Dismissal of Double Derivative Delaware Securities Lawsuits Over The Bank of America-Merrill Lynch Merger is Affirmed by the Second Circuit

The U.S. Court of Appeals for the Second Circuit has affirmed the dismissal of Lambrecht v. O’Neal and Sollins v. O’Neal, two double derivative actions that were brought under Delaware law for Bank of America Corp. (BAC) and its subsidiary Merrill Lynch & Co. The cases were brought by Merrill shareholders contending wrongdoing. (Because Bank of America acquired Merrill, following the stock-for-stock swap, these shareholders are now BofA shareholders.)

The actions were an attempt to make Bank of America board of directors mandate that Merrill sue some of the subsidiary’s officials over allegedly reckless investments that were made. Finding that the actions were a result of unprecedented losses experienced by Merrill because it had invested aggressively in mortgage-baked securities (including collateralized debt obligations) before it was acquired by Bank of America, the district law court dismissed both actions for different but related reasons under Delaware law. In Sollins, the court said that the plaintiff’s predecessor-in-interest submitted the action without making presuit demand on the board yet did not demand futility. As for the Lambrecht action, while that lawsuit made three demands on the Bank of America board, it did not demonstrate that the bank had wrongfully denied the request that claims be made against ex-Merrill officials.

The Second Circuit, in its unpublished summary order, said that it sees no error in the rulings made by the district court. The appeals court noted that while Sollins suggested that Bank of America was “complicit” in Merrill’s alleged pre-merger wrongdoing involving the subprime market by letting the latter issue bonuses at 2007 levels, consenting to indemnify Merrill directors over pre-merger wrongdoing, approving the merger without figuring out Merrill’s growing losses, sealing the deal despite serious misgivings about the firm’s financial state, and not doing a good enough job of notifying investors about losses, his arguments are not properly placed. The district court was therefore correct in stating that the plaintiff cannot “boostrap” his claims against Merrill related to the subprime market onto the merger-related allegations against Bank of America to get around the demand request.

The appeals court also noted that an exculpatory provision in Bank of America’s incorporation articles protects its directors. It also turned down Sollins’ demand futility argument related to Merrill giving out approximately $3.4 billion in employee bonuses in 2008.

As for the Lambrecht case, the appeals court said that a board deciding not to act on a demand by a shareholder is examined under the business judgment rule, which sets up a presumption that the directors of a corporation behave in food faith when making decisions. Overcoming this presumption would require that the plaintiff accomplish the task of demonstrating that not bringing the case was a decision done in bad faith or because of an unreasonable probe, which Lambrecht’s case fails to do, said the Second Circuit.

“This case demonstrates some of the difficulties in pursuing claims against corporations, their management and their directors under Delaware law,” said Shepherd Smith Edwards and Kantas, LLP founder and stockbroker fraud lawyer William Shepherd.

Lambrecht v. O’Neal (PDF)

Dismissal of Del. Law. Suits Over Merger of BofA, Merrill Affirmed, New York Law Journal, December 5, 2012

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