Chancery Upholds Claims Post-Merger
Harris v. Harris, C.A. No. 2019-0736-JTL (Del. Ch. Jan. 6, 2023)
Delaware law allows for two exceptions to the continuous stock ownership rule for stockholders to bring and maintain standing to assert derivative claims that predate a transaction: (1) when the transaction, which would otherwise deprive the plaintiffs of standing, is essentially a reorganization that does not affect the plaintiff’s relative ownership in the post-merger enterprise; or (2) when a plaintiff stockholder loses standing based on a merger consummated for the purpose of depriving the stockholder of the ability to bring or maintain a derivative action. Stockholders with derivative claims that predate a transaction also may assert direct claims to challenge a merger by pleading that the value of the derivative claim is material in the context of the merger, that the acquirer did not assign value or provide additional consideration for the value of the derivative claim, and that the acquirer will not assert the derivative claim.
In Harris, the Court of Chancery found that all three routes were available to the plaintiffs. The Court held that the merger met the first exception to the continuous stock ownership rule, explaining that the transaction was “the epitome of corporate reshuffling” as the only parties to the merger were the already existing company and a newly-formed shell company in New Jersey, all the shares of the stock were converted on a one-to-one basis, and so the only change in the entity was its domicile and which state’s laws would govern the entity going forward. The Court found that the second exception to the continuous stock ownership rule applied because the merger was effected for the purpose of denying the plaintiffs’ standing to continue litigation. The Court further ruled that the plaintiffs had stated a direct claim for breach of fiduciary duties challenging the merger for not valuing the derivative claims.
In terms of case management and citing potential litigation efficiencies, the Court ruled that the claims challenging the merger would proceed focusing on the direct claim route to relief. The Court also stayed post-merger derivative claims, reasoning that a quasi-appraisal remedy for the direct claim challenging the merger may moot those claims.