Litigation

Court of Chancery Denies Standing For Lost Shares

By Morris James LLP

Postorivo v. AG Paintball Holdings Inc., C.A. No. 2991-VCP (February 29, 2008).

It has long been recognized that a stockholder may lose her standing to bring derivative litigation by losing her shares in a merger.  There is a recognized exception to this rule for mergers designed just to eliminate derivative litigation.

Here, the plaintiff  sold the assets of his company in return for cash and stock in the buyer. The stock was held in escrow and when a dispute arose, the buyer revoked the stock as compensation for its claims against the seller. When the seller brought a derivative suit, the court dismissed it as he no longer owned stock in the buyer. Thus, the court refused to make another exception to the rule that a derivative plaintiff must continue to be a stockholder through out the litigation.

One solution to this problem would have been for the seller to receive a share of stock in the buying corporation to preserve its rights to sue derivatively. Of course, if you hold only one share why would you care? But, there may be value in leverage in litigation.

Full post as published by Delaware Business Litigation Report on February 29, 2008 (boomark / email).