Weather Underground, Incorporated v. Navigation Catalyst Systems, Incorporated et al
Filing
186
APPENDIX re: 178 MOTION for Summary Judgment filed by Epic Media Group, Incorporated. by Epic Media Group, Incorporated (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4, # 5 Exhibit 5, # 6 Exhibit 6, # 7 Exhibit 7, # 8 Exhibit 8, # 9 Exhibit 9, # 10 Exhibit 10, # 11 Exhibit 11, # 12 Exhibit 12, # 13 Exhibit 13) (Delgado, William)
Exhibit 8
Page 1
852 A.2d 896
(Cite as: 852 A.2d 896)
Supreme Court of Delaware.
Shirley LEWIS, Plaintiff Below, Appellant,
v.
Milton H. WARD, Allen Born, Gerald J. Malys,
Rockwell A. Schnabel, Vernon F. Taylor, Jr., Russell L. Wood, Cyprus Amax Minerals Company and
Amax Gold, Inc., Defendants Below, Appellees.
No. 567,2003.
Submitted: April 27, 2004.
Decided: June 16, 2004.
Background: Shareholder brought derivative suit
against majority shareholder. Corporation merged
with unaffiliated third party to become whollyowned subsidiary. Corporation's shares were exchanged for shares of parent corporation. After
complaint was dismissed, shareholder filed
amended complaint and majority shareholder
moved to dismiss for lack of standing. The Court of
Chancery, New Castle County, dismissed complaint
with prejudice. Shareholder appealed.
Holdings: The Supreme Court, Holland, J., held
that:
(1) mere reorganization exception did not apply to
establish standing to sue;
(2) trial court correctly applied particularized
pleading requirements to amended complaint alleging merger was fraudulent; and
(3) amended complaint failed to make sufficient allegations that merger was fraudulent to establish
standing.
Affirmed.
West Headnotes
[1] Corporations and Business Organizations
101
2031
101 Corporations and Business Organizations
101VIII Derivative Actions; Suing or Defending
on Behalf of Corporation
101VIII(A) In General
101k2027 Persons Entitled to Sue or Defend; Standing
101k2031 k. Effect of merger, acquisition, or reorganization. Most Cited Cases
(Formerly 101k207)
Merger which eliminates a derivative plaintiff's
ownership of shares of the corporation for whose
benefit she has sued terminates her standing to pursue those derivative claims.
[2] Corporations and Business Organizations
101
2030
101 Corporations and Business Organizations
101VIII Derivative Actions; Suing or Defending
on Behalf of Corporation
101VIII(A) In General
101k2027 Persons Entitled to Sue or Defend; Standing
101k2030 k. Time of stock ownership
in general. Most Cited Cases
(Formerly 101k207)
A derivative shareholder must not only be a
stockholder at the time of the alleged wrong and at
the time of commencement of suit but that he must
also maintain shareholder status throughout the litigation. 8 Del.C. §§ 259, 327; Chancery Court Rule
23.1.
[3] Corporations and Business Organizations
101
2031
101 Corporations and Business Organizations
101VIII Derivative Actions; Suing or Defending
on Behalf of Corporation
101VIII(A) In General
101k2027 Persons Entitled to Sue or Defend; Standing
101k2031 k. Effect of merger, acquisition, or reorganization. Most Cited Cases
(Formerly 101k589, 101k207)
A merger which eliminates a complaining
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852 A.2d 896
(Cite as: 852 A.2d 896)
stockholder's ownership of stock in a corporation
also ordinarily eliminates his status to bring or
maintain a derivative suit on behalf of the corporation, whether the merger takes place before or after
the suit is brought, on the theory that upon the merger the derivative rights pass to the surviving corporation which then has the sole right or standing to
prosecute the action. 8 Del.C. §§ 259, 327; Chancery Court Rule 23.1.
eliminates derivative plaintiff's ownership of shares
of corporation terminates plaintiff's standing,
provides that derivative standing will not be eliminated where merger is in reality a reorganization
which does not affect plaintiff's ownership of the
business enterprise.
[4] Corporations and Business Organizations
101
2031
101 Corporations and Business Organizations
101VIII Derivative Actions; Suing or Defending
on Behalf of Corporation
101VIII(A) In General
101k2027 Persons Entitled to Sue or Defend; Standing
101k2031 k. Effect of merger, acquisition, or reorganization. Most Cited Cases
(Formerly 101k207)
Exception to general rule that merger which
eliminates derivative plaintiff's ownership of shares
of corporation terminates plaintiff's standing is
where merger itself is subject of claim of fraud, being perpetrated merely to deprive shareholders of
the standing to bring derivative claim.
