Joyce v. Morgan Stanley

I'm not sure whether this case is important in the big scheme of things, so I'll try to think it through here. If any one out there has commentary, I'd be happy to hear it.

Joyce v. Morgan Stanley is a decision of the 7th circuit court of appeals, issued August 19, that arose out of a merger of two telecomm firms in 1999.

The decision itself is available through the website of Wachtell Lipton.

Morgan Stanley was the financial adviser to one of the firms involved in the merger, the target company. Stockholders in the corporation it was advising brought this lawsuit, alleging that MS didn't warn them how to minimize their exposure to a decline in the value of the counterparty's stock's price.

On the plaintiff's theory, MS had a fiduciary responsibility to the shareholders in the target corp., and it breached that because of a prior conflict-generating relationship with the acquirer.

At first blush, then, the shareholders' claim is of the sort usually characterized as a "shareholders derivative" lawsuit. The district court certainly thought so. It dismissed the case on the ground that the plaintiffs had failed to follow the proper procedures for bringing a derivative claim. Thus, they were dismissed at the district court level for lack of standing.

The appellate court made things more complicated. It said this ISN'T a derivative lawsuit, because it wasn't a decline in share price per se that constitutes the harm alleged by a failure to hedge against such a decline. So the district court was wrong to use the standing argument.

But, the appellate court continued, Morgan Stanley didn't have any duty to warn the shareholders that they should hedge, so the question of whether it had any "conflict" with that alleged duty doesn't arise, and the district court was right to dismiss the case anyway.

As I indicated above, I'm not sure whether this is important. In fact my head hurts just thinking about it.