Delaware Supreme Court Adopts Post-Merger Derivative Standing Framework From In re Primedia, Inc. Shareholders Litigation
In Delaware corporate law, “the standing inquiry has assumed special significance,” especially in the post-merger context. The Delaware Supreme Court in Morris v. Spectra Energy holds that a plaintiff has post-merger standing if she brings a claim disputing the fairness of a merger and satisfies the three-part framework set forth in In re Primedia, Inc. Shareholders Litigation, 67 A.3d 455 (Del. Ch. 2013), even if the underlying claim seems unlikely to succeed on the merits.
The plaintiff was a minority unitholder of a limited partnership of which the defendant was the general partner. The plaintiff pursued a derivative claim related to a transaction against the general partner for breach of fiduciary duties that survived a motion to dismiss, but the plaintiff lost standing to pursue that claim after the limited partnership was acquired via a merger. The plaintiff filed a second lawsuit against the general partner for failing to secure appropriate value for the pre-merger derivative claim. The Court of Chancery applied the three-part test for post-merger standing from Primedia that examines whether: (i) the plaintiff alleged a viable derivative claim that could withstand a motion to dismiss, (ii) the value of the claim was material to the overall value of the transaction, and (iii) the claim will not be pursued by the buyer and is not reflected in the merger consideration. The Court of Chancery concluded that the value of plaintiff’s pre-merger claim was not material as compared to the value of the merger transaction after discounting the claim to reflect (i) the unitholder’s proportionate share of potential recovery and (ii) a one-in-four chance of prevailing in that litigation. The Court of Chancery dismissed the lawsuit on standing grounds without determining whether the plaintiff had adequately plead a claim for relief. The plaintiff challenged the Court of Chancery’s application of the Primedia factors on appeal.
The Delaware Supreme Court reviewed its jurisprudence on post-merger standing and concluded that, under Parnes v. Bally Entm’t Corp., 722 A.2d 1243 (Del. 1999), the plaintiff must plead a direct claim targeting the fairness of the merger itself caused by director breaches of fiduciary duty that resulted in unfair dealing and/or an unfair price. The Supreme Court reasoned that, if the direct claim results from the failure to secure value for pre-existing derivative claims, the three-part framework set forth in Primedia “provides a reasonable basis to conduct a pleadings-based analysis to evaluate standing on a motion to dismiss.” Applying the Primedia factors to the plaintiff’s complaint, the Supreme Court determined that the Court of Chancery “strayed from the proper standard of review.” On appeal, the materiality requirement was the only disputed Primedia issue because the parties agreed that the derivative claim was viable (it previously survived a motion to dismiss), that the general partner secured no merger value for the claim, and that the purchaser would not pursue the claim. The Supreme Court concluded that the Court of Chancery’s application of a discount for litigation risk was incorrect because, at the pleadings stage, a plaintiff is entitled to all reasonable inferences in her favor. Additionally, a materiality review requires that the court compare the plaintiff’s pro rata interest in the derivative claim recovery to the plaintiff’s proportional interest in the merger consideration, as opposed to the overall transaction value, to ensure an apples-to-apples comparison. The Supreme Court reversed and remanded the case back to the Court of Chancery.