Teacher Retirement 
System, Fire & Police Pension Association of Colorado, Louisiana 
Municipal Police Employees’ Retirement System, Central Laborers Pension 
Fund and Public Employees’ Retirement System of Mississippi. 
 
 
 
2 
 
Thomas A. Beck, Esquire, Richard P. Rollo, Esquire, Richards, 
Layton & Finger, P.A., Wilmington, Delaware, and Brian E. Pastuszenski, 
Esquire (argued), Goodwin Procter LLP, Boston, Massachusetts, Daniel P. 
Roeser, Esquire, Goodwin Procter LLP, New York, New York, and Jason L. 
Krajcer, and Teodora E. Manolova, Esquire, Goodwin Procter LLP, Los 
Angeles, California, for appellee, Countrywide Financial Corporation.   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HOLLAND, Justice: 
 
 
3 
 
This is a proceeding under Article IV, Section 11(8) of the Delaware 
Constitution and Supreme Court Rule 41.  The following question of law 
was certified to and accepted by this Court from the United States Court of 
Appeals for the Ninth Circuit (“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. 
 
We answer that question in the negative.  In explaining our answer, we ratify 
and reaffirm the continuous ownership rule and the fraud exception 
recognized by our holding in Lewis v. Anderson.1   
Stipulated Facts 
 
This shareholder derivative action has been appealed to the Ninth 
Circuit from the orders of the United States District Court for the Central 
District of California (“District Court”), which granted the defendant-
appellee’s motion for judgment on the pleadings and denied plaintiffs-
appellants’ motion for reconsideration.  Five institutional investors brought 
this shareholder derivative action on behalf of the former Countrywide 
Financial Corporation (“Countrywide”), asserting state and federal 
derivative claims for breach of fiduciary duty and securities law violations 
                                          
 
1 Lewis v. Anderson, 477 A.2d 1040 (Del. 1984). 
4 
 
against former Countrywide officers and directors.  While the suit was 
pending in the District Court, Countrywide merged into a wholly-owned 
subsidiary of Bank of America Corporation (“BofA”) in a stock-for-stock 
transaction that divested the plaintiffs of their Countrywide shares.  Nominal 
defendant, Countrywide then moved for judgment on the pleadings, arguing 
that the merger terminated the plaintiffs’ standing to pursue derivative 
claims on Countrywide’s behalf.  The District Court granted the defendant’s 
motion, finding that the plaintiffs could not satisfy the “continuous 
ownership” requirement for shareholder derivative standing under Federal 
Rules of Civil Procedure 23.1 and Delaware law. 
 
Thereafter, this Court decided Arkansas Teacher Retirement Systems 
v. Caiafa,2 which arose from the same underlying facts and involved the 
parties to this appeal.  Following that intervening decision, the plaintiffs 
moved for reconsideration of the District Court’s order.  The plaintiffs 
argued that, in Arkansas Teacher, this Court clarified the scope of the “fraud 
exception” to Delaware’s continuous ownership rule and confirmed that the 
plaintiffs have post-merger derivative standing in this case.  The District 
Court denied that motion, and the plaintiffs appealed to the Ninth Circuit.   
                                          
 
2 Ark. Teacher Ret. Sys. v. Caiafa, 996 A.2d 321 (Del. 2010). 
5 
 
 
In the Ninth Circuit, the parties agree that Delaware law governs the 
plaintiffs’ derivative standing, although they vigorously dispute the meaning 
of Arkansas Teacher and its effect on this case.  The plaintiffs argue that, 
because they allege “a single, inseparable fraud” by which the defendant 
Countrywide “directors cover[ed] massive wrongdoing with an otherwise 
permissible merger,”3 they maintain post-merger derivative standing under 
the fraud exception to the continuous ownership rule, as interpreted by 
Arkansas Teacher.   
The defendant asserts that Arkansas Teacher merely reaffirmed the 
traditional scope of the fraud exception, as articulated in Lewis v. Anderson,4 
and its progeny.  The defendants argue that the fraud exception to the 
continuous ownership requirement applies only where the plaintiffs allege 
that the merger was executed “merely” to destroy derivative standing and 
lacked any legitimate business purpose.   
The parties agree that the Ninth Circuit panel’s decision on this issue 
of state law will determine the outcome of the appeal pending in the Ninth 
Circuit.  The appeal was argued before the Ninth Circuit and remains 
undecided pending our answer to its certified question of law.   
                                          
