law-shareholder-derivative-action | class actions |


Kansas courts often look to Delaware law on substantive corporate law issues. See Arnaud v. Stockgrowers
State Bank, 992 P.2d 216, 218 (Kan. 1999). Under Delaware law, "[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." Lewis v.
Anderson, 477 A.2d 1040, 1049 (Del. 1988). "[A] derivative shareholder must not only be a stockholder at the
time of the alleged wrong and at the time of commencement of suit but . . . he must also maintain shareholder
status throughout the litigation." Id. at 1046; see also Elloway v. Pate, 238 S.W.3d 882, 900 (Tex.
App.--Houston [14th Dist.] 2007, no pet.) (acknowledging same). However, a merger does not terminate a
derivative shareholder's standing if the shareholder can demonstrate that the merger is a fraud "being
perpetrated merely to deprive shareholders of the standing to bring a derivative action." Kramer v. W. Pac.
Indus., Inc., 546 A.2d 348, 354 (Del. 1988); see also Lewis v. Ward, 852 A.2d 896, 905 (Del. 2004) ("[A]
complaint seeking to invoke the fraud exception must demonstrate that the merger was fraudulent and done
merely to eliminate derivative claims."). This is known as the "fraud exception." See Ward, 852 A.2d at 904-05.

City of Inkster Policeman and
FIreman Retirement System v. Kinder (Tex.App.- Houston [1st Dist.] Jun. 4,
2009)(Alcala)(shareholder derivative action, standing issue after buyout)
Justice Alcala  
Before Justices Jennings, Alcala and Higley
01-08-00308-CV City of Inkster Policeman and Fireman Retirement System, derivatively on behalf of Kinder
Morgan, Inc. v. Richard D. Kinder, Michael C. Morgan, William V. Morgan, Fayez Sarofm, Edward H. Austin, Jr.,
William J. Hybl, Ted A. Gardner, Charles W. Battey, H.A. True, III, James M. Stanford, Stewart A. Bliss, Edward
Randall, III, Douglas W.G. Whitehead, Et Al
Appeal from 270th District Court of Harris County
Trial Court
Judge: Hon. Brent Gamble  

B. Analysis

In this case, the City filed its petition 18 months prior to the trial court's rendering final judgment, so the City had
18 months during which to conduct discovery. The City asserts that it was diligent in attempting to obtain
discovery on the issue of standing because "[u]ntil Appellees actually filed the Summary Judgment Motion, [the
City] was not in a position to analyze the purported reasons for the merger and craft the narrow discovery
necessary to fully explore KMI's Special Committee's reasons for approving the merger." However, the City was
in a position to foresee the need for this "targeted discovery" because the City filed this derivative suit in
response to the proposed merger, and the City knew it would no longer have standing once the merger took

More importantly, the discovery sought by the City was immaterial to the City's response to appellees' summary
judgment motion. In its brief, the City asserts that it "should have been allowed to conduct targeted discovery to
determine whether the Merger was consummated for fraudulent or other improper purposes (thereby
preserving [the City's] standing)." However, the fraud exception applies to preserve standing only when the
merger was consummated for the purpose of depriving the shareholder of standing to pursue a pre-existing
derivative claim. See Anderson, 477 A.2d at 1046 n.10 ("Plaintiff has not asserted that the merger was
perpetrated to deprive Old Conoco of its claims against the individual defendants . . . ."). The merger itself must
be the subject of a claim of fraud. See Ward, 852 A.2d at 902. In this case, the merger could not have been
consummated for the purpose of destroying the City's standing to bring its derivative suit because the merger
proposition pre-existed the suit and was in fact the subject of the suit. The merger was never the subject of a
claim of fraud. Therefore, the discovery sought by the City was immaterial to the motion for summary judgment.

We hold that the trial court did not abuse its discretion by denying the City's request for a continuance to
conduct additional discovery. We overrule the sole issue on appeal.

Elloway v. Pate (Tex.App.- Houston [14th Dist.] Nov. 1, 2007)(Hudson)(business organization law,
shareholder class action,
breach of fiduciary duty, standing, derivative, jury instruction)
AFFIRMED: Opinion by Justice Hudson
Before Justices Brock Yates, Anderson and Hudson
14-06-00062-CV Peter Elloway, On Behalf of Himself and All Others Similarly Situated v. Donna C. Pate, In her
capacity as Independent Executor of the Estate of James L. Pate, James J. Postl, Terry L. Savage, H. John
Greeniaus, Brent Scowcroft, Lorne R. Waxlax, Forrest R. Haselton, C. Berdon Lawrence, and Gerald B. Smith
Appeal from 295th District Court of Harris County (Hon. Tracy Kee Christopher)

Nov. 10, 2009:  200972839 - BIANCANALA, RALPH vs. FERTITTA, TILMAN J (link to docket)
See Petition: Ralph Biancanala v. Tilman Fertitta Shareholder Derivative Suit re Landry's Buyout