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Countrywide Stock Case Hinges on Standing Issue

(CN) - The 9th Circuit wants Delaware's highest court to decide whether former Countrywide shareholders still have derivative standing after the Bank of America merger.

Five institutional investors, led by the Arkansas Teacher Retirement System, sued on behalf of the former Countrywide Financial Corp., asserting breach of fiduciary duty and securities law violations against former Countrywide officers and directors.

Countrywide merged soon after into a wholly owned subsidiary of Bank of America Corp., divesting the plaintiffs of their Countrywide shares.

Agreeing with Countrywide that this merger destroyed the plaintiffs' standing, a federal judge in California granted the defendants judgment on the pleadings.

The merger blocked the investors' ability to show continuous ownership for shareholder derivative standing, according to that ruling.

Meanwhile, the investors had been advancing similar claims in Delaware. They sought reconsideration of the California federal case after a 2010 ruling from the Delaware Supreme Court they deemed relevant.

In Arkansas Teacher Retirement System v. Caiafa, the Delaware Supreme Court supposedly clarified the scope of the "fraud exception" to Delaware's continuous ownership rule and affirmed that the plaintiffs have post-merger derivative standing in this case.

This claim went to the 9th Circuit after the Central District of California refused to bend.

After holding a hearing in Pasadena two months ago, however, the three-judge appeals panel found that the Delaware Supreme Court must weigh in.

The panel certified the following question:

"Whether, under the 'fraud exception' to Delaware's continuous ownership rule, shareholder plaintiffs may maintain a derivative suit after a merger that divests them of their ownership interest in the corporation on whose behalf they sue by alleging that the merger at issue was necessitated by, and is inseparable from, the alleged fraud that is the subject of their derivative claims."

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