In N.A. Lambrecht v. O’Neal, No. 135, 2010 (Del. Supr. Aug. 27, 2010), read opinion here, the Delaware Supreme Court explained the requirements for pursuing a double derivative suit. That is, it explained what is necessary when the claim is being pursued on behalf of a subsidiary that is wholly owned by a parent corporation. The case arose upon a certified question from the United States District Court for the Southern District of New York. The origin of the case was a derivative claim by a Merrill Lynch shareholder before Merrill Lynch was purchased by Bank of America (BofA).
The issue certified to the Court is as follows:
Whether plaintiffs in a double derivative action under Delaware law,
who were pre-merger shareholders in the acquired company and who
are current shareholders, by virtue of a stock-for-stock merger, in the
post-merger parent company, must also demonstrate that, at the time
of the alleged wrongdoing at the acquired company, (a) they owned
stock in the acquiring company, and (b) the acquiring company owned
stock in the acquired company.
The Court alternatively framed the issue thusly:
"[W]here a shareholder has lost standing to maintain a standard derivative action by reason of an acquisition of the corporation in a stock-for-stock merger, may that shareholder, in his new capacity as a shareholder of the acquiring corporation, assert the claim double derivatively and, if so, what requirements must the plaintiff satisfy?
Analysis and Holding
The Court explained that many Delaware cases uphold the right to a double derivative action as a means for a shareholder to seek a remedy. Footnote 14 notes in passing, but does not decide, the likelihood of the same result if the parent owns a controlling interest but does not own 100% of a subsidiary. The focus in this opinion was what prerequisites must be satisfied for a double-derivative suit.
The Court discussed in great detail the relevant Delaware cases that touch on the issue though it acknowledged that Delaware’s High Court had never addressed all of the requirements for a double derivative suit. In this decision, however, the more specific approach of the Court was to reject the arguments of the defendant–as certified by the District Court in New York. Namely, the Supreme Court found no support in Delaware law for the defendant’s position, and therefore, determined that the plaintiff in this case does NOT need to demonstrate that at the time of the alleged wrongdoing at Merrill Lynch: (i) they owned stock in BofA, and (ii) BofA owned stock in Merrill Lynch.
The structure of the opinion was to reject defendants arguments about requirements for a double derivative suit (that the Court determined not to exist). The Court dissected the faulty reasoning in one particular phrase that deserves to be quoted: "… one would expect that their brief would expose the chain of deductive reasoning that flows from its premise to arrive at its conclusion." [But it did not do so.]
Bottom Line: It suffices that plaintiffs own shares of the parent corporation [BofA in this case], at the time they seek to proceed double derivatively on its behalf. That is, the plaintiffs need not own shares in the parent as of the time of the wrongdoing, nor did the parent need to own shares in the subsidiary at the time of the wrongdoing. The reasoning is that the parent owns post-merger the rights of the subsidiary to pursue the subsidiary’s pre-merger claims.