In this opinion, the Delaware Court of Chancery addressed several issues related to class actions alleging breaches of fiduciary duty, including typicality and adequacy and the effect of the recent United States Supreme Court decision in the case of Wal-Mart Stores, Inc. v. Dukes on certification of classes in such actions. The Court also addressed attorneys’ fees in the context of the settlement presented, which conferred only therapeutic, non-monetary benefits on the proposed class of stockholders.
The case came before the Court on an application for approval of a settlement of class claims arising from alleged breaches of fiduciary duty related to Quest Diagnostics’ acquisition of Celera Corporation. The acquisition was structured in two tiers: first, a tender offer by Quest for any and all shares of Celera at $8.00 per share and, second, a back-end squeeze-out merger at the same price. Lead plaintiff New Orleans Employee Retirement System (NOERS) entered into a memorandum of understanding with defendants shortly after filing its complaint that would implement certain changes to the deal structure along with supplemental disclosures but reflected no monetary benefits to stockholders. The parties conditioned the settlement on confirmatory discovery, which permitted NOERS to rescind the settlement and litigate the claims if such discovery led NOERS to reevaluate the strength of its claims. Following the successful completion of the tender offer, but before effectuation of the back-end short-form merger, NOERS sold its shares on the secondary market.
BVF Partners, L.P. (BVF), Celera’s largest shareholder, objected to the proposed settlement by challenging NOERS’s status as lead plaintiff asserting that NOERS could not satisfy the typicality requirement of Court of Chancery Rule 23(a)(3) because NOERS would be susceptible to the defense of acquiescence due to its sale of shares on the secondary market before the merger was effected. The Court agreed that acquiescence may bar relief for a shareholder who sells its shares on the secondary market but observed that none of the three elements of the acquiescence defense were present here. First, discovery of new facts was a logical predicate to NOERS rejecting the settlement. Thus, the first element of the defense, knowledge of all salient facts, would not exist. Second, the sale of NOERS’s stock on the open market did not reflect a meaningful choice because the merger had effectively become inevitable once the tender offer had been successfully completed. Finally, NOERS’s pursuit of legal action, rejection of the merger consideration, and sale of its shares on the open market refuted an unequivocal acceptance of the merger, the third element of an acquiescence defense. To the extent the defense did apply, the Court rejected the idea that it would interfere with NOERS’s ability to satisfy the typicality requirement because the majority of shareholders would be susceptible to the same defense which, in any event, would only bar obtaining relief but not the ability to seek a determination of liability for the breach of fiduciary duty.
BVF also objected to the adequacy of NOERS as lead plaintiff under Rule 23(a)(4), alleging NOERS’s sale of shares on the secondary market removed any incentive to conduct meaningful confirmatory discovery or rescind the settlement agreement. The Court disagreed, observing that because the alleged breaches of fiduciary duty were both personal and direct, NOERS’s sale of stock did not categorically bar its potential receipt of monetary relief. The Court also rejected BVF’s invitation to create a bright-line rule whereby a lead plaintiff who sells its shares automatically suffers a disqualifying conflict. The Court did, however, agree that such a sale creates an appearance of impropriety, which undermines the trust of other shareholders and the Court in the lead plaintiff. Observing that such facts created legitimate criticisms, the Court stated that in the future it might well employ BFV’s suggested bright-line test because “Delaware courts have good reason to expect more from those who would serve as lead plaintiffs in representative litigation.”
BVF also argued that the United States Supreme Court’s Wal-Mart decision rendered inappropriate the certification of the class pursuant to Rule 23(b)(1) and (2). Class actions certified pursuant to these sections typically do not provide individual members with the right to opt-out of the class. The Court did not agree that Wal-Mart had any impact on the instant case. Rather, the Court explained, because the United States Supreme Court found that the claims at issue in Wal-Mart included individualized monetary damages, any certification, to the extent it was warranted, would have been under Rule 23(b)(3), which provides for a right of individual members to opt out of the class. In cases involving breaches of fiduciary duty, the Court explained it does not generally make individualized determinations of liability because the monetary relief, if awarded, flows from the finding of liability to the class as a whole. And, the fact that allocation might vary due to the amount of stock owned was of no moment because “apportionment of the relief [from a common fund] is not synonymous with idiosyncrasy of the claims.” For those reasons, the Court rejected BVF’s argument and certified the class for the purpose of the proposed settlement pursuant to Rule 23(b)(1) and (2).
After finding NOERS satisfied the typicality and adequacy requirements and certifying the class, the Court considered the fairness of the proposed settlement. The Court categorized the benefits of the settlement as therapeutic deal modifications and supplemental disclosures. In addition to a reduction of the amount of the termination fee, the defendants had agreed to waive standstill provisions that potential bidders for Celera had agreed to in exchange for confidential information during the bidding process. The standstill provisions prevented the bidders from making an offer for Celera shares without an express invitation from its board and also prevented the bidders from seeking a waiver of the standstill provisions from Celera’s board. The Court found the waiver of these standstill provisions to be a significant achievement because NOERS’s challenge to them was at least colorable and a waiver represented the likely maximum relief the plaintiffs could have obtained had the claim been litigated. The Court explained that the waiver of the standstill provisions created value because those agreements, along with the merger agreement’s restriction on Celera’s board from soliciting alternative offers, effectively placed the Celera board in an “informational vacuum.” This was so because the standstill agreements prevented once-interested potential bidders from communicating their interest and the “no solicitation” provisions in the merger agreement prevented the board from inquiring into any further interest. The Court was careful to explain that its conclusion was limited to the waiver being valuable and that it was not finding “provisions expressly barring a restricted party from seeking a waiver of the standstill necessarily are unenforceable,” cautioning that such a ruling should only be done on the merits.
At the conclusion of its opinion, the Court addressed NOERS’s application for attorneys’ fees, over which the parties disagreed. The Court used the attorneys’ fee award in In re RehabCare Group, Inc. Shareholders Litigation as a starting point because the deal modification benefits at issue in both cases were substantially similar. The Court, however, modified the award to account for certain factual differences between the two cases, including deal size. With such adjustments, the Court determined that plaintiffs’ counsel was entitled to a fee relating to the deal modifications in the range of $400,000 to $750,000. Regarding disclosures, the Court found four of those at issue meaningful and categorized the remaining as “lesser-quality” disclosures, finding a range of $550,000 to $650,000 reasonable compensation. As to the final element of the fee petition, counsel’s expenses, the Court rejected the invitation to consider expenses as a separate component of the fee award. Rather, the Court considered counsel’s expenses subsumed within the awards for the therapeutic benefits and supplemental disclosures, respectively. Such a result, the Court explained, provides a proper incentive for counsel to manage litigation expenses efficiently. As a result of this analysis, the total fee the Court awarded was $1.35 million, inclusive of expenses.
The full opinion is available here.