 
3 Id. at 323 (citation omitted). 
4 Lewis v. Anderson, 477 A.2d 1040 (Del. 1984). 
6 
 
District Court Dismisses Derivative Action 
 
 
The plaintiffs, all former Countrywide shareholders, filed this 
derivative action in the District Court in October 2007.  On January 11, 
2008, Countrywide agreed to merge with a subsidiary of BofA in a stock-
for-stock transaction valued at approximately $4 billion.  On July 1, 2008, 
following approval by Countrywide’s shareholders, the merger closed.  All 
outstanding Countrywide shares were exchanged for BofA shares, and all 
Countrywide shareholders at the time of the merger became shareholders of 
BofA.  Countrywide was merged into BofA’s acquisition subsidiary, which 
remained a wholly-owned subsidiary of BofA without any public 
shareholders.   
 
The defendants then moved in the District Court for judgment on the 
pleadings dismissing the plaintiffs’ derivative claims on the ground that the 
plaintiffs lost derivative standing when, as a result of the merger, they 
ceased to be Countrywide shareholders.  In opposing the motion, the 
plaintiffs took the position that federal, not Delaware, law governed their 
derivative standing and asked the District Court to make an “equitable 
exception” to the federal, not Delaware, continuous ownership requirement.  
The plaintiffs expressly challenged the applicability of Delaware’s 
continuous ownership rule, and apparently did not argue that they could 
7 
 
satisfy the Delaware fraud exception.  On December 11, 2008, the District 
Court granted the defendants’ motion for judgment on the pleadings.  It 
dismissed all derivative claims, holding that the merger had extinguished the 
plaintiffs’ derivative standing under both federal and Delaware law.   
Plaintiffs’ Direct Claims Settled In Delaware 
 
After Countrywide and BofA had agreed to the merger, the plaintiffs 
amended their District Court complaint to add direct merger-related class 
claims.  The District Court stayed the plaintiffs’ direct claims in favor of 
similar claims asserted on behalf of the same putative class that were 
pending in the Court of Chancery.  Following the announcement of an 
agreement to settle the merger-related direct claims in Delaware, the District 
Court ordered the plaintiffs to address to the Court of Chancery any 
objections concerning the release of the merger-related direct claims.   
Before the Court of Chancery, the plaintiffs did object to approval of 
the settlement, arguing that it would improperly release their direct claims.  
Those direct claims were that Countrywide’s directors had breached their 
duties (i) both to “value” the plaintiffs’ shareholder derivative claims 
separately by carving them out of the merger and (ii) to “preserve” the value 
of those derivative claims “either by extracting additional consideration from 
8 
 
[BofA] or by assigning the derivative claims to a litigation trust that could 
pursue the claims for the benefit of Countrywide’s shareholders.” 
 
On March 31, 2009, based on its review of a discovery record of more 
than 400,000 pages of documents, the Court of Chancery overruled the 
plaintiffs’ objection to the settlement.  The Court of Chancery held that the 
plaintiffs’ direct “failure-to-value” and “failure-to-preserve” claims were 
unsupported by Delaware law, and thus were “functionally worthless.”  The 
Court of Chancery also held that the settlement was “fair” and “reasonable” 
to the proposed class despite the release of those direct claims.   
In approving the settlement, the Court of Chancery made several 
relevant factual findings about the Countrywide board’s reasons for 
approving the merger.  First, the Court of Chancery found that the merger 
had not been motivated by any desire to eliminate derivative standing, but 
rather, by economic necessity:  “[A]voiding derivative liability was neither 
the only nor the principal reason for supporting the transaction.”  Second, 
the Court of Chancery found that the merger consideration received by 
Countrywide shareholders was fair:  “[T]here is precious little doubt that the 
consideration received by the Countrywide shareholders was anything other 
than at least fair.” 
9 
 
