Opinion ID: 2442966
Heading Depth: 1
Heading Rank: 6

Heading: Standing To Sue Double Derivatively

Text: The standing issue is a consequence of the doctrine articulated in Lewis v. Anderson . [16] There, a standard derivative action was brought in the Court of Chancery on behalf of Conoco Inc. (Old Conoco) charging its directors with breaches of fiduciary duty. Thereafter, and while that action was pending, E.I. duPont de Nemours, Inc. (DuPont) acquired Old Conoco in a stock-for-stock merger. As a result, Old Conoco disappeared and the surviving corporationa wholly owned subsidiary of DuPontwas renamed Conoco, Inc. (New Conoco). After the merger, the defendants moved to dismiss the derivative action, arguing that the plaintiff had lost his standing to maintain it because as a matter of law the derivative claim became the property of New Conoco, which post-merger was the only party with standing to assert the claim. The Court of Chancery dismissed the action, and this Court affirmed. The reasoning which supports that outcome is critical to understanding how the standing issue arises in the double derivative context. The Anderson court, citing earlier Delaware decisions, 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. [17] These two imperatives are referred to, respectively, as the contemporaneous ownership and the continuous ownership requirements. The contemporaneous ownership requirement is imposed by statute; [18] while the continuous ownership requirement is a creature of common law. Lewis v. Anderson holds that where the corporation on whose behalf a derivative action is pending is later acquired in a merger that deprives the derivative plaintiff of his shares, the derivative claimoriginally belonging to the acquired corporationis transferred to and becomes an asset of the acquiring corporation as a matter of statutory law. [19] Because as a consequence the original derivative shareholder plaintiff can no longer satisfy the continuous ownership requirement, the plaintiff loses standing to maintain the derivative action. And, because the claim is now (post merger) the property of the acquiring corporation, that corporation is now the only party with standing to enforce the claim, either by substituting itself as the plaintiff or by authorizing the original plaintiff to continue prosecuting the suit on the acquiring company's behalf. [20] That rationale generates the question presented here, which may be stated thusly: where a shareholder has lost standing to maintain a standard derivative action by reason of an acquisition of the corporation in a stock-for-stock merger, may that shareholder, in his new capacity as a shareholder of the acquiring corporation, assert the claim double derivatively and, if so, what requirements must the plaintiff satisfy? That issue did not arise in Lewis v. Anderson because the plaintiff there did not sue double derivatively, but the issue did arise in Rales v. Blasband , which involved facts similar (although not identical) to those presented here. Rales had a tortuous procedural history. The plaintiff brought a derivative action on behalf of a Delaware parent corporation that had previously acquired (and wholly owned) a subsidiary in a stock-for-stock merger. The action sought to remedy alleged pre-merger misconduct of the subsidiary's board. The defendants moved to dismiss the federal action for lack of standing and for failure to plead that a pre-suit demand would have been futile. Granting the motion, the District Court held that the plaintiff could not assert his action double derivatively because he failed to allege that the acquiring corporation was a stockholder of the acquired corporation at the time of the wrongdoing. The District Court also rejected the plaintiff's contention that he had standing to maintain his action on the (acquired) subsidiary's behalf, because that standing was lost as a result of the merger. [21] On appeal, the United States Court of Appeals for the Third Circuit vacated the District Court's order. Holding that the plaintiff had standing to bring his claim as a double derivative action, the Third Circuit permitted the plaintiff to amend his complaint to plead demand excusal. [22] The plaintiff amended his complaint and the defendants again moved to dismiss on the basis that the plaintiffs had not adequately pled that demand on the parent corporation's board was excused. The question of whether demand was excused was then certified to and accepted by this Court, and became the subject of this Court's decision in Rales v. Blasband , which was limited to the demand excusal issue. [23] In Rales we held that the traditional Aronson v. Lewis [24] demand excusal test would not be employed in considering whether a demand on the parent board was required in a double derivative action. Rather, a different test (the  Rales test) would apply, which is whether the particularized factual allegations of the complaint create a reasonable doubt that the parent's board of directors could properly have exercised its independent and disinterested business judgment in responding to a demand. [25] This Court further held that in a double derivative action the Rales test would apply as of the time the complaint was filed, as distinguished from the time of the alleged wrongdoing. [26] The most recent signpost on this legal roadmap is Lewis v. Ward . [27] There, a shareholder of a Delaware corporation brought a standard derivative action, challenging the fairness of an interested transaction between the corporation and the corporation's majority stockholder. Thereafter, the corporation entered into a merger with an unaffiliated third party acquirer, in which the acquired corporation became a wholly owned subsidiary, and the plaintiff became a shareholder, of the acquiring corporation. The suit was later dismissed for lack of standing with leave to amend. The plaintiff amended her complaint to allege that the merger fell within the fraud exception of Lewis v. Anderson . [28] Importantly, however, the plaintiff did not purport to assert her claim double derivatively on the parent's behalf. [29] Affirming the dismissal of the amended complaint, this Court held that the fraud allegations were legally inadequate. We emphasized, however, that the plaintiff did not lack any remedy to pursue her derivative claims [because] the plaintiff might have been able to bring a post-merger double derivative suit but made no attempt to file such an action. [30] Thus, Lewis v. Ward , like Rales v. Blasband , reaffirmed the vitality of resorting to a double derivative remedy in appropriate circumstances.