Ark. Teacher Ret. System v. Caiafa

• Decision Date: 21 May 2010
• Docket Number: 2009.,No. 530,530
• Citation: 996 A.2d 321
• Court: United States State Supreme Court of Delaware
• Parties: ARKANSAS TEACHER RETIREMENT SYSTEM, Fire & Police Pension Association of Colorado, Louisiana Municipal Police Employees' Retirement System, Central Laborers Pension Fund, and Public Employees' System of Mississippi, Objectors Below, Appellants,v.Anthony CAIAFA and Ming Fang Li, Plaintiffs Below, Appellees,andCountrywide Financial Corp., Bank of America Corp., Defendants Below Appellees.

996 A.2d 321

ARKANSAS TEACHER RETIREMENT SYSTEM, Fire & Police Pension Association of Colorado, Louisiana Municipal Police Employees' Retirement System, Central Laborers Pension Fund, and Public Employees' System of Mississippi, Objectors Below, Appellants,v. Anthony CAIAFA and Ming Fang Li, Plaintiffs Below, Appellees,andCountrywide Financial Corp., Bank of America Corp., Defendants Below Appellees.

No. 530,2009.

Supreme Court of Delaware.

Submitted: April 28, 2010.

Decided: May 21, 2010.

Court Below: Court of Chancery of the State of Delaware, C.A. No. 3464.

Upon appeal from the Court of Chancery. AFFIRMED.

Stuart M. Grant, Jay W. Eisenhofer, Michael J. Barry and Diane Zilka of Grant & Eisenhofer P.A., Wilmington, DE. Of Counsel: Blair A. Nicholas Niki L. Mendoza, David A. Thorpe and Jon F. Worm of Bernstein Litowitz Berger & Grossman LLP, San Diego, CA; Lester L. Levy Carl L. Stine and Robert Plosky, Wolf Popper LLP, New York City, for appellants.

Pamela S. Tikellis, Robert J. Kriner, Jr. and Scott M. Tucker of Chimicles & Tikellis LLP, Wilmington, DE. Of Counsel: Steven J. Toll and Julie Goldsmith Reiser of Cohen Milstein Sellers & Toll PLLC; Jeffrey W. Golan and William J. Ban of Barrack, Rodos & Bacine, Philadelphia, PA, for appellees Anthony Caiafa and Ming Fang Li.

Thomas A. Beck, Richard P. Rollo and Scott W. Perkins of Richards, Layton & Finger, P.A., Wilmington, DE. Of Counsel: Eric M. Roth, Stephen R. DiPrima, Martin J.E. Arms and Graham W. Meli of Wachtell, Lipton, Rosen & Katz, New York City, for appellees Countrywide.

Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and RIDGELY, Justices, court en banc.

STEELE, Chief Justice:

Former Countrywide stockholder, Arkansas Teachers Retirement Systems, objected to the Vice Chancellor's approval of a settlement among a majority of Countrywide stockholders, Countrywide directors, and Bank of America, related to Countrywide's merger with BOA. TRS objected on the basis that the Vice Chancellor failed to value TRS's derivative claim pending in a companion Federal District Court action. The Vice Chancellor denied the objection and approved the settlement, allowing BOA to close its acquisition of Countrywide, thus extinguishing TRS's standing to pursue derivative claims. Because the Vice Chancellor did not abuse his discretion by holding that TRS's derivative suit claims for breach of asserted duties were worthless and, therefore, added no conceivable value to the merger, we AFFIRM his judgment approving the settlement.

At the hearing on the objection to the settlement, TRS argued that the Vice Chancellor should place part of the merger consideration into a constructive trust in order to protect the value of its derivative claims. TRS alleged that it had sufficiently pleaded a derivative claim in Federal District Court, and that the Vice Chancellor erred by valuing that claim as worthless. The Vice Chancellor appropriately denied the objection, because Delaware corporate fiduciary law does not require directors to value or preserve piecemeal assets in a merger setting, and TRS failed to show a likelihood of prevailing on the merits of its claims. Therefore, we affirm the Vice Chancellor's decision on the basis of the reasons in his opinion.

* * *

We note, however, that TRS has alleged facts that reflect conduct wholly inappropriate for Delaware corporate directors. Countrywide's board settled insider trading, improper stock repurchase, and predatory lending claims, while the company exposed itself to bad loans causing plummeting stock value that allegedly cost Countrywide $848 million to $25 billion. TRS does not, however, claim that the board fraudulently conducted or inadequately priced the merger transaction (nor on this record could they reasonably have done so). In isolation, this would preclude its claim for fraud, but the allegations underlying TRS' request for relief suggest a potential relationship between the directors' alleged premerger fraudulent conduct and the rapidly and severely depressed stock price on which the merger consideration was based.

Other than in instances of fraud or reorganization, a plaintiff loses standing to maintain a derivative suit where the corporation in which the plaintiff holds stock, merges with another company.¹ A stockholder may maintain his post-merger suit “if 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.” ²Anderson generally applies where stockholder-plaintiffs allege that the board inadequately priced or improperly conducted a corporate merger, but its terms apply more broadly to fraud connected to the merger.

The current record does not reflect that the directors prospectively sought and approved a merger, solely to deprive stockholders of standing to bring a derivative action. The extent of the Countrywide directors' allegedly fraudulent conduct and breach of fiduciary duties by...