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RECENT DEVELOPMENTS IN CLASS ACTION ADMINISTRATION AND SETTLEMENTS: HAVE THEY GONE CRAZY OUT IN DELAWARE?. KURT M. HEYMAN email@example.com MELISSA N. DONIMIRSKI firstname.lastname@example.org PROCTOR HEYMAN LLP WILMINGTON, DELAWARE.
KURT M. HEYMAN
MELISSA N. DONIMIRSKI
PROCTOR HEYMAN LLP
A controlling shareholder (the “Controller”) of a company proposes a going private transaction by way of fully negotiated merger. On announcement of the proposed merger, numerous stockholder lawsuits are filed challenging the fairness of the yet-to-be negotiated merger.
* In re Cox Commc’ns, Inc. S’holder Litig., 879 A.2d 604 (Del. Ch. 2005)
Why do defendants engage plaintiffs in this Kabuki dance? Because Kahn v. LynchCommc’n, Inc. 638 A.2d 1110 (Del. 1994), sets forth a standard requiring that all mergers with a controlling stockholder be subject to entire fairness review, which will not be dismissible on a Rule 12(b)(6) motion, making it economically more logical to settle rather than litigate a Kahn lawsuit.
Vice Chancellor Strine proposed to integrate the review standards of Kahn and the In re Siliconix Inc. S’holders Litig., 2001 WL 716787 (Del.Ch.) line of cases. The Siliconix line of authority regulates a Controller’s attempt to take a corporation private through a tender offer and subsequent back end merger, but permits avoidance of entire fairness review if the tender offer is subject to approval by the minority shareholders and the board is not involved in the tender.
Brinckerhoff v. Texas E. Prods. Pipeline Co., LLC, 986 A.2d 370 (Del. Ch. 2010)
On the expanded record, the Court found that the Special Committee had used the derivative claims “as an effective negotiation tool to increase the Merger consideration and obtain a fair result.” (Id. at 395.)
Brinckerhoff v. Texas E. Prods. Pipeline Co., LLC, 986 A.2d 370 (Del. Ch. 2010) (continued)
Less than a majority of the minority shareholders tendered and the controlling shareholder renegotiated the tender to waive the majority of the minority tender condition and to eliminate most of the concessions obtained by plaintiffs. Plaintiffs agreed to the terms of the revised tender offer and endorsed the settlement as reasonable and in the best interests of the stockholders.
The Court replaced lead counsel, citing concerns that “Old Counsel has acted only when there was a dispute over control of the case and Old Counsel’s path to a fee.” (990 A.2d at 957.) The Court pointed to the lack of evidence that the old lead counsel had conducted any meaningful assessment of the claims or investigation into the facts. Minimal discovery was served but responses were never sought and old counsel acknowledged that, at the time the settlement was negotiated, they had only publicly available information.
The Court ordered the New Counsel to conduct confirmatory discovery and evaluate the settlement in preparing to present the settlement to the Court. Furthermore, the Court ordered investigation into Old Counsel, including what actions had been taken in negotiating the settlement, the degree of factual and legal investigation, the number of hours expended, the identity and qualifications of the unnamed financial advisor and the basis for the determination that the settlement was fair.
In re Revlon, Inc. S’holdersLitig., 990 A.2d 940 (Del. Ch. 2010) (continued)
C.A. No. 5890-VCL (Del. Ch. Dec. 17, 2010) (Transcript)
Out of concern that the parties were seeking to submit the settlement to the Arizona court based on the weak disclosure claims (as opposed to the strong process claims) in an attempt to avoid scrutiny of a settlement with no monetary value to the shareholders, the Court ordered additional briefing respecting the sudden move to Arizona. The Court also ordered briefing on what remedies are available to the Court if “collusive forum shopping” had occurred.
Special Counsel recommended a “best practice” of substantively involving Delaware plaintiffs’ counsel in negotiations to avoid the appearance of impropriety, given the Court’s focus on representative settlements. Special Counsel also recommended that multijurisdictional parties keep all Courts informed of proceedings in the others. Special Counsel also noted that “much self-policing among the bar has already occurred and will continue to occur, supplemented by the continued careful consideration of settlements by this Court…”
In re Del Monte Foods Company S’holdersLitig., 2010 WL 5550677 (Del. Ch.)
The role of Delaware Courts as fiduciary when managing class action litigation has been long established. There is really very little that is new about the recent decisions summarized herein. The recent cases are best understood as a continuation of a traditional role that exists for the benefit of absent class members.
“If, in the light of these matters, the Court of Chancery approves the settlement as reasonable through the exercise of sound business judgment, its function as the so-called third party to the settlement has been discharged.” Nottingham Partners v. Dana, 564 A.2d 1089, 1102 (Del. 1989) [Prince era]