Prince Ex Rel. Concord EFS, Inc. v. Palmer ( 2005 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 05a0594n.06
Filed: July 13, 2005
Case No. 04-5494
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
TERRY PRINCE, Derivatively on behalf of )
Concord EFS, Inc.; STANLEY TSENG, )
)
Plaintiffs-Appellants, ) ON APPEAL FROM THE
) UNITED STATES DISTRICT
v. ) COURT FOR THE WESTERN
) DISTRICT OF TENNESSEE
DAN M. PALMER; EDWARD A. LABRY, )
III; RONALD V. CONGEMI; RICHARD M. )
HARTER; DOUGLAS C. ALTERNBERN; )
RICHARD BUCHIGNANI; RICHARD P. )
KIPHART; JERRY D. MOONEY; PAUL L. )
WHITTINGTON; CONCORD EFS, INC., )
Defendants-Appellees.
_______________________________________
BEFORE: BATCHELDER and GRIFFIN, Circuit Judges; GADOLA,* District Judge.
ALICE M. BATCHELDER, Circuit Judge. Plaintiffs-Appellants Terry Prince and
Stanley Tseng appeal the Fed. R. Civ. P. 12(b)(6) dismissal of their shareholder derivative claims
alleging “breaches of fiduciary duty, abuse of control, corporate waste and gross mismanagement”
against Defendants-Appellants, members of the Board of Directors (“Board”) of Concord EFS, Inc.
(“Concord”). The district court dismissed Plaintiffs’ complaint for failure to make a demand on
Concord’s Board prior to suit, and failure to allege particularized facts sufficient to demonstrate that
demand was excused under Delaware law. Shortly before the district court issued its opinion,
*
The Honorable Paul V. Gadola, United States District Judge for the Eastern District of Michigan, sitting by
designation.
Concord became a wholly owned subsidiary of First Data Corporation (“First Data”) in a stock-for-
stock transaction that converted Plaintiffs’ Concord stock into shares of First Data. Because
Plaintiffs are no longer shareholders of Concord, Delaware law requires that their complaint be
dismissed for lack of standing.
BACKGROUND
Plaintiff Terry Prince filed his initial complaint on September 13, 2002. On February 4,
2003, his action was consolidated with an action brought by Plaintiff Stanley Tseng, resulting in a
Consolidated Verified Derivative Complaint filed on February 14, 2003. On May 1, 2003,
Defendants moved to dismiss Plaintiffs’ complaint for, inter alia, failure to make demand on
Concord’s Board as required by Delaware law.
On February 26, 2004, Concord merged with First Data. The merger converted all Concord
stock into First Data stock at a rate of 0.365 First Data shares for each Concord share, and resulted
in former Concord shareholders’ owning 21% of First Data. On March 12, 2004, Defendants filed
a supplemental Fed. R. Civ. P. 12(b)(6) motion to dismiss Plaintiffs’ case for lack of standing under
Delaware law, because Plaintiffs were no longer shareholders of Concord, the corporation on whose
behalf they were suing. Plaintiffs filed their response on March 22, 2004. On March 31, 2004, the
district court issued its opinion dismissing Plaintiffs’ case for failure to allege particularized facts
warranting excusal of their failure to make demand. The district court did not mention the standing
issue in its opinion.
On appeal, Plaintiffs ignore the standing issue in their initial brief, but Defendants raise
standing as a threshold issue in their response, and Plaintiffs address it in their reply.
ANALYSIS
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“Standing is a threshold issue in every case before a federal court.” United States v.
Perry, 360 F.3d 519, 540 (6th Cir. 2004) (Gibbons, J., dissenting) (citing United States v. McVeigh,
106 F.3d 325, 334 (10th Cir. 1997)). Whether Plaintiffs maintain standing to pursue their
shareholder derivative action under the Delaware corporation statutes is an issue of statutory
standing. See, e.g., Trollinger v. Tyson Foods, Inc., 370 F.3d 602 (6th Cir. 2004) (treating the issue
of whether the federal RICO statute grants a particular plaintiff a substantive right to sue as one of
statutory standing). While Supreme Court precedent does not provide a clear answer as to whether
the plaintiff’s lack of statutory standing affects our court’s jurisdiction, see, e.g., Steel Co. v. Citizens
For A Better Environment, 523 U.S. 83, 89, 97, 101-02 (1998), we need not resolve that issue in this
case. Defendants made a timely motion to dismiss for lack of statutory standing in the district court,
to which Plaintiffs responded, and we are convinced that the district court should have granted that
motion.