 
The plaintiffs appealed from the Court of Chancery’s final judgment 
approving the settlement.  This Court affirmed that judgment, stating:  “The 
Vice Chancellor appropriately denied the objection, because Delaware 
corporate fiduciary law does not require directors to value or preserve 
piecemeal assets in a merger setting, and [the plaintiffs] failed to show a 
likelihood of prevailing on the merits of [their] claims.”5  In the first 
paragraph of our opinion, this Court stated that the closing of the merger had 
terminated the plaintiffs’ standing to pursue derivative claims under 
longstanding Delaware law: 
The Vice Chancellor denied the objection and approved the 
settlement, allowing [BofA] to close its acquisition of 
Countrywide, thus extinguishing [the plaintiffs’] standing to 
pursue derivative claims.  Because the Vice Chancellor did not 
abuse his discretion by holding that [the plaintiffs’] derivative 
suit claims for breach of asserted duties were worthless and, 
therefore, added no conceivable value to the merger, we 
AFFIRM his judgment approving the settlement.6 
 
Dictum in Arkansas Teachers 
 
In the Arkansas Teacher’s opinion, after announcing our conclusion, 
this Court then in dictum discussed certain direct claims that the plaintiffs 
could have but did not present to the Court of Chancery.7  In particular, this 
Court stated that the plaintiffs theoretically could have pled a claim for “a 
                                          
 
5 Ark. Teacher Ret. Sys. v. Caiafa, 996 A.2d at 322. 
6 Id. (first emphasis added). 
7 Id. at 322-24. 
10 
 
single, inseparable fraud” alleging that pre-merger fraudulent conduct made 
the merger “a fait accompli.”8  This Court stated that, in any such claim, “the 
injured parties would be the shareholders who would have post-merger 
standing to recover [the] damages instead of the corporation.”9  This Court 
noted, however, that the plaintiffs “did not present this claim to the Vice 
Chancellor.”10  Therefore, we held “that the Vice Chancellor did not abuse 
his discretion in approving the settlement, despite facts in the complaint 
suggesting that the Countrywide directors’ premerger agreement fraud 
severely depressed the company’s value at the time of BOA’s acquisition, 
and arguably necessitated a fire sale merger.”11 
Plaintiffs Seek Reconsideration of Derivative Claims 
 
 
Following this Court’s decision in Arkansas Teacher, the plaintiffs 
moved for reconsideration of the District Court’s order dismissing their 
derivative claims.  Before the District Court, the plaintiffs asserted that 
Delaware law, rather than federal law, governed their post-merger derivative 
standing.  The plaintiffs then argued that this Court’s dictum in Arkansas 
Teacher represented “a new material change of law” that “expanded the 
post-merger standing fraud exception to include situations where, as here, 
                                          
 
8 Id. at 323.   
9 Id. at 324. 
10 Id. at 323. 
11 Id. at 324. 
11 
 
the plaintiffs sufficiently allege fraudulent conduct that necessitated that 
merger.”  The plaintiffs acknowledged, however, that before this Court 
announced its dictum in Arkansas Teacher, they did not fit within the Lewis 
v. Anderson12 fraud exception to Delaware’s continuous ownership rule.   
 
The District Court denied the plaintiffs’ motion for reconsideration, 
holding that this Court’s dictum in Arkansas Teacher “did not change 
Delaware law regarding the loss of derivative standing after a merger”: 
[T]he Delaware Supreme Court relied on established Delaware 
law and affirmed the decision of the Vice Chancellor on the 
basis of the reasons in his opinion, because the record did not 
support a finding that avoiding derivative liability was the 
principal reason for the Countrywide Board of Directors’ 
approval of the merger with Bank of America.  Moreover, the 
Delaware Supreme Court acknowledged that its approval of the 
settlement extinguished standing to bring derivative claims on 
behalf of Countrywide.   
 
The District Court also found that this Court’s Arkansas Teacher 
dictum simply confirmed longstanding Delaware law that “shareholders—
not the corporation via a derivative suit—would have had post-merger 
standing to recover damages from a direct fraud claim, if one had been 
properly pleaded.”  After the District Court entered it order denying the 
plaintiffs’ motion for reconsideration and dismissing the case, the plaintiffs 
                                          
 
12 Lewis v. Anderson, 477 A.2d 1040 (Del. 1984). 
12 
 
appealed to the Ninth Circuit, which certified the question that is now before 
this Court.   
Lewis v. Anderson Precedent 
 