101 Corporations and Business Organizations
101VIII Derivative Actions; Suing or Defending
on Behalf of Corporation
101VIII(A) In General
101k2027 Persons Entitled to Sue or Defend; Standing
101k2031 k. Effect of merger, acquisition, or reorganization. Most Cited Cases
(Formerly 101k589, 101k207)
The “mere reorganization” exception to general
rule that merger that eliminates derivative plaintiff's
ownership of shares of corporation terminates
plaintiff's standing did not apply in shareholder's
derivative suit on behalf of corporation that merged
with, and became subsidiary of, third-party corporation; merging corporations were unaffiliated, distinct corporations with separate boards of directors,
officers, and stockholders, and not merely a holding
company with affiliated directors and shareholders.
[5] Corporations and Business Organizations
101
2031
101 Corporations and Business Organizations
101VIII Derivative Actions; Suing or Defending
on Behalf of Corporation
101VIII(A) In General
101k2027 Persons Entitled to Sue or Defend; Standing
101k2031 k. Effect of merger, acquisition, or reorganization. Most Cited Cases
(Formerly 101k207)
Exception to general rule that merger which
[6] Corporations and Business Organizations
101
2031
[7] Corporations and Business Organizations
101
2048
101 Corporations and Business Organizations
101VIII Derivative Actions; Suing or Defending
on Behalf of Corporation
101VIII(A) In General
101k2045 Pleading
101k2048 k. Allegations as to interest
of or injury to plaintiff. Most Cited Cases
(Formerly 101k211(2))
Court of Chancery rule that required particularized pleading regarding fraud allegations was correctly applied by trial court to amended complaint
in derivative suit of shareholder; amended complaint was filed to establish standing through fraud
exception to general rule that merger of corporation
deprives shareholder of standing to bring derivative
claims. Chancery Court Rule 9(b).
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852 A.2d 896
(Cite as: 852 A.2d 896)
[8] Corporations and Business Organizations
101
2098
101 Corporations and Business Organizations
101VIII Derivative Actions; Suing or Defending
on Behalf of Corporation
101VIII(B) Derivative Actions by Shareholders Against Directors, Officers, or Agents
101k2095 Pleading
101k2098 k. Allegations as to interest
of or injury to plaintiff. Most Cited Cases
(Formerly 101k211(2))
Shareholder in derivative action failed to make
sufficient allegations that merger of corporation
with third-party corporation was product of fraud
and done solely to eliminate her derivative claims,
as required to establish her standing to maintain suit
after her shares were exchanged for third-party corporation's shares; complaint made no allegations
that corporation's board of directors dictated structure of merger or that board even considered shareholder's claims when it approved merger, and mere
fact that corporation became subsidiary did not infer fraud. Chancery Court Rule 9(b).
*897 Court Below-Court of Chancery of the State
of Delaware, in and for New Castle County, C.A.
No. 15255.
Upon appeal from the Court of Chancery. Affirmed.Joseph A. Rosenthal, Rosenthal, Monhait,
Gross & Goddess, Wilmington, DE and Irving Bizar (argued) and A. Arnold Gershon, P.C., Ballon,
Stoll, Bader & Nadler, P.C., New York City, for appellant, Shirley Lewis.
Kenneth J. Nachbar, William M. Lafferty (argued)
and Susan D. Wood, Morris, Nichols, Arsht & Tunnell, Wilmington, DE, for appellees, Vernon F.
Taylor, Jr. and Russell L. Wood.
David C. McBride, Young, Conaway, Stargatt &
Taylor, Wilmington, Delaware, for appellees,
Milton H. Ward, Allen Born and Gerald L. Malys.
Thomas P. Preston,Blank Rome, L.L.P., Wilming-
ton, DE, for appellee, Amax Gold, Inc.
Joel Friedlander and Karen L. Pascale, Bouchard,
Margules & Friedlander, Wilmington, DE, for appellees, Cyprus Amax Minerals Company.
Before STEELE, Chief Justice, HOLLAND and
BERGER, Justices.
HOLLAND, Justice:
Shirley Lewis, the plaintiff-appellant, is a
former shareholder of Amax Gold, Inc. (“Amax
Gold”). The plaintiff brought this derivative action
nearly seven years ago, challenging the fairness of
a transaction between Amax Gold and its then majority stockholder, Cyprus Amax Minerals Company (“Cyprus”). While the litigation was pending
in the Court of Chancery, Amax Gold merged with
and into a subsidiary of Kinross Gold Corporation
(“Kinross”), an Ontario corporation with no prior
relationship to Amax Gold.
