Opinion ID: 2442966
Heading Depth: 1
Heading Rank: 9

Heading: Conceptual Flaws in Defendants' Model

Text: First, as Judge Rakoff correctly observed in his Memorandum Order, [s]uch requirements would render double derivative lawsuits virtually impossible to bring except in bizarrely happenstance circumstances. [34] Yet, our precedents not only validate but also encourage the bringing of double derivative actions in cases where standing to maintain a standard derivative action is extinguished as a result of an intervening merger. [35] Unless a positive rule of law so requires, this Court should not undermine its own precedents by imposing procedural requirements that effectively would defeat that remedy. Other than the Saito decision, which we conclude misapplies Delaware law, no Delaware decision or statute imposes those requirements. Second, the fact that requirement (2) finds no support in Delaware case or statutory law should come as no surprise, because any such requirement would run afoul of Lewis v. Anderson and its progeny. [36] Requirement (2)that BofA must have owned Merrill Lynch stock at the time of the pre-merger wrongdoingincorrectly presupposes that to be legally capable of enforcing Merrill Lynch's pre-merger claim, BofA must proceed derivatively against the persons who were Merrill Lynch directors at the time of the alleged wrongdoing. That assumption ignores the legal precept, confirmed in Lewis v. Anderson and its progeny, that as a result of the merger, Merrill Lynch's claim becomes the property of BofA as a matter of statutory law. [37] As the sole owner of Merrill Lynch, BofA is not required to proceed derivatively; it may enforce that claim by the direct exercise of its 100 percent control. To illustrate why this must be the correct result, suppose (hypothetically) that the merger is structured as a two party transaction in which Merrill Lynch disappears and the surviving corporation is BofA. In that case, because Merrill Lynch would no longer exist, BofA could notand would not be required tosue derivatively on Merrill Lynch's behalf. As sole owner of the (former) Merrill Lynch claim, BofA could sue directly and in its own name. [38] BofA would not be required to own any Merrill Lynch shares before the merger occurred. No different result should obtain where, as here, the merger is structured as a three party transaction with Merrill Lynch ending up as BofA's wholly owned subsidiary. Because BofA owns 100 percent of the shares of its (post-merger) Merrill Lynch subsidiary, there is no basis in law or logic to treat BofA as if it were a minority shareholder of Merrill Lynch and require it to sue derivatively to enforce Merrill Lynch's pre-merger claim. BofA's sole ownership, alone and without more, empowers and entitles BofA, acting through its own board of directors or authorized officers, to use its direct control to cause its wholly owned subsidiary, Merrill Lynch, to do what is necessary to enforce Merrill Lynch's pre-merger claim. [39] To accomplish that, the only Merrill Lynch shares BofA would have to own would be those it acquired as a result of the merger. [40] Third, requirement (1) of the defendants' double derivative modelthat the original derivative plaintiffs must have owned BofA shares at the time of the alleged wrongdoing at Merrill Lynchis also fatally flawed. To the extent the defendants argue that that requirement flows from the contemporaneous ownership requirement of Section 327, the argument misapplies that statute. As discussed above, BofA is not required to have been a shareholder of Merrill Lynch at the time of the alleged wrongdoing to enforce Merrill Lynch's pre-merger claim. In a double derivative action the plaintiffs stand in the shoes of BofA; that is, they are enforcing BofA's post-merger right, as 100 percent owner, to prosecute Merrill Lynch's pre-merger claim. Just as BofA is not required to have owned Merrill Lynch shares at the time of the alleged wrongdoing, neither are the plaintiffs required to have owned BofA shares at that point in time. It suffices that the plaintiffs own shares of BofA at the time they seek to proceed double derivatively on its behalf. [41] For the plaintiffs in this specific case, that requirement is easily satisfied, because they acquired their BofA shares in the merger, and their double derivative claim is based on post-merger conduct by the BofA board, viz., its failure to prosecute Merrill Lynch's pre-merger claim, which BofA now (indirectly) owns. [42] Fourth, and finally, the preceding analysis answers the defendants' policy argument that unless we conclude that their model represents Delaware law, allowing the plaintiffs' post-merger double derivative action to proceed would disrespect the corporate separateness of BofA and Merrill Lynch, subvert the rationale of Lewis v. Anderson , and undermine the policy underlying Section 327 (to prevent abuse of the derivative action remedy). [43] This argument lacks merit, because it rests upon an unstatedand incorrectpremise, namely, that the post-merger double derivative action must be viewed as a de facto continuation of the pre-merger original derivative action, only with a different label. If that premise were correct, then the defendants' position might have merit, because allowing the original derivative action to proceed would undo the plaintiffs' loss-of-standing recognized by Lewis v. Anderson , and arguably would constitute, de facto, a piercing of BofA's corporate veil. The defendants' argument is flawed, however. A post-merger double derivative action is not a de facto continuation of the pre-merger derivative action. It is a new, distinct action in which standing to sue double derivatively rests on a different temporal and factual basisnamely, the failure of the BofA board, post-merger, to enforce the premerger claim of its wholly-owned subsidiary. [44] In this quite different structure, the policies favoring both the preservation of the corporate separateness of the parent and subsidiary and the prevention of abusive derivative suits are fully respected. That is because the double derivative suit cannot go forward except in the unusual case where the parent company board is shown to be incapable of deciding impartially whether or not to enforce the claim that the parent company now (indirectly) owns. Like their conceptual arguments, the defendants' policy contentions misconceive the nature of a post-merger double derivative action.