Alleged Expanded Fraud Exception To The Continuous Ownership Rule Rejected.

Plaintiff brought a shareholder derivative action on behalf of a financial institution, a Delaware corporation, after it was acquired by a bank and merged into another corporation. The trial court affirmed defendant’s demurrer without leave to amend. Delaware’s continuous ownership rule requires a plaintiff in a shareholder derivative action to retain stock ownership for the duration of the litigation. A plaintiff who ceases to be a shareholder as a result of a merger, or for any other reason, loses standing to maintain a derivative action. The Delaware Supreme Court has stated in several opinions, however, that a former shareholder will retain standing to maintain a derivative action despite a merger if the sole purpose of the merger was to eliminate potential derivative claims. This is known as the fraud exception to the continuous ownership rule. Plaintiff contended the fraud exception to Delaware’s continuous ownership rule has been extended and now applies not only where the sole purpose of a merger was to deprive shareholders of standing to maintain a derivative action, but also where the directors’ fraudulent conduct and breach of fiduciary duty prior to a merger impaired the corporation’s financial condition to such an extent that a merger became a practical necessity. The Court of Appeal affirmed, finding that Delaware law does not support plaintiff’s alleged expanded version of the fraud exception. Villari v. Mozilo  (Cal. App. Second Dist., Div. 3; August 30, 2012) 208 Cal.App.4th 1470.