Arkansas Teacher Retirement System, et al. v. Caiafa, No. 530, 2009 (Del. May 21, 2010)

In this case, the Supreme Court upheld the Court of Chancery’s approval of a settlement among Countrywide stockholders, Countrywide directors and Bank of America, relating to Countrywide’s merger with Bank of America, but noted in dicta that the directors’ conduct may have justified a separate direct claim of fraud that would have survived the merger. In connection with its approval of the settlement, the Court of Chancery denied an objection of certain Countrywide stockholders (the “Objectors”). In the court below, the Objectors argued that the Vice Chancellor should have protected the value of their derivative claims by placing a portion of the merger consideration in a constructive trust. The Court of Chancery denied the objection, reasoning that Delaware corporate fiduciary law does not require directors to value or preserve piecemeal assets in a merger setting, and observing that the Objectors failed to demonstrate a likelihood of prevailing on the merits. Because the Vice Chancellor did not abuse his discretion in holding that the Objectors’ derivative claims were worthless, the Supreme Court affirmed the decision of the Court of Chancery.

The Court continued, in dicta, to comment on the actions of Countrywide’s board of directors and whether  their conduct satisfied the fraud exception to maintain a post-merger claim. Under established Delaware law, a plaintiff may maintain a post-merger suit only where “the merger itself is the subject of a claim of fraud, being perpetrated merely to deprive stockholders of the standing to bring a derivative action.”  Lewis v. Ward, 852 A.2d 896 (Del. 2004). Although the record did not reflect that the board of directors of Countrywide sought and approved a merger solely to deprive stockholders of standing, the Supreme Court observed that the Objectors alleged facts supporting “a colorable claim of fraud that, if proved, would have made the company’s dissolution or auction a fait accompli.” Nevertheless, the Objectors did not make this claim in the Court of Chancery or in the Supreme Court, and the Supreme Court upheld the decision of the Court of Chancery. This opinion, suggests, however, that under certain circumstances, a “pattern of fraudulent conduct and conscious neglect” may be sufficient to invoke the fraud exception to the loss of standing to pursue derivative claims post-merger.

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