In Anderson, this Court held that for a shareholder to have standing to 
maintain a derivative action, the plaintiff “must not only be a stockholder at 
the time of the alleged wrong and at the time of commencement of suit but   
. . . must also maintain shareholder status throughout the litigation.”13  These 
two conditions precedent to initiating and maintaining a derivative action are 
referred to, respectively, as the “contemporaneous ownership” and the 
“continuous ownership” requirements.  The contemporaneous ownership 
requirement is imposed by statute.14  The continuous ownership requirement 
is a matter of common law.   
In Lewis v. Anderson, this Court held that where the corporation on 
whose behalf a derivative action is pending is later acquired in a merger that 
deprives the derivative plaintiff of her shares, the derivative claim—
originally belonging to the acquired corporation—is transferred to and 
                                          
 
13 Id. at 1046 (citations omitted).   
14 Title 8, § 327 of the Delaware Code provides: 
In any derivative suit instituted by a stockholder of a corporation, it shall 
be averred in the complaint that the plaintiff was a stockholder of the 
corporation at the time of the transaction of which such stockholder 
complains or that such stockholder’s stock thereafter devolved upon such 
stockholder by operation of law.   
13 
 
becomes an asset of the acquiring corporation as a matter of statutory law.15  
The original plaintiff loses standing to maintain the derivative action, 
because as a consequence of the merger, the original derivative shareholder 
plaintiff can no longer satisfy the continuous ownership requirement.16   
In Lewis v. Anderson, this Court recognized two exceptions to the 
loss-of-standing rule.  The first is where the merger itself is the subject of a 
claim of fraud, being perpetrated merely to deprive shareholders of their 
standing to bring or maintain a derivative action.  The second is where the 
merger is essentially a reorganization that does not affect the plaintiff’s 
relative ownership in the post-merger enterprise.  Only the fraud exception is 
implicated by the certified question from the Ninth Circuit in this 
proceeding.   
Plaintiffs’ Argument 
 
In Arkansas Teacher, this Court unequivocally stated that 
Countrywide’s merger with BofA had extinguished the plaintiffs’ standing 
to pursue derivative claims.17  The plaintiffs characterize that statement in 
Arkansas Teacher as part of “a summary of the basis for Plaintiffs’ objection 
                                          
 
15 Lewis v. Anderson, 477 A.2d at 1049-50; Del. Code Ann. tit. 8, § 259 (2013). 
16 Lewis v. Anderson, 477 A.2d at 1049-50; Del. Code Ann. tit. 8, § 259 (2013). 
17 Ark. Teacher Ret. Sys. v. Caiafa, 996 A.2d at 322.   
14 
 
to the class action settlement.”  That characterization, however, cannot be 
reconciled with the unambiguous statement in our opinion.   
 
After ruling that the Countrywide-BofA merger had extinguished 
Countrywide shareholders’ standing to pursue derivative claims, this Court 
discussed, in dictum, certain direct claims that the plaintiffs could have 
brought, but did not.  According to the plaintiffs, that dictum overruled sub 
silentio more than twenty-five years of precedent that consistently held the 
fraud exception applies only where the sole purpose of a merger is to 
extinguish shareholders’ derivative standing.18  The plaintiffs’ argument, 
however, is contradicted not only by our holding in Arkansas Teacher that 
the Court of Chancery’s approval of the merger extinguished the plaintiffs’ 
derivative standing, but also by the language and reasoning of the dictum 
itself.   
Inseparable Fraud Explained 
In its discussion of “inseparable fraud,” this Court made clear that it 
was referring to direct, not derivative, claims.  This Court began its 
discussion by reaffirming the narrow scope of the fraud exception as set 
                                          
 
18 Lambrecht v. O’Neal, 3 A.3d 277, 284, n.20 (Del. 2010); Ark. Teacher Ret. Sys. v. 
Caiafa, 996 A.2d at 323; Feldman v. Cutaia, 951 A.2d 727, 731 & n.20 (Del. 2008); 
Lewis v. Ward, 852 A.2d 896, 904 (Del. 2004); Kramer v. W. Pac. Indus., Inc., 546 A.2d 
348, 354 (Del. 1988); Lewis v. Anderson, 477 A.2d at 1046 n.10. 
15 
 
