APPEAL from a judgment of the Superior Court of Los Angeles County, Jane L. Johnson, Judge. (Los Angeles County Super. Ct. Nos. BC375275, BC378319 & BC378605)
The opinion of the court was delivered by: Croskey, J.
CERTIFIED FOR PUBLICATION
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.
Joseph Villari (plaintiff) appeals a judgment dismissing his second amended complaint after the sustaining of a demurrer without leave to amend. The trial court concluded, pursuant to the continuous ownership rule, that plaintiff had no standing to maintain shareholder derivative claims on behalf of Countrywide Financial Corporation (Countrywide), a Delaware corporation, after its acquisition by Bank of America Corporation (Bank of America) and merger into another corporation. Plaintiff nonetheless contends that he has adequately alleged a factual basis for application of the fraud exception based on dicta contained in the recent opinion of the Delaware Supreme Court in Arkansas Teacher Retirement System v. Caiafa (Del. 2010) 996 A.2d 321 (Arkansas Teacher). We disagree and conclude that Arkansas Teacher cannot be read to support plaintiff's contention. The dismissal of plaintiff's second amended complaint by the trial court was correct. We will therefore affirm.
FACTUAL AND PROCEDURAL BACKGROUND
1. Original Complaints and Consolidation
Robert L. Garber filed a shareholder derivative complaint in August 2007 on behalf of Countrywide against several of its officers and directors and against Countrywide as a nominal defendant. Garber alleged that the individual defendants had mismanaged the company's mortgage lending business, disseminated misinformation so as to disguise the company's perilous financial condition and engaged in insider selling based on nonpublic information. He alleged eight counts for various breaches of fiduciary duty, insider selling, waste of corporate assets, and unjust enrichment.
New Jersey Carpenters' Pension Fund and Teamsters Local 456 Annuity Fund filed similar shareholder derivative complaints in October 2007 on behalf of Countrywide against several of its officers and directors and against Countrywide as a nominal defendant. The trial court consolidated the three actions in January 2008.*fn1
2. Acquisition, Merger and Consolidated Complaint
On January 11, 2008, Countrywide announced its proposed acquisition by Bank of America.*fn2 Garber, Villari, New Jersey Carpenters' Pension Fund and Teamsters Local 456 Annuity Fund filed a consolidated shareholder derivative and class action complaint in this action that same day. Plaintiffs challenged the proposed acquisition in their class action allegations. The trial court stayed the action in March 2008 because of a pending shareholder derivative action in federal court in California involving essentially the same claims (In re Countrywide Financial Corp. Derivative Litigation (C.D.Cal., No. CV-07-06923-MRP)) and a Delaware class action challenging the proposed acquisition and merger (In re Countrywide Corp. Shareholders Litigation (Del.Ch., No. 3464-VCN)).
Countrywide shareholders approved its acquisition by Bank of America on terms that provided for each Countrywide shareholder to receive shares of stock in Bank of America in exchange for their Countrywide shares. The acquisition was completed in July 2008, and Countrywide was merged into Red Oak Merger Corporation, a subsidiary of Bank of America. Red Oak Merger Corporation later changed its name to Countrywide Financial Corporation (New Countrywide).
3. First Amended Consolidated Complaint, Demurrer and Other Events
New Jersey Carpenters' Pension Fund and Teamsters Local 456 Annuity Fund voluntarily dismissed their claims in November 2008.*fn3 In December 2008, the federal court in California granted the individual defendants' motion for judgment on the pleadings against the derivative claims alleged in the federal action on the grounds that the merger had deprived the plaintiffs of standing to maintain a derivative action on behalf of Countrywide, pursuant to the continuous ownership rule.*fn4 An appeal from that order is currently pending in the Ninth Circuit Court of Appeals (Arkansas Teacher Retirement System v. Mozilo, No. 10-56340).
In August 2009, the Delaware trial court in the class action challenging the acquisition and merger approved a settlement and release of all claims relating to the acquisition and merger.*fn5 The trial court in the present action lifted the stay in November 2009.
Plaintiff filed a first amended complaint on February 19, 2010 on behalf of Bank of America against several former Countrywide directors and officers and against Bank of America and New Countrywide as nominal defendants. He alleged double derivative claims and omitted the prior class action allegations. Bank of America demurred to the complaint, and New Countrywide joined in the demurrer. On June 3, 2010, the trial court sustained the demurrer as to both defendants with leave to amend, concluding that Villari had failed to allege a proper basis to excuse him from the requirement of making a prior demand on the boards of directors of the two nominal defendants.
4. Second Amended Consolidated Complaint and Demurrer
Plaintiff filed his second amended complaint on August 3, 2010, on behalf of Countrywide against several of its former directors and officers and against Bank of America as a nominal defendant. He alleges that (1) the individual defendants mismanaged the company's mortgage lending business, disseminated misleading information concerning the company's financial condition and engaged in insider selling based on nonpublic information; (2) the individual defendants' fraudulent scheme resulted in Countrywide's severely impaired financial condition and severely depressed stock price, and necessitated both a corporate rescue and their individual legal protection from liability for their alleged fraud; and (3) the acquisition was an effort to accomplish both of these objectives and was part of a single, inseparable fraud.
Plaintiff alleges six shareholder derivative counts on behalf of Countrywide for various breaches of fiduciary duty, insider selling, waste of corporate assets and unjust enrichment. He also again alleges six additional double derivative counts "in the ...