As a result of the reverse triangular merger
between Amax Gold and Kinross, Amax Gold became a wholly-owned subsidiary of Kinross. The
plaintiff's shares in Amax Gold were converted into
the right to receive shares of Kinross. Consequently, after the merger, the plaintiff was no
longer a stockholder of Amax Gold, but rather a
stockholder of Kinross.
*898 Procedural Background
Following the merger, the defendants moved to
dismiss the complaint on the ground that the
plaintiff's derivative standing to pursue claims on
Amax Gold's behalf was eliminated because she no
longer held any shares in Amax Gold. After full
briefing, the Court of Chancery granted the defendants' motions to dismiss and held that, pursuant to
FN1
the general rule of Lewis v. Anderson,
the effect of the Amax Gold-Kinross merger was to deprive the plaintiff of standing to maintain her derivative action on behalf of Amax Gold. However, the
Court of Chancery also granted the plaintiff leave
to amend her complaint to allege facts that would
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852 A.2d 896
(Cite as: 852 A.2d 896)
bring her claims within the so-called “fraud exception” to the general rule of Lewis v. Anderson.
FN1. Lewis v. Anderson, 477 A.2d 1040
(Del.1984).
The plaintiff filed an amended complaint. Once
again, each of the defendants filed a motion to dismiss. The Court of Chancery dismissed the
plaintiff's amended complaint with prejudice, holding that she had not alleged sufficient facts to satisfy the fraud exception to the Lewis general rule and,
therefore, no longer had standing to pursue her derivative claims.
Issues on Appeal
The plaintiff has raised two issues on appeal.
First, she argues that this Court should reconsider
FN2
and overrule
Lewis v. Anderson, so that stockfor-stock mergers between unaffiliated corporations
will not preclude continuing stockholders of the
parent corporation from pursuing derivative litigation on behalf of a subsidiary corporation. Second,
she submits that, under the general pleading standards that are applicable to Rule 12(b)(6) motions,
her amended complaint adequately alleges that the
merger between Kinross and Amax Gold was fraudulently structured to deprive her of standing to prosecute this derivative action.
FN2. Prior precedents can only be overruled when this Court is sitting en Banc.
Supr. Ct. R. 4. The plaintiff did not file a
motion for en Banc consideration. The
panel did not order en Banc consideration
sua sponte because of our unanimous view
that Lewis v. Anderson should not be overruled.
We have concluded that both of the plaintiff's
arguments are without merit. Therefore, the judgment of the Court of Chancery must be affirmed.
Original Complaint
The plaintiff, as a stockholder of Amax Gold,
filed the original complaint in this action on Octo-
ber 8, 1996, “derivatively in the right of and for the
benefit of the Company.” The original complaint
alleged that in 1995 and 1996, Amax Gold experienced unanticipated cost overruns in connection
with a gold development venture known as the Fort
Knox Project. At that time, Amax Gold was engaged in the exploration for, and mining of, gold
and other precious metals. The original complaint
further alleged that the cost overruns in the Fort
Knox Project required additional financing. The
crux of the plaintiff's derivative claim in the original complaint was that Amax Gold obtained such
financing from its then majority stockholder,
Cyprus, on terms that were not entirely fair to
Amax Gold.
Subsequent Merger
On February 9, 1998, Amax Gold announced
that it intended to merge with Kinross, an unaffiliated third-party, in an arms'-length merger. On June
1, 1998, Amax Gold merged with and into Kinross
Merger Corp. (“Merger Corp.”), a wholly owned
subsidiary of Kinross (the “Kinross Merger”). Prior
to the merger, Kinross was traded on the New York
and Toronto *899 stock exchanges and had assets
of $461 million and annual revenues of $183 million. Kinross and Merger Corp. were both unrelated
to Amax Gold prior to and at the time of the merger. After the Kinross Merger, in September 1998,
Amax Gold changed its name to Kinam Gold, Inc.
FN3
FN3. Nevertheless, all references in this
opinion shall be to Amax Gold, rather than
Kinam Gold, Inc.
Pursuant to the Kinross Merger, shares of
Amax Gold, including the shares owned by the
plaintiff, were converted into the right to receive
shares of Kinross. As a result of the Kinross Merger, Amax Gold is a wholly owned subsidiary of
Kinross. Although the plaintiff no longer owns any
shares of Amax Gold, she presumably still owns
shares of Amax Gold's parent company, Kinross.