forth in Anderson and its progeny.19  This Court reiterated that “[a] 
stockholder may maintain his suit post-merger ‘if the merger itself is the 
subject of a claim of fraud, being perpetrated merely to deprive stockholders 
of standing to bring a derivative action.’”20  We then explained that the 
conditions necessary to satisfy the fraud exception were not present in this 
case because the record did “not reflect that the [Countrywide] directors 
prospectively sought an approved a merger, solely to deprive stockholders of 
standing to bring a derivative action.”21  This Court recognized that “[t]he 
Vice Chancellor noted that avoiding derivative liability was neither the only 
nor the principal reason for supporting the transaction.”22   
In Lewis v. Anderson, this Court reconciled Delaware’s extant 
common law jurisprudence and the applicable provisions of the Delaware 
General Corporation Law statute regarding derivative standing following a 
corporate merger: 
The holdings of Braasch, Heit and Schreiber that a corporate 
merger destroys derivative standing of former shareholders of 
the merged corporation from instituting or pursuing derivative 
claims confirm [section] 327’s requirement of continued as well 
as original standing . . . . 
 
                                          
 
19 Ark. Teacher Ret. Sys. v. Caiafa, 996 A.2d at 322-23 (quoting Lewis v. Ward, 852 A.2d 
896, 902 (Del. 2004)).  
20 Id. at 323 (emphasis added) (citation omitted).   
21 Id. 
22 Id. (citation omitted) (internal quotation marks omitted). 
16 
 
We conclude that 8 Del. C. [sections] 259, 261 and 327, read 
individually and collectively, permit one result which is not 
only consistent but sound:  A plaintiff who ceases to be a 
shareholder, whether by reason of a merger or for any other 
reason, loses standing to continue a derivative suit.23 
 
 
In our dictum in Arkansas Teacher, stating that “Delaware law 
recognizes a single, inseparable fraud,” this Court also cited Braasch v. 
Goldschmidt.24  Braasch involved the acquisition of American Sumatra 
Tobacco Corporation (“American Sumatra”) by its majority shareholder, 
whereby the shareholder first acquired over 90 percent of American 
Sumatra’s shares through a tender offer and then used a statutory short-form 
merger to complete the acquisition.25  The plaintiffs alleged fraud in 
connection with the tender offer—i.e., that the majority shareholder had 
“coerced the public stockholders into selling their shares pursuant to the 
offer to buy upon false, deceptive and misleading statements made in the 
public press and in official documents.”26  But the plaintiffs “d[id] not 
challenge the regularity of the merger proceedings” themselves.27 
 
On those facts, the Court of Chancery dismissed the plaintiffs’ 
derivative claims, holding that “the derivative rights asserted passed to the 
                                          
 
23 Lewis v. Anderson, 477 A.2d at 1047-49. 
24 Braasch v. Goldschmidt, 199 A.2d 760, 764 (Del. Ch. 1964). 
25 Id. at 762. 
26 Id. at 763. 
27 Id. 
17 
 
surviving corporation” and the standing of the former shareholders of the 
acquired corporation to pursue derivative claims was thereby extinguished 
by the merger.28  Conversely, the Court of Chancery allowed certain of the 
plaintiffs’ direct post-merger claims to proceed, finding that the plaintiffs 
had effectively alleged “that the merger was the final step of a conspiracy to 
accomplish an unlawful end by unlawful means.”29  The Court of Chancery 
explained that, even if “the end was not, in and by itself, unlawful, if the 
means employed to accomplish that end were unlawful, the whole might be 
so tainted with illegality as to require invalidation of the merger.”30   
Braasch v. Goldschmidt was cited in both Anderson v. Lewis and 
Arkansas Teacher.  It supports the conclusion that where pre-merger 
fraudulent conduct makes a merger inevitable, that conduct gives rise to a 
direct claim that can survive the merger, but not a derivative claim.  In 
Arkansas Teacher, this Court was careful to cite to that portion of Braasch 
which discusses the survival of direct claims, when addressing the direct 
claims that the plaintiffs here could have brought (but did not), and 
separately to that portion of Braasch that discusses loss of derivative 
standing when addressing the plaintiffs’ derivative claims.   
                                          
 
28 Id. at 767. 
29 Id. at 764.   
30 Id. 
18 
 
Specifically, in addressing the continuous ownership rule, this Court 
made a pinpoint citation to page 767 of Braasch, which discusses the 
derivative claims that the Court of Chancery had dismissed.31  In contrast, in 
our discussion of “inseparable fraud,” this Court cited the portion of 
Braasch32 addressing the direct claims that the Court of Chancery 
sustained.33  Arkansas Teacher’s pinpoint citations to these two distinct 
portions of Braasch underscore that this Court’s dictum about “inseparable 
fraud” referred to direct, not derivative, claims. 
Dictum Describes a Direct Claim 
 
