Opinion ID: 2189591
Heading Depth: 1
Heading Rank: 9

Heading: Lewis and Its Progeny

Text: In Lewis v. Anderson , [13] the plaintiff filed a derivative action on behalf of Conoco, Inc. (Old Conoco) against various Old Conoco directors and officers alleging that the corporation had entered into improper employment agreements with nine of its officers in response to a third-party tender offer for the corporation. Following execution of these golden parachutes, a bidding contest ensued for Old Conoco. [14] Du Pont acquired a majority interest in Old Conoco through a successful tender offer. The Old Conoco was merged into a Du Pont subsidiary. The surviving corporation was renamed New Conoco. [15] In the back-end merger, the shareholders of Old Conoco received shares of Du Pont stock in exchange for their Old Conoco shares. [16] Thus, the plaintiff in Lewis v. Anderson became a Du Pont stockholder and Du Pont became the sole stockholder of New Conoco. [17] The defendants in Lewis v. Anderson then moved to dismiss the derivative complaint on the grounds that the plaintiff no longer had standing as an Old Conoco shareholder to pursue his derivative claims. [18] The Court of Chancery held that, by reason of the merger, the plaintiff had lost derivative standing to pursue the action. [19] On appeal, 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.... 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. [20] This Court concluded that the plaintiff's derivative claim was an asset of Old Conoco that had clearly passed by virtue of the merger under § 259 to New Conoco. Accordingly, in Lewis v. Anderson , we held that the decision whether to proceed against Old Conoco's former management was New Conoco's to make. [21] Four years later, in Kramer v. Western Pac. Indus., Inc., [22] this Court was again called upon to address the implications of a merger on a stockholder-plaintiff's standing to maintain a derivative suit post-merger, albeit this time in the context of a cash-out merger. Applying the general rule of Lewis v. Anderson , this Court affirmed the dismissal of the derivative suit and held that, [t]o maintain a shareholder derivative suit, a plaintiff must be a shareholder at the time of the filing of the suit and must remain a shareholder throughout the litigation. [23] In Kramer, we also reaffirmed and restated the two exceptions to the general rule of Lewis v. Anderson as follows: This Court, in Lewis, set forth two exceptions in the merger context to its holding that only a current shareholder has standing to maintain an action that is derivative in nature: (i) if the merger itself is the subject of a claim of fraud, being perpetrated merely to deprive shareholders of the standing to bring a derivative action; or (ii) if the merger is in reality merely a reorganization which does not affect plaintiff's ownership in the business enterprise. [24] In Kramer, we concluded that neither exception applied and held that the merger caused the plaintiff to lose standing to pursue the derivative claims. [25] Accordingly, in Kramer, we also held that [t]itle to such claims has passed by operation of law to [the acquirer], and [the acquirer] alone has the right to determine whether to pursue such claims against the defendants. [26] Subsequent cases have applied the general rule of Lewis v. Anderson and held that a stockholder-plaintiff may not continue to pursue derivative claims following a merger that eliminates the plaintiff's shareholder status, unless facts are alleged that fall within one of the two exceptions. [27] In support of her argument in favor of overruling Lewis v. Anderson , the plaintiff submits that this Court's holding in Lewis v. Anderson is at odds with the decision of the United States Court of Appeals for the Third Circuit in Blasband v. Rales. [28] Although this Court had the opportunity to comment on the Third Circuit's reasoning in Blasband, when the District of Delaware certified a question of law regarding the excusal of demand under Delaware law to the Court, we declined to do so because of the procedural posture of the case. [29] This Court stated, however, that [o]ur recognition of the limited scope of the present proceeding should not be interpreted as either an acceptance or a rejection of the Third Circuit's conclusions on matters of the substantive Delaware corporation law relating to the standing issue decided in Blasband I. [30] In a subsequent decision that was affirmed by this Court, the Court of Chancery correctly held: The Third Circuit's decision in Blasband is both inconsistent with the clear holding of Lewis v. Anderson and immaterial to the decision in this case as, at most, it would recognize [the plaintiff's] ability to proceed double derivatively in the name of [the acquiring company], something which [the plaintiff] does not purport to do. [31] The general rule of Lewis v. Anderson and its progeny is a logical corollary to the established principle of Delaware corporate law recognizing the separate corporate existence and identity of corporate entities, as well as the statutory mandate that the management of every corporation is vested in its board of directors, not in its stockholders. [32] When a merger eliminates a plaintiff's shareholder status in a corporation, it also generally eliminates her standing to pursue derivative claims on behalf of that corporation. Those derivative claims pass by operation of law to the surviving corporation, whose board of directors then has the sole right and standing to prosecute the action. Accordingly, in this case, we ratify and reaffirm the general rule and two exceptions of Lewis v. Anderson .