In In Re Celera Corporation Shareholder Litigation, No. 212, 2012 (Del. Dec. 27, 2012), the Delaware Supreme Court reversed the lower Court of Chancery and ruled that a large holder of Celera Corporation (“Celera”) shares must permitted to opt out of a shareholder class action settlement relating to the company’s sale to Quest Diagnostics, Inc. (“Quest”) in 2011. BVF Partners LP (“BVF”), which owned approximately twenty-five percent of the company’s stock by the time the sale closed, objected to the sale because it believed Celera’s drug royalties were undervalued and that the sale price was too low. The New Orleans Employees’ Retirement System (“NOERS”), which owned a smaller number of shares than BVF, filed a class action complaint against the board of Celera alleging breach of fiduciary duty.
Over BVF’s objection, the Delaware Court of Chancery certified a settlement class under subdivisions 23(b)(1) and (b)(2) of Delaware’s class action rules, and approved a settlement between NOERS and the defendants that named NOERS as the class representative, broadly defining the class as any and all owners of Celera shares during the relevant period, and requiring that the class be certified with no opt-out rights, preventing non-members of the class from independently pursuing any other legal claim against the defendants.
On appeal, the Delaware Supreme Court found that the Court of Chancery had abused its discretion in refusing to permit BVF to opt out of the class. The Delaware Supreme Court’s decision turned on competing policies favoring the global resolution of class action claims and the due process rights of parties with valid claims to be heard. According to the Supreme Court, two factors in the Celera case tipped the scales in favor of due process. First, NOERS was “barely adequate” as a class action representative. A few days before the sale, NOERS had sold all of its stock in Celera. Concluding that NOERS barely met the requirement for an appropriate class representative, the Court of Chancery noted itself that “NOERS’s careless and cavalier sale of all its stock in Celera” called into question its suitability to serve as a class representative. Second, BVF was a “significant shareholder prepared independently to prosecute a clearly identified and supportable claim for substantial money damages,” and the only claims being settled were for money damages.
This case points up the differences between class certification in federal court versus the Delaware courts. Here, the Delaware court admitted that money damages were key, yet nevertheless certified the class under equitable principles, which do not mandate opt-out rights. The Delaware Supreme Court recognized that when the case was filed, the claims presented were primarily for equitable relief, but that that had changed over the course of time. Its solution was not to overturn the certification order as erroneously based on equitable grounds, but to allow BVF to opt out. The decision represents a significant departure from federal law and serves as a warning to companies defending against certification under state class action jurisprudence.