Court Finds Company Cannot Sue Its Shareholders Over Loss

August 14, 2003 ( - A company cannot sue its institutional investors over a financial discrepancy disclosure following a merger.

>The US 9th Circuit Court of Appeals turned aside the company’s lawsuit finding legal precedents mitigating shareholder liability in such a deal.     “The sanctity of the corporate entity, as well as the policies mitigating against subjecting individual shareholders of a public company to liability for a merger gone bad, defeat McKesson’s effort to turn corporate law inside out,” Circuit Judge M. Margaret McKeown wrote, according to a report by The Recorder.

Merger Gone Bad

The case arose from the merger between   McKesson Corp. and HBO & Co. (HBOC) in January 1999.   Following the merger, McKesson-HBOC publicly announced that HBOC had engaged in improper and illegal accounting practices and not surprisingly, McKesson-HBOC’s stock price dropped sharply; as much as $9 billion in a single day

McKesson sued shareholders who exchanged more than 20,000 shares in HBOC for shares in the new company. The case was brought under the theory that trading flawed HBOC shares for “good” McKesson shares unjustly enriched the investors.

McKeown went on to find a decision in favor of the company would not be fair to shareholders.   “McKesson has potential legal claims against any number of parties who, unlike the former shareholders, actually played a substantial role in the decision to enter the merger agreement,” McKeown wrote. “Possible claims and remedies lie against the former HBOC officers and directors, as well as the phalanx of investment bankers, lawyers, auditors, accountants and other advisors associated with the transaction.”

The case is HBOC v. New York State Common Fund , 03 C.D.O.S. 7259.  

Other Cases

McKesson is no stranger to the courtroom, and pending cases do not forecast a change in that trend anytime soon. Both the US Securities and Exchange Commission (SEC) and the US Attorney’s office have cases pending in connection with the alleged fraud.   In addition, the Ninth Circuit has another case on its docket over whether McKesson waived its attorney-client and work-product privileges when it turned over the results of an internal investigation to regulators and criminal authorities.

>Previously, the US District Court for the Northern District of California determined the fiduciaries for the combined McKesson-HBOC 401(k) Plan did not breach their Employee Retirement Income Security Act (ERISA)-imposed duties when the plan failed to divest employer stock holding prior to the merger (See   Judge Clears Fiduciaries of Co. Stock Wrongdoing ).   US District Judge Ronald Whyte in that case ruled the fiduciaries would have violated federal securities laws had they dumped the employer stock before the announcement of the accounting issues.

“Fiduciaries are not obligated to violate the securities laws in order to satisfy their fiduciary duties,” the court said, adding that the plaintiffs in the case “offered no convincing argument …which would authorize an ERISA fiduciary to violate the law in order to protect” plan participants.