 
This Court’s “inseparable fraud” dictum is also consistent with the 
framework for distinguishing between direct and derivative claims adopted 
in Tooley v. Donaldson, Lufkin & Jenrette.34  In Tooley, this Court held that 
whether a claim is direct or derivative turns “solely on the following 
questions:  [1] [w]ho suffered the alleged harm-the corporation or the suing 
stockholder individually-and [2] who would receive the benefit of the 
recovery or other remedy?”35  In Arkansas Teacher, this Court stated that 
any injury flowing from the “inseparable fraud” would be suffered by the 
                                          
 
31 See Ark. Teacher Ret. Sys. v. Caiafa, 996 A.2d at 323 n.1 (citing Braasch v. 
Goldschmidt, 199 A.2d at 767).   
32 Id. at 323 (citing Braasch v. Goldschmidt, 199 A.2d at 764). 
33 See id. at 323 & n.3 (citing Braasch v. Goldschmidt, 199 A.2d at 764).   
34 Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004).   
35 Id.   
19 
 
shareholders rather than the corporation and any recovery would go to the 
shareholders rather than the corporation:  “If the Vice Chancellor had found 
that [the plaintiffs] had successfully pleaded [their] fraud claim then 
[plaintiffs]—rather than Countrywide—could recover from the former 
Countrywide directors.  In that case, the injured parties would be the 
shareholders who would have post-merger standing to recover damages 
instead of the corporation.”36  Accordingly, this Court’s unambiguous 
language in Arkansas Teacher demonstrates that any “inseparable fraud” 
claim would be direct.   
Question Answered 
 
The shareholders ability “to initiate an action on behalf of the 
corporation inherently impinges upon the directors’ statutory power to 
manage the affairs of the corporation.”37  Therefore, “the law imposes 
certain prerequisites on a shareholder’s right to sue derivatively.”38  The 
continuous ownership rule is one of those requirements.39 
[A] shareholder is permitted to intrude upon the authority of the 
board by means of a derivative suit only because his status as a 
shareholder provides an interest and incentive to obtain legal 
redress for the benefit of the corporation.  Once the derivative 
                                          
 
36 Ark. Teacher Ret. Sys. v. Caiafa, 996 A.2d at 323-24 (emphasis added).   
37 Kaplan v. Peat Marwick, Mitchell & Co., 540 A.2d 726, 730 (Del. 1988). 
38 Id. 
39 Ala. By-Prods. Corp. v. Cede & Co. ex rel. Shearson Lehman Bros., 657 A.2d 254, 264 
(Del. 1995) (citing Lewis v. Anderson, 477 A.2d at 1046). 
20 
 
plaintiff ceases to be a stockholder in the corporation on whose 
behalf the suit was brought, he no longer has a financial interest 
in any recovery pursued for the benefit of the corporation.40 
 
 
Lewis v. Anderson is settled Delaware law and has been consistently 
followed since 1984.41  In Arkansas Teacher, this Court did not change the 
scope of the fraud exception.  Indeed, in Lambrecht v. O’Neal, which was 
decided three months after Arkansas Teacher, this Court once again 
reaffirmed that the Lewis v. Anderson fraud exception applies only in the 
limited circumstance “where the merger itself is . . . being perpetrated 
merely to deprive shareholders of their standing to bring the derivative 
action. . . .”42  
 
We hold Arkansas Teacher did not “clarify,” “expand,” or constitute 
“a new material change” in Lewis v. Anderson’s continuous ownership rule 
or the fraud exception.43  In the first paragraph of Arkansas Teacher—i.e., 
the portion that is not dictum—this Court unequivocally held that the 
Countrywide-BofA merger extinguished the plaintiffs’ derivative standing. 
We answer the certified question in the negative.  The Clerk is 
directed to transmit this opinion to the Ninth Circuit. 
                                          
 
40 Id. at 265 (emphasis added).   
41 Lambrecht v. O’Neal, 3 A.3d at 288 n.36. 
42 Id. at 284, n.20. 
43 See Lewis v. Anderson, 477 A.2d 1040 (Del. 1984).