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Adam H. Offenhartz and Jefferson E. Bell

M&A practitioners are regularly faced with the question of whether derivative claims will survive a merger after which the plaintiff will no longer be a stockholder. Related questions include whether such claims are direct or derivative and what happens to the claims after the merger if the plaintiff is no longer able to assert them. In a recent decision, In re Massey Energy Derivative & Class Litigation (Massey II), C.A. No. 5430-CB (Del. Ch. May 4), Chancellor Andre G. Bouchard provided helpful guidance on these issues. The court ruled that the “inseparable fraud” claim was derivative under the test articulated in Tooley v. Donaldson, Lufkin & Jenrette, 845 A.2d 1031 (Del. 2004). The Chancellor also ruled that ownership of a well-pleaded Caremark claim passes from the pre-merger plaintiff, suing derivatively on behalf of the company, to the acquirer unless one of two exceptions applies. Under the mere reorganization exception, the merger does not change the ultimate ownership of the company, so the plaintiff continues as a stockholder and may maintain its derivative claim. Under the fraud exception, the merger itself is the subject of a fraud claim because director defendants effectuated it merely to deprive plaintiffs of standing.

Background

Massey II arose from an April 2010 explosion at Massey Energy Co.’s Upper Big Branch coal mine in West Virginia, which killed 29 miners. When Massey’s stock price fell, potential acquirers approached Massey about a merger. Although Massey’s board believed its stand-alone plan was a viable option, it engaged in a thorough sales process and agreed to merge with Alpha Natural Resources, Inc. Plaintiffs sought to preliminarily enjoin the merger, arguing, among other things, that the board failed to value their derivative claims and transfer them into a litigation trust for Massey stockholders’ exclusive benefit. Then-Vice Chancellor Leo Strine denied the application, finding that stockholders had sufficient information to decide whether the company should remain independent and enjoining the merger unless Alpha transferred the derivative claims to a litigation trust would let Alpha walk away from the deal. See In re Massey Energy Co. Derivative & Class Litigation (“Massey I”), C.A. No. 5430-VCS (Del. Ch. May 31, 2011).

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