Original Complaint Dismissed
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852 A.2d 896
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In February 1999, all of the defendants moved
to dismiss the original complaint on the grounds
that the plaintiff was no longer a stockholder of
Amax Gold and, therefore, lacked standing to assert
derivative claims on its behalf. The Court of Chancery granted the defendants' motion to dismiss
based on this Court's holding in Lewis v. Anderson.
The effect of a merger, such as the one that took
place in this case, is normally to deprive a shareholder of the merged corporation of standing to
FN4
maintain a derivative action.
That general rule
is, however, subject to two limited exceptions:
FN4. See Lewis v. Anderson, 477 A.2d
1040, 1049-50 (Del.1984). See also Lewis
v. Ward, 2003 WL 22461894 (Del.Ch. Oct.
29, 2003).
(1) Where 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; and
(2) Where the merger is in reality a reorganization which does not affect plaintiff's ownership of
FN5
the business enterprise.
FN5. Kramer v. Western Pac. Indus., Inc.,
546 A.2d 348, 354 (Del.1988); Lewis v.
Anderson, 477 A.2d at 1046 n. 10; In re
First Interstate, 729 A.2d 851, 867
(Del.Ch.1998); Ash v. McCall, 2000 WL
1370341, at *12 (Del.Ch. Sept. 15, 2000).
The plaintiff argued that her original complaint
set forth facts that brought this case within the first
of two exceptions articulated in Lewis v. Anderson.
The Court of Chancery disagreed that the original
complaint set forth facts that, if true, alleged the
merger was “being perpetrated merely to deprive
FN6
the plaintiff of derivative standing.”
Because
the plaintiff's brief suggested that she might be able
to plead such a claim, however, the Court of Chancery granted the plaintiff leave to file an amended
complaint.
FN6. Lewis v. Anderson, 477 A.2d at 1046
n. 10.
Amended Complaint
On October 13, 2000, the plaintiff filed an
amended complaint. The most relevant substantive
changes in the amended complaint were the addition of new paragraphs 26-31:
26. On or about February 9, 1998, a merger
was announced between the Company [Amax
Gold] and Kinross. The form of the merger contemplated that the Company would become a
subsidiary of Kinross, and the common stockholders of the Company would receive shares of
Kinross stock in exchange for their shares of
Company stock.
27. The merger proxy statement, at p. 26, describes the discussions as leading potentially to a
merger of equals. At p. 33, the merger proxy
statement discloses that Kinross's contribution to
*900 the combined entity ranged from 31.0% to
57.7% on the equity value measures. However,
Kinross stockholders would own approximately
50% of the combined entity on an equity value
basis.
28. At p. 28, it discloses that Kinross's total
present value contribution would equal 45.5%. At
p. 41, it discloses that the Company's contribution to the combined company ranged from 17%
to 72% on equity measures and 57% to 134% on
Enterprise measures. Under another analysis the
Company's contribution was 45% to 53% to
equity and 73% to 78% to Enterprise Value. The
Company's stockholders would own approximately 50% of the equity and 67% of the Enterprise Value of the combined company.
29. The merger became effective on June 1,
1998.
30. The merger of the Company and Kinross
was specifically structured and perpetrated in the
form described in paragraph 26 merely to deprive
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852 A.2d 896
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the plaintiff and other common stockholders of
standing to prosecute this action.
31. Moreover, there is no principled economic
or equitable argument that plaintiff should lose
standing here as a result of the merger between
the Company and Kinross. Such loss of standing
is inconsistent with basic economic principles as
well as fundamental principles of equity and fairness.
The amended complaint also alleged the same
substantive derivative claims that had been pled in
the original complaint regarding the Fort Knox
Project and the allegedly unfair financing.
The amended complaint alleges that demand on
Amax Gold's Board of Directors under Chancery
Court Rule 23.1 is futile because four of the seven
members of that Board were officers and/or directors of Amax Gold's former majority stockholder,
Cyprus, and were not disinterested. The plaintiff
does not purport to bring this claim as a stockholder
of Kinross in the form of a double derivative action.
Accordingly, the amended complaint does not set
forth any allegations regarding any demand having
been made on the Kinross Board to pursue the
claims or any allegations regarding demand futility
as to the Kinross Board.