In the seminal case of Lewis v. Anderson, 477 A.2d 1040 (Del. 1984), the Delaware
Supreme Court, interpreting relevant statutory provisions of the Delaware Corporation Law, held
that in order to maintain standing, “a derivative shareholder must not only be a stockholder at the
time of the alleged wrong and at time of commencement of suit but that he must also maintain
shareholder status throughout the litigation.” Id. at 1046. The court further clarified that “[a]
plaintiff who ceases to be a shareholder, whether by reason of a merger or for any other reason, loses
standing to continue a derivative suit.” Id. at 1049. The court recognized but two narrow exceptions
to this continuing ownership requirement for standing: “(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.” Id. at 1046 n.10.
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Plaintiffs offer three responses to Anderson. First, they argue that they fit within the first
Anderson exception–that the First Data-Concord merger was a fraudulent attempt by Defendants to
deprive them of standing. In the district court, Plaintiffs conjectured that the mere timing of the
merger (seven months after their lawsuit was instituted) “at least raises the possibility that it was
entered into in an attempt to deprive Plaintiff of standing,” and then requested discovery to further
pursue this theory. The fraud exception, however, requires Plaintiffs to allege “particularized facts”
in support of fraud, Lewis v. Ward, 852 A.2d 896, 905 (Del. 2004), which Plaintiffs are clearly
unable to do, as evidenced by the absence of any factual allegations at all and their request for
discovery and “leave to amend [their] complaint to assert such a [fraudulent merger] claim if
discovery warrants it.”
Plaintiffs also try to fit their case under the second Anderson exception, characterizing the
merger as a mere reorganization that does not affect Plaintiffs’ ownership of the business enterprise.
Plaintiffs’ sole basis for this argument is a press release stating that “[t]he exchange of shares in the
merger is expected to qualify as a tax-free reorganization.” This statement, however, refers only to
the tax consequences of the merger for Concord shareholders, not the nature of Plaintiffs’ post-
merger ownership interest. Plaintiffs received only 0.365 First Data shares for each Concord share,
and they admit that Concord shareholders will constitute only 21% of the outstanding shares of First
Data. Moreover, Plaintiffs do not refute Defendants’ assertion that the First Data-Concord merger
was a “seven billion dollar [merger] . . . between two unrelated pre-existing corporations, each with
their own directors, officers, substantial assets and stockholders.” This merger clearly does not
qualify as a mere reorganization. See Ward, 852 A.2d at 904 (refusing to apply reorganization
exception to “two distinct corporations, each with its own board of directors, officers, assets and
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stockholders,” whose merger was far more than a “corporate reshuffling,” and which resulted in
plaintiffs’ possessing “property interests . . . distinctly different from that which they held as
shareholders of [the old corporation]”); Schreiber v. Carney, 447 A.2d 17, 22 (Del. 1982) (applying
reorganization exception, pre-Anderson, to a merger which resulted in “the shareholders of the old
company owning all the shares of the new holding company”).
Finally, Plaintiffs cite Blasband v. Rales, 971 F.2d 1034 (3d Cir. 1992), a Third Circuit case
analogous to the one at bar, for the proposition that a plaintiff can maintain “double derivative”
standing based upon his continuing, though diluted, interest in the new corporation that he owns.
Rales, however, does not require us to find that Plaintiffs maintain standing in this case. First and
foremost, Rales conflicts with Delaware law. Just last year in Lewis v. Ward, 852 A.2d 896 (Del.
2004), the Delaware Supreme Court re-affirmed its Anderson analysis, and in so doing, noted that
the Delaware Chancery Court (in a subsequent Rales proceeding) “correctly held” that “[t]he Third
Circuit’s decision in Blasband [v. Rales] is . . . inconsistent with the clear holding of Lewis v.
Anderson.” Id. at 903-04. Therefore, it is clear to us that the Delaware Supreme Court, whose
interpretation of Delaware law binds us, does not recognize the double derivative standing found
by the Third Circuit in Rales. Furthermore, were we to recognize Rales’s double derivative
standing, Plaintiffs would still have to amend their complaint to assert such standing. See Rales, 971
F.2d at 1043; Ward, 852 A.2d at 906. But neither in the district court, nor on appeal, have Plaintiffs
expressed any interest in amending their complaint for this purpose.
Because under applicable Delaware law Plaintiffs no longer have standing to pursue their
derivative lawsuit on behalf of Concord, we need not address the merits of the district court’s
opinion in order to affirm its dismissal of Plaintiffs’ action.
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CONCLUSION
For these reasons, we REMAND this matter to the district court, with instructions that it be
DISMISSED for lack of statutory standing.
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