Opinion ID: 2622828
Heading Depth: 2
Heading Rank: 2

Heading: Delaware Law

Text: The parties do not dispute that Delaware imposes two stock ownership requirements for standing in a derivative action. The Delaware Corporations Code provides: In any derivative suit instituted by a stockholder of the 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. (Del.Code, tit.8, § 327.) Delaware Court of Chancery Rules of Court, rule 23.1 similarly specifies: In a derivative action ... the complaint shall allege that the plaintiff was a shareholder or member at the time of the transaction of which the plaintiff complains or that the plaintiffs share or membership thereafter devolved on the plaintiff by operation of law.... The purpose of this first requirement for contemporaneous ownership is to prevent so-called strike suits, whereby stock in a corporation is purchased with purely litigious motives, that is, for the sole purpose of prosecuting a derivative action to attack transactions that occurred before the stock purchase. ( Alabama By-Products Corp. v. Cede & Co. (Del.1995) 657 A.2d 254, 264, fn. 12 ( Alabama By-Products ); see Agostino v. Hicks (Del.Ch.2004) 845 A.2d 1110,1117, fn. 16.) The Delaware courts have construed the foregoing legislation and rule as further requiring that the derivative plaintiff retain stock ownership for the duration of the litigation. ( Lewis v. Anderson (Del. 1984) 477 A.2d 1040, 1046 ( Lewis ); see Kramer v. Western Pacific Industries; Inc. (Del.1988) 546 A.2d 348, 354 ( Kramer ), citing Lewis, supra, 477 A.2d 1040.) This second requirement, for continuous ownership of stock, is consistent with general principles of corporation law and stems from the recognition that, ordinarily, the decision to pursue a claim on behalf of a corporation is entrusted to the board of directors as within the ambit of its authority to manage the corporation's affairs. ( Alabama By-Products, supra, 657 A.2d at p. 265.) The rationale for permitting a shareholder to maintain a derivative suit on a corporation's behalf, and thereby intrude upon a board's authority, is that his or her status as a shareholder provides an interest and incentive to obtain legal redress for the benefit of the corporation. ( Ibid. ) But [o]nce the derivative 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. ( Ibid. ) Like the contemporaneous ownership rule, the continuous ownership rule aims to prevent the abuses frequently associated with a derivative suit. ( Id. at p. 264, relying on Lewis, supra, 477 A.2d at p. 1046.) Significantly, Delaware views the continuous ownership requirement as fully applicable to a question of post-merger standing to carry on a derivative suit. ( Lewis, supra, 477 A.2d at p. 1046.) Thus, [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. ( Id. at p. 1049.) Delaware recognizes two limited exceptions to the requirement of continuous ownership as applied to mergers. A plaintiff who loses stock in a corporation as a result of a merger may nonetheless possess standing to pursue a derivative action: (1) where the merger itself is the subject of a claim of fraud, perpetrated merely to deprive shareholders of the standing to bring a derivative action; or (2) where the merger is in reality merely a reorganization that does not affect the plaintiffs ownership in the business enterprise. ( Lewis v. Ward (Del.2004) 852 A.2d 896, 902.) Huang does not contend there are facts bringing this case within either exception.