Amended Complaint Dismissed
After the amended complaint was filed, all of
the defendants again filed motions to dismiss. The
Court of Chancery framed the question before it as
“whether the plaintiff has pled facts invoking the
fraud exception to the [Lewis v. Anderson] general
rule that the loss of stockholder status in a merger
divests a derivative plaintiff of standing?” After reviewing the allegations in the amended complaint
regarding the Kinross Merger, the Court of Chancery concluded that, to survive a motion to dismiss,
the plaintiff was required to plead “particularized
facts invoking the fraud exception to Lewis v. Anderson in order to avoid dismissal,” and that
plaintiff failed to meet that burden. Alternatively,
the Court of Chancery concluded that, even if the
less stringent pleading standard in Court of Chancery Rule 12 was applicable to the plaintiff's claim
of fraud, the plaintiff's amended complaint still
failed to meet that standard because “[n]othing in
the plaintiff's complaint reasonably supports the inference that Amax Gold structured the merger with
Kinross the way it did solely to deprive the plaintiff
of standing or that it was Amax Gold that sought
this structure.”
Derivative Standing Requires Share Ownership
[1] Under Delaware law, it is well established
that a merger which eliminates a derivative
plaintiff's ownership of shares of the corporation
for whose benefit she has *901 sued terminates her
FN7
standing to pursue those derivative claims.
In
this appeal, the plaintiff asks this Court to reconsider and to overrule its now seminal holding in
FN8
Lewis v. Anderson.
The plaintiff contends that,
under general principles of equity and fairness, she
has “equitable standing” to proceed with her derivative claims despite the fact that she no longer
owns any shares of Amax Gold, the corporation on
whose behalf she purports to sue.
FN7. See Lewis v. Anderson, 477 A.2d
1040, 1049 (Del.1984); Kramer v. Western
Pac. Indus., 546 A.2d 348, 354 (Del.1988);
Parnes v. Bally Entm't Corp., 722 A.2d
1243, 1244-45 (Del.1999); In re First Interstate Bancorp Consol. S'holder Litig.,
729 A.2d 851, 868 (Del.Ch.1998), aff'd
sub nom. Bradley v. First Interstate Bancorp., 748 A.2d 913 (Del.2000); Ash v.
McCall, 2000 WL 1370341, at *13
(Del.Ch. Sept. 15, 2000).
FN8. Lewis v. Anderson, 477 A.2d 1040
(Del.1984).
[2][3] In Lewis v. Anderson, this Court determined that Court of Chancery Rule 23.1, Del.Code
Ann. tit. 8, § 259(a), and Del.Code Ann. tit. 8, §
327 “have been nearly universally construed” to require that, in the context of a corporate merger, “a
derivative shareholder must not only be a stock-
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852 A.2d 896
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holder at the time of the alleged wrong and at the
time of commencement of suit but that he must also
maintain shareholder status throughout the litigaFN9
tion.”
The purpose of this rule is: “to eliminate
FN10
abuses associated with a derivative suit”
and
to ensure that “upon the merger the derivative
rights pass to the surviving corporation which then
has the sole right or standing to prosecute the acFN11
tion.”
As the Court of Chancery explained in
Schreiber:
FN9. Id. at 1046 (citing Heit v. Tenneco,
Inc., 319 F.Supp. 884 (D.Del.1970);
Schreiber v. Carney, 447 A.2d 17
(Del.Ch.1982); Harff v. Kerkorian, 324
A.2d 215 (Del.Ch.1974); Braasch v. Goldschmidt, 199 A.2d 760 (Del.Ch.1964)).
FN10. Lewis v. Anderson, 477 A.2d at
1046 (citing Harff v. Kerkorian, 324 A.2d
at 218).
FN11. Schreiber v. Carney, 447 A.2d at 21
.
[A] merger which eliminates a complaining
stockholder's ownership of stock in a corporation
also ordinarily eliminates his status to bring or
maintain a derivative suit on behalf of the corporation, whether the merger takes place before or
after the suit is brought, on the theory that upon
the merger the derivative rights pass to the surviving corporation which then has the sole right
FN12
or standing to prosecute the action.
Lewis and Its Progeny
FN13
In Lewis v. Anderson,
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
FN14
Old Conoco.
Du Pont acquired a majority interest in Old Conoco through a successful tender
offer. *902 The Old Conoco was merged into a Du
Pont subsidiary. The surviving corporation was reFN15
named New Conoco.
FN13. Lewis v. Anderson, 477 A.2d 1040,
1042 (Del.1984).
FN14. Id.
FN15. Id.
In the back-end merger, the shareholders of
Old Conoco received shares of Du Pont stock in exFN16
change for their Old Conoco shares.
