In re Massey Energy Co. Derivative & Class Action Litigation
In In re Massey Energy Co. Derivative & Class Action Litigation, (Del. Ch. May 31, 2011), the plaintiffs' argue that the decision in Caifaia modifies the standard set forth in Lewis v. Anderson such that stockholders in a merger do not ultimately lose standing to pursue derivative claims post-merger "where the complaint adequately alleged that the board of directors' pre-merger breaches of fiduciary duty reflected misconduct so injurious to the company that it led to the subsequent merger, even in the absence of any claim that the board fraudulently negotiated or priced the merger transaction." Id. at 120-21.
The Massey court rejected this proposition and found that The Supreme Court in Caifaia appears to have perceived that there was a factual basis for the fraud exception in Lewis to apply but that the objector had failed to invoke that exception in a fair and timely manner. To that point, the Supreme Court found that "the extent of the Countrywide directors' allegedly fraudulent conduct and breach of fiduciary duties by failing loyally to oversee the company's practices in good faith would have necessitated (a) corporate rescue; and (b) individual legal protection. A merger was one of few available alternatives that met both of those objectives after the board's allegedly fraudulent schemes bankrupted a multibillion-dollar company." Ark. Teacher Ret. Sys., 996 A.2d at 323. "No one disputes," the Supreme Court goes on to say, "that Countrywide needed to sell itself, and at a price significantly below its recent share price." (Id. at 122-23.)
In Massey, the court found that:
Delaware law recognizes a single, inseparable fraud when directors cover massive wrongdoing with an otherwise permissible merger...After allegedly intentionally engaging in fraudulent conduct that caused the stock price to plummet near bankruptcy; Countrywide directors would understandably seek an acquirer to effect a merger that would extinguish potential derivative claims...(Id. at 123-24.)