Opinion ID: 2442966
Heading Depth: 1
Heading Rank: 11

Heading: The Saito Decision

Text: That leaves Saito as the defendants' sole legal support for their position. We conclude that, insofar as Saito addresses the issue presented here, it does not represent sound Delaware law. Saito was a stockholder's derivative action brought in the Court of Chancery in April 1999, to recover damages allegedly inflicted on: (i) the former HBO & Company (HBOC), (ii) McKesson Corporation (McKesson), and (iii) McKesson HBOC, the combined company after a stock-for-stock merger of those two companies in January 1999. The central claims were that: HBOC's directors and senior officers presided over a fraudulent accounting scheme; McKesson's officers and directors learned of that fraudulent scheme while conducting due diligence in connection with the merger, but the directors nonetheless approved the merger; and that after the merger the McKesson HBOC board acted too slowly in rectifying the accounting problems at HBOC. [45] None of the plaintiffs were HBOC shareholders at the time the complaint was originally filed in April 1999. Two of the plaintiffs were HBOC shareholders before the merger and became McKesson HBOC stockholders in the January 1999 stock-for-stock merger with McKesson. [46] The Saito opinion decided a motion to dismiss the fifth amended complaint, which alleged thirteen counts of wrongdoing. Only one of those countsCount VIis relevant to the issue presented here. Count VI alleged ( inter alia ) that the former directors of HBOC violated their fiduciary duty by failing to monitor HBOC's internal accounting practices and to disclose HBOC's false financial statements before the merger. Count VI also asserted that claim double derivatively on behalf of McKesson HBOC and of post-merger HBOC, which was McKesson HBOC's wholly-owned subsidiary. [47] That claim, originally alleged as a standard derivative claim in the second amended complaint, had previously been dismissed for failure to satisfy the continuous ownership requirement, because the plaintiffs were not shareholders of HBOC at the time the action was filed. The Chancellor dismissed the claim without prejudice to replead that the merger fell into one of the two exceptions recognized in Lewis v. Anderson . [48] As repled, Count VI alleged in conclusory terms that the merger had been fraudulently structured to eliminate the plaintiffs' ability to assert pre-merger claims on behalf of HBOC. [49] The Chancellor found that, as repled, the claim failed adequately to allege that the merger had been designed to thwart shareholder derivative claims. [50] The plaintiffs argued, nonetheless, that they had standing for an independent reason, namely, that Count VI was a double derivative claim which, as a result of the merger, they had standing to bring as McKesson HBOC shareholders. [51] The Chancellor disagreed, holding that to have standing to sue double derivatively on behalf of McKesson HBOC, (1) the plaintiffs must have been shareholders of McKesson HBOC at both the time of the alleged wrong and at the time they commenced their lawsuit, and (ii) McKesson HBOC must have been a shareholder of HBOC at the time of the alleged wrong. Those requirements (the court held) were not satisfied because [the] plaintiffs ... were not McKesson HBOC shareholders before January 12, 1999 [the date of the merger], so they cannot bring a derivative suit, double or otherwise[;] [52] and, moreover, [the] plaintiffs have failed to allege that McKesson HBOC was a shareholder of HBOC at the time the alleged harm occurred. [53] Saito is the only case supporting the defendants' position that, where a merger has deprived a shareholder of standing to continue a pending standard derivative suit, to have standing to sue double derivatively the plaintiffs must have owned stock in both the acquired and the acquiring corporation, and the acquiring corporation must have owned shares of the acquired corporation, all at the time of the alleged wrongdoing. To the extent Saito so holds, the issue becomes whether that holding is sound Delaware law. We conclude that it is not. No reasoning is articulated to support Saito's conclusory holding. Unless the defendants' model of a double-derivative action is valid, Saito cannot be correct. For the reasons earlier discussed, that model is legally infirm. We do note, in fairness to the author of Saito, that it is understandable why his holding regarding double derivative standing was expressed in conclusory form. Four years earlier, that same highly respected jurist decided Ash v. McCall, [54] which involved an earlier dismissal motion, and similar standing issues, in the same case. In Ash the defendants moved to dismiss an earlier version of Count VI for lack of standing. The plaintiffs argued that despite having lost their HBOC shareholder status in the McKesson HBOC merger, they still had standing to continue pursuing their standard derivative claim. The plaintiffs relied on the Third Circuit decision in Blasband v. Rales , which (the plaintiffs argued) upheld standing in virtually identical circumstances. The Chancellor disagreed. Pointing to In re First Interstate Bancorp Consol. S'holder Litig., [55] where the Court of Chancery had held that the Third Circuit Blasband decision was inconsistent with Lewis v. Anderson , [56] the Ash Court stated: First Interstate clearly expressed the Delaware Courts' rejection of the Third Circuit's holding in Blasband v. Rales that the combination of a direct pre-merger equity interest (in the subsidiary) and a direct but diluted post-merger equity interest (in the surviving corporation) is sufficient to meet the common law continuous ownership requirement necessary to prosecute pre-merger derivative claims.... [Although t]he Third Circuit's view.... has been characterized by commentators as persuasive[,]... [n]onetheless, it is not the law in Delaware. [57] That is, the Court in Saito felt no need to articulate the requirements for a double derivative action with more particularity because the rationale driving the result in Saito had been explained in Ash, four years earlier. Ash, however, involved a standard derivative action. By implicitly extending the Ash rationale to double derivative actions, Saito misapplied Delaware law. To that extent, Saito is inconsistent with the reasoning and conclusions in this Opinion and is overruled.