Mid-Litigation Merger Causes Investor to Lose Case

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By Michael Greene

April 12 — Linkwell Corp. directors don't have to face a derivative lawsuit, after a Florida federal judge ruled that the plaintiff-investor couldn't continue to pursue claims as a result of a mid-litigation merger.

Judge Darrin P. Gayles from the U.S. District Court for the Southern District of Florida dismissed the lawsuit in an April 11 order, finding that the investor lacked standing under the “continuous ownership rule.”

The judge observed that under both federal and Florida law, shareholders bringing lawsuits on behalf of corporations must continue to own their shares throughout the life of the litigation.

The court declined to create an exception to the rule despite the plaintiff's contention that the merger was entered into for the purpose of terminating the pending derivative lawsuit. The plaintiff argued that the court should look to Delaware law, which recognizes such an exception.

No Longer Shareholder

In his lawsuit, the investor claimed that Linkwell directors entered into a self-dealing reverse-merger transaction at the expense of shareholders. Five days after the plaintiff filed a third amended complaint in the action, Linkwell entered into a merger with Leading World Corp. After the combination, the plaintiff was no longer a Linkwell shareholder.

In its ruling, the court cited a 2005 decision in which the Florida state appeals court declined to create an exception to the continuous-ownership rule. In that case, the plaintiff lost his shares as a result of one defendant exercising a statutory right to purchase them in response to a dissolution action.

“This Court will not contravene or otherwise disturb the only controlling decision of a Florida appellate court ruling on an issue of Florida law by importing and enforcing an exception from Delaware or from any other jurisdiction, regardless of how often Florida courts have looked to Delaware corporate law for myriad unrelated purposes,” Gayles wrote.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com