In re Massey Energy Co. Derivative and Class Action Litigation
160 A.3d 484
| Del. Ch. | 2017Background
- In April 2010 an explosion at Massey Energy’s Upper Big Branch mine killed 29 miners; investigations (McAteer, MSHA, UMWA) concluded Massey management willfully disregarded safety rules. Several Massey executives later faced criminal liability.
- After the disaster Massey’s board explored strategic alternatives; Blankenship retired and a sale process produced competing bids. Massey agreed to merge with Alpha Natural Resources in January 2011; the merger closed June 1, 2011 for consideration valuing Massey at roughly $7 billion.
- Plaintiffs (former Massey stockholders) filed derivative suits alleging directors and officers breached fiduciary duties by running a business plan that willfully ignored safety regulations, causing corporate losses and forcing a “fire sale” merger.
- Plaintiffs sought a preliminary injunction to prevent the merger and transfer the derivative claims into a litigation trust; Vice Chancellor Strine denied the injunction, finding plaintiffs likely would lose derivative standing if the merger closed.
- After delays (criminal investigation, Alpha bankruptcy), plaintiffs refiled a class/derivative complaint asserting (1) a direct “inseparable fraud” claim and (2) a derivative Caremark-style claim; defendants moved to dismiss.
- The Court dismissed both claims: the derivative claim for lack of standing under Delaware’s continuous-ownership rule; the asserted direct "inseparable fraud" claim because the alleged pre-merger misconduct is derivative (corporate mismanagement) not a direct injury to stockholders.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to pursue derivative claims post-merger | Massey shareholders should be allowed to pursue the Caremark-style derivative claim despite merger | Continuous-ownership rule bars derivative standing after merger unless narrow exceptions apply | Dismissed: plaintiffs concede derivative claim does not survive merger; no applicable exception; claim transferred to Alpha |
| Viability of a direct "inseparable fraud" claim | The alleged pre-merger misconduct (willful safety violations causing a fire-sale merger) constitutes an inseparable fraud giving stockholders a direct claim that survives merger | Countrywide II/Tooley require that pre-merger wrongdoing give rise to a direct injury to stockholders; here the harm is to the corporation | Dismissed: conduct alleges corporate mismanagement (derivative), not direct injury to individual shareholders; inseparable-fraud doctrine does not create a third derivative-standing exception |
| Whether pre-merger misconduct "necessitated" the merger (causation) | Complaint alleges the merger was the direct/proximate result of defendants’ conduct, making the inseparable-fraud theory plausible | Prior injunction record (May 2011) found the Merger was not necessitated by board conduct; causation insufficient | Court did not reach causation in detail because claim fails on direct-vs-derivative ground; pleads no direct injury |
| Applicability of Corwin (cleansing effect of a fully informed shareholder vote) | Plaintiffs argued public-policy reasons to allow accountability; impliedly resist Corwin-based dismissal | Defendants contended shareholder approval could bar relief under Corwin where relevant | Court: Corwin not implicated—stockholder vote did not cleanse pre-merger mismanagement claims and was not a separate basis for dismissal |
Key Cases Cited
- Lewis v. Anderson, 477 A.2d 1040 (Del. 1984) (continuous-ownership rule and narrow exceptions for derivative standing)
- Tooley v. Donaldson, Lufkin & Jenrette, 845 A.2d 1034 (Del. 2004) (test distinguishing direct vs. derivative claims)
- Arkansas Teacher Retirement System v. Caiafa, 996 A.2d 321 (Del. 2010) (discussing "inseparable fraud")
- Arkansas Teacher Retirement System v. Countrywide Financial Corp., 75 A.3d 888 (Del. 2013) (clarifying that "inseparable fraud" relates to direct claims and does not create a new derivative-standing exception)
- In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996) (standards for director oversight liability)
- Corwin v. KKR Financial Holdings, 125 A.3d 304 (Del. 2015) (effect of an informed, uncoerced shareholder vote)