Survival of Rights of Action After Corporate Merger

Once a corporation ceases to exist, most courts permit neither primary nor derivative suits to be brought in its name. If a merger precipitates that corporate demise, courts usually hold that standing to sue, like other assets of the “merged” corporation, passes to the surviving corporation. This Note ponders the merit of that rule of passage.

Section I categorizes the cases defining the rule of passage. Some courts have steadfastly adhered to the rule and denied standing to the merged corporation’s shareholders. Other courts, fearing that the rule would preclude meritorious actions, have created exceptions allowing these shareholders to sue despite the merger. Unfortunately, no court has provided satisfactory criteria for determining when an exception to the rule of passage is proper.

Section II examines the policies supporting the rule of passage and proposes criteria for determining when an exception does not offend those policies. It suggests that an exception is proper only when the defendant is not at arm’s length from either the merged corporation’s management or the surviving corporation. In such excepted cases, the merged corporation’s former shareholders should be entitled to sue derivatively and to seek pro rata recovery.