By: Robert Proudfoot, Staff Member
On April 5, 2010, 29 Massey Energy employees were killed in the Upper Big Branch coal mine disaster in West Virginia. Accusations of negligence and criminal wrong doing led to federal and state regulatory scrutiny, wrongful death tort claims on behalf of the victims, and derivative shareholder suits against directors and officers. In reaction to this disaster and its fallout, Massey’s stock price plummeted and Alpha Natural Resources opportunistically offered to take over the beleaguered company. Shareholders, concerned that the merger would stop their derivative action suits for lack of standing under Delaware General Corporation Law §259(a), sued for injunctive relief in the Delaware Court of Chancery to block the merger.
Derivative actions are lawsuits by shareholders against directors and officers on behalf of the corporation to recoup losses caused by the breach of fiduciary duties of the directors and officers. Successful suits make the directors and officers personally liable to the corporation for their actions. As was the case for Massey directors and officers, such liability is usually covered by directors and officers insurance.
The Delaware Court of Chancery ruled in In re Massey Energy Co. that shareholder suits against the Massey board of directors could not stop a merger between Massey and Alpha even though such a merger would render any shareholder action effectively moot for lack of standing. While the Delaware court recognized the potential conflict of interest and inequity, it permitted the merger to continue on the grounds that Alpha could sue the Massey Board of Directors as the new owner of the shareholder claim under Del. C. §259(a).
The court cited Lewis v. Anderson when it listed the two exceptions to this strict standing requirement for shareholder actions after a merger: “(1) where the merger itself is the subject of a claim of fraud; and (2) where the merger is in reality a reorganization which does not affect plaintiff's ownership of the business enterprise.” Had Massey attempted the merger solely to circumvent the shareholder action, the derivative action would have been able to continue under the first exception listed in Lewis v. Anderson. To prove such an allegation is a tall order indeed and the court declined to find such a fraudulent abuse of corporate power for the purposes of granting the injunction against the merger.
This theory of standing during mergers has broad implications for the corporate governance for publicly traded natural resource companies, food producers, and energy utilities – especially during disasters or scandals with ongoing shareholder derivative actions. Shareholders should be aware that they will lose standing for any derivative actions after a merger and such actions will be transferred as a property right to the new corporation. It is up to the newly merged corporation to bring its own suit against the very old board of directors that negotiated the merger deal in the first place, a situation ripe for potential conflicts of interest. The court also suggested that the Massey shareholders, as new Alpha shareholders after the merger, demand Alpha bring a suit against Massey directors and officers. If Alpha declined to take action, then the shareholders could sue the Massey board of directors in what is called a double derivative suit. In its opinion, the court recognized the improbability of a double derivative action as a realistic option against the Massey board of directors. The court also pointed out that value of the director and officer liability insurance should have been priced into the deal because of the realistic chance of Alpha later recovering it in a suit. With Massey’s director and officer liability insurance valued at $95 million, this would have represented “no trifle sum” to Massey shareholders during the $8.5 billion merger.
 Ian Urbina, No Survivors Found After West Virginia Mine Disaster, The New York Times (April 9, 2010), http://www.nytimes.com/2010/04/10/us/10westvirginia.html
 Kevin LaCroix, In a Must Read Opinion, Delaware Court Rejects Bid to Block Massey Merger, The D & O Diary (June 2, 2011),http://www.dandodiary.com/2011/06/articles/shareholders-derivative-litiga/in-a-mustread-opinion-delaware-court-rejects-bid-to-block-massey-merger/
 Alpha Natural Resources Acquires Massey Energy Company, Creating A Global Leader In Metallurgical Coal Supply, Alpha Natural Resources,http://alnr.client.shareholder.com/releasedetail.cfm?ReleaseID=582243 (last visit September 25, 2011)
 LaCroix, supra note 2
 Seth Aronson et al, Practicing Law Institute, Shareholder Derivative Actions: From Cradle to Grave 325 (2011)
 Id. at 424.
 In Re Massey Energy, Co., 2011 WL 2176479 (Del. Ch. 2011), available athttp://amlawdaily.typepad.com/massey%20decision.pdf
 Lewis v. Anderson, 477 A.2d 1040, 1044 (Del. 1984) (citing 8 Del. C. § 259(a)); Id. at 1047 (citing Heit v. Tenneco, 319 F. Supp. 884 (D. Del. 1970)); see also Lewis v. Ward, 852 A.2d 896, 902 (Del. 2004) (reaffirming Lewis).
 In Re Massey Energy Co., 2011 WL 2176479 at *3.
 Id. at 76.
 Id. at 75-6.
 Id. at 74-5.
 In Re Massey Energy, Co., 2011 WL 2176479 at 74-5 (Del. Ch. 2011), available athttp://amlawdaily.typepad.com/massey%20decision.pdf
 Id. at 65.