Thus, the
plaintiff in Lewis v. Anderson became a Du Pont
stockholder and Du Pont became the sole stockFN17
holder of New Conoco.
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
FN18
to pursue his derivative claims.
The Court of
Chancery held that, by reason of the merger, the
plaintiff had lost derivative standing to pursue the
FN19
action.
FN12. Id. (citations omitted).
FN16. Id.
When a merger eliminates a plaintiff's shareholder status in a company, it also eliminates her
standing to pursue derivative claims on behalf of
that company. Those derivative claims pass by operation of law to the surviving corporation, which
then has the sole right and standing to prosecute the
action. This Court and the Court of Chancery have
consistently applied these well-established precepts
of Delaware corporate law.
FN17. Id.
FN18. Id. at 1043.
FN19. Id.
On appeal, in Lewis v. Anderson, this Court reconciled Delaware's extant common law jurisprudence and the applicable provisions of the
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852 A.2d 896
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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
FN20
suit.
FN20. Lewis v. Anderson, 477 A.2d at
1047-49.
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
FN21
Conoco's to make.
FN21. Id. at 1050-51.
Four years later, in Kramer v. Western Pac. InFN22
dus., Inc.,
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
FN23
litigation.”
In Kramer, we also reaffirmed
and restated the two exceptions to the general rule
of Lewis v. Anderson as follows:
FN22. Kramer v. Western Pac. Indus.,
Inc., 546 A.2d 348 (Del.1988).
FN23. Id. at 354 (citing Lewis v. Anderson,
477 A.2d 1040 (Del.1984)).
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
FN24
business enterprise.
FN24. Id. (citations omitted).
*903 In Kramer, we concluded that neither exception applied and held that the merger caused the
plaintiff to lose standing to pursue the derivative
FN25
claims.
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
FN26
claims against the defendants.”
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
FN27
of the two exceptions.
FN25. Id. at 354-55.
FN26. Id. at 355.
FN27. See, e.g., Parnes v. Bally Entm't
Corp., 722 A.2d 1243, 1245 (Del.1999)
(“Since a stockholder suing derivatively is
bringing a corporate claim not a personal
one, the stockholder must maintain his or
her status as a stockholder in order to continue the litigation.”); In re First Interstate
Bancorp Consol. S'holder Litig., 729 A.2d
851, 867 (Del.Ch.1998), aff'd sub nom.
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852 A.2d 896
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Bradley v. First Interstate Bancorp., 748
A.2d 913 (Del.2000) (“The Delaware Supreme Court has held that once a plaintiff
ceases to be a shareholder, whether by
reason of a merger or for any other reason,
[he] loses standing to continue a derivative
suit.”) (internal citations omitted).
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.
FN28
Rales.
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.
FN29
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
FN30
in Blasband I.”
In a subsequent decision that
was affirmed by this Court, the Court of Chancery
correctly held:
FN28. Blasband v. Rales, 971 F.2d 1034
(3d Cir.1992).
FN29. See Rales v. Blasband, 634 A.2d
927, 931 (Del.1993) (noting that the Third
Circuit's decision allowing Blasband standing to pursue the derivative claims was the
law of the case).
FN30. Id. n. 5.
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
FN31
to do.
FN31. In re First Interstate Bancorp Consol. S'holder Litig., 729 A.2d at 868 n. 18
(citations omitted), aff'd sub nom. Bradley
v. First Interstate Bancorp., 748 A.2d 913
(Del.2000).
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
FN32
its board of directors, not in its stockholders.
When a merger eliminates a plaintiff's shareholder
status in a corporation, it also generally eliminates
her standing to pursue derivative claims on *904
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.
FN32. See Del.Code Ann. tit. 8, § 141(a)
(2001); Aronson v. Lewis, 473 A.2d 805,
811 (Del.1984).
Mere Reorganization Inapplicable
[4][5] The second recognized exception to the
general rule of Lewis v. Anderson provides that derivative standing will not be eliminated where “the
merger is in reality a reorganization which does not
affect plaintiff's ownership of the business enterFN33
prise.”
The primary precedents relied upon
by the plaintiff in this appeal to overrule Lewis v.
Anderson permitted derivative standing only because the facts of those cases fall into that second
recognized exception. Both Schreiber v. Carney
and Helfand v. Gambee, for example, involved applications of the Lewis v. Anderson “mere reorganFN34
ization” exception.
