Shareholders cannot pursue derivative claims against a corporation after a merger divests them of their ownership interest, even if a board's fraud resulted in the merger, the Delaware Supreme Court has ruled. The high court said that under its 1984 decision in Lewis v. Anderson, establishing the continuous ownership rule, a plaintiff must own stock in a company throughout the litigation even in cases where fraud divested the shareholder of his corporate ownership.
The en banc court's decision blocked five institutional investors, including the Arkansas Teacher Retirement System, from pursuing claims against Countrywide Financial Corp. after it merged with Bank of America in 2008, ending their ownership of shares in the mortgage giant. All five investors had commenced litigation in California and the U.S. Court of Appeals for the Ninth Circuit requested that Delaware, where Countrywide was incorporated, resolve the issue of whether they can still be considered shareholders for the purposes of a derivative claim.
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