FN33. Lewis v. Anderson, 477 A.2d 1040,
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852 A.2d 896
(Cite as: 852 A.2d 896)
1046 n. 10 (Del.1984). Accord Kramer v.
Western Pac. Indus., Inc., 546 A.2d 348,
354 (Del.1988).
FN34. See Schreiber v. Carney, 447 A.2d
17, 22 (Del.Ch.1982) (allowing the
plaintiff equitable standing because the
merger of the corporation with a holding
company was little more than a reorganization that had “no meaningful effect on the
plaintiff's ownership of the business enterprise”); Helfand v. Gambee, 136 A.2d 558,
562 (Del.Ch.1957) (noting that the plaintiff
simply had “two pieces of paper rather
than one” after the corporation split into
two new corporations pursuant to an antitrust consent decree).
The present case involves the merger of two
FN35
unrelated corporations. In Bonime v. Biaggini,
the Court of Chancery held that a merger of two independent corporations extinguishes a stockholder's
standing to pursue derivative claims on behalf of
FN36
the disappearing corporation.
In distinguishing the case from Schreiber, the Court of Chancery
in Bonime v. Biaggini stated:
FN35. Bonime v. Biaggini, 1984 WL
19830 (Del.Ch. Dec. 7, 1984), aff'd, 505
A.2d 451 (Del.1985).
igation.
FN37
FN37. Id. at *3.
The “mere organization exception” of Lewis v.
Anderson has no applicability to this case. Amax
Gold and Kinross were two distinct corporations,
each with its own board of directors, officers, assets
and stockholders. In this case, as in Bonime v.
Biaggini, the Kinross Merger was far more than a
corporate reshuffling. The equitable concerns that
have caused Delaware courts to allow a plaintiff
equitable standing following a mere corporate reorganization are not extant in the case sub judice.
Fraud Exception Requires Particularization
[6] In her original and amended derivative
complaints, the plaintiff attempted to plead facts
sufficient to bring her claims *905 within the first
exception to the general rule of Lewis v. Anderson,
the so-called “fraud exception.” In Lewis v. Anderson, this Court held that the fraud exception is applicable “where the merger itself is the subject of a
FN38
claim of fraud.”
The plaintiff argues that the
Court of Chancery incorrectly applied the
heightened pleading standards of Court of Chancery
Rule 9(b) to her allegations that the Kinross Merger
was fraudulent.
FN38. Lewis v. Anderson, 477 A.2d 1040,
1046 n. 10 (Del.1984).
FN36. Id. at *2-3.
Here SPSF, as presently constituted, is the result of a merger of two distinct corporations each
of which had separate boards, officers, assets and
stockholders.... SPFS is distinctly different from
either of its constituent corporations, Southern
Pacific or Santa Fe.... In short, the entire corporate mix is distinctly different from that of Southern Pacific as its existed when plaintiffs' claim
arose. As a consequence the shares held by
plaintiffs represent property interests also distinctly different from that which they held as
shareholders of Southern Pacific. They thereupon
have lost standing to maintain this derivative lit-
[7] Although subsequent cases have paraphrased this Court's language in Lewis v. Anderson,
the substance remains the same-a complaint seeking
to invoke the fraud exception must demonstrate that
the merger was fraudulent and done merely to elimFN39
inate derivative claims.
Therefore, the particuFN40
larized pleading requirement of Rule 9(b)
must be satisfied by a derivative complaint that
seeks to invoke the fraud exception in Lewis v. Anderson. Accordingly, the Court of Chancery correctly concluded that the plaintiff was required to
plead “particularlized facts invoking the fraud exception to Lewis v. Anderson in order to avoid disFN41
missal.”
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852 A.2d 896
(Cite as: 852 A.2d 896)
FN39. See, e.g., Kramer v. Western Pac.
Indus., 546 A.2d 348, 354 (Del.1988)
(holding that to invoke Lewis' fraud exception, a plaintiff must establish that the merger was the “subject of a claim of fraud,
being perpetrated merely to deprive shareholders of the standing to bring a derivative action”); Parnes v. Bally Entm't Corp.,
1998 WL 51739, at *3 (Del.Ch. Feb.4,
1998), rev'd on other grounds, 722 A.2d
1243 (Del.1999) (“[P]laintiff may retain
standing to pursue a derivative claim if the
merger that deprived her of her shares was
effectuated fraudulently to deprive her of
her claim.”).
FN40. Court of Chancery Rule 9(b) states:
(b) Fraud, mistake, condition of the
mind. In all averments of fraud or mistake, the circumstances constituting
fraud or mistake shall be stated with particularity. Malice, intent, knowledge and
other condition of mind of a person may
be averred generally.
FN41. Id.
Fraud Allegations Inadequate
The plaintiff submits that “the amended complaint charges with particularized factual allegations that the purported merger of equals in reality
was an acquisition of Kinross by Amax Gold” and,
therefore, “that the merger was structured, with
Kinross as parent and Amax Gold as subsidiary, to
deny plaintiff standing to pursue this action.” The
Court of Chancery, however, was unable to discern
any allegations in the plaintiff's amended complaint
to suggest that the merger was the product of fraud.
FN42
The Court of Chancery's determination that
the facts alleged were not sufficient to invoke the
fraud exception to Lewis v. Anderson is supported
by the record.
FN42. Id.
[8] The Court of Chancery reasoned that for it
to make economic sense for Cyprus-the then owner
of over 58% of Amax Gold-to enter into the merger
solely to eliminate the plaintiff's derivative claims,
Cyprus' potential liability from the plaintiff's derivative action would have needed to be greater than
the financial loss it would have experienced by accepting an inadequate price for its Amax Gold
shares. According to the Court of Chancery,
however, the plaintiff was “unable to identify with
any precision the magnitude of [her] claims regarding the unfair financing that Cyprus Amax allegedly provided to Amax Gold” and, “[m]ost critically, nothing in the complaint supports a rational
inference that Cyprus Amax would have entered into a merger divesting itself of 58% of Amax Gold
solely to insulate itself and its affiliated directors
from liability in this derivative action.” The Court
of Chancery concluded that “[g]iven the magnitude
of the merger transaction, the involvement*906 of
an Amax Gold special committee, and a third-party
merger partner like Kinross, the absence of wellpled facts suggesting that the liability Cyprus Amax
and its affiliated directors faced was so substantial
as to have motivated them to cause Amax Gold to
enter into a pretextual merger with another publicly
traded company at a sub-optimal price is fatal.” We
agree.
The amended complaint makes no allegation
that the Amax Gold Board of Directors dictated the
structure of the Kinross Merger or that the Amax
Gold Board even considered the plaintiff's derivative claims when it approved the Kinross Merger. In
the absence of such allegations, the Court of Chancery properly determined that the mere fact that
Amax Gold and Kinross chose to structure the merger as a reverse triangular merger “provides no rational basis to infer that the merger was a fraud designed merely to deprive stockholders of the corporation that has lost its status as a public company
of derivative standing.” In reaching that determination, the Court of Chancery properly recognized
that no inference regarding Amax Gold's intent for
entering into the merger can be drawn from the fact
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852 A.2d 896
(Cite as: 852 A.2d 896)
that Kinross was the surviving company after the
merger, as opposed to Amax Gold, because
“triangular mergers are common and have a myriad
FN43
of legitimate justifications.”
In its analysis of
the plaintiff's amended derivative complaint, the
Court of Chancery properly construed our holding
in Lewis v. Anderson as “focusing the ‘fraud’ inquiry on the board facing a derivative suit and
whether that board caused the company [Amax
Gold] to merge with another party simply to avoid
defending the derivative suit rather than for other
valid business reasons.”
END OF DOCUMENT
FN43. Lewis v. Ward, 2003 WL 22461894,
at *4 n. 18 & n. 19 (Del.Ch. Oct.29, 2003)
(citing R. Balotti & J. Finkelstein, The
Delaware Law of Corporations & Business
Organizations §§ 9.7 & 9.8 (3d ed. Supp.
2003); J. Freund, Anatomy of a Merger:
Strategies and Techniques for Negotiating
Corporate Acquisitions 79, 105-07 (1975);
and 1 L. Kling & E. Nugent, Negotiated
Acquisitions of Companies, Subsidiaries,
and Divisions § 1.02 [11], at 1-19 (2001)).
Double Derivative Remedy
In this case, the plaintiff did not lack any remedy to pursue her derivative claims. Rather, as the
Court of Chancery correctly recognized, the
plaintiff might have been able to bring a postmerger double derivative suit but made no attempt
to file such an action. In Rales v. Blasband, this
Court set forth the procedures and standards for
bringing a post-merger double derivative action.
FN44
FN44. Rales v. Blasband, 634 A.2d 927
(Del.1993).
Conclusion
The judgments of the Court of Chancery are affirmed.
Del.Supr.,2004.
Lewis v. Ward
852 A.2d 896
© 2011 Thomson Reuters. No Claim to Orig. US Gov. Works.
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