In this letter opinion, the Court of Chancery granted a motion to intervene by certain shareholders (the “Proposed Intervenors”) of Freeport-McMoRan Copper & Gold Inc. (“Freeport”) and approved the Proposed Intervenors’ application to certify an interlocutory appeal of the Court’s previous decision establishing a plaintiffs’ management structure for the derivative action.
In this shareholder derivative action challenging Freeport’s acquisition of the balance of McMoRan Exploration Co. (“MMR”) and Plains & Production Company (“P&P”), the Court had previously entered an order establishing a plaintiffs’ management structure. The Freeport transaction was scheduled to close fairly soon, perhaps as early as seven weeks from the date of this letter opinion. The Proposed Intervenors had not yet filed a substantive derivative complaint on behalf of Freeport, as is typically required of a party seeking intervention, because they had elected to instead pursue a books and records inspection under 8 Del. C. § 220 before deciding what claims (if any) the Proposed Intervenors wished to assert in any derivative complaint. Concerned over the possible collateral estoppel effects on any action the Proposed Intervenors might choose to bring if the Lead Plaintiffs were to fail in their derivative action, the Proposed Intervenors filed both a motion to intervene in the derivative action and an application to certify an interlocutory appeal of the Court’s order establishing a plaintiffs’ management structure.
The Court first addressed the Proposed Intervenors’ motion to intervene, noting that an application for permissive intervention is subject to the Court’s discretion, and that the Court is expressly directed to “consider whether the intervention will unduly delay or prejudice the adjudication of the rights of the original parties.” The Court found that there was no reason to believe that allowing intervention in this instance would cause a delay or prejudice the current parties because allowing the Proposed Intervenors to pursue their books and records action would not interfere with the scheduling and course of the derivative action. The Court, however, declined to address what action it would take if the Proposed Intervenors’ books and records action generated significant new information regarding the conduct of Freeport’s directors at issue in the pending derivative action. The Lead Plaintiffs argued that the Court should deny the motion to intervene because the Proposed Intervenors did not file a proposed derivative complaint as mandated under Court of Chancery Rule 24(c). The Proposed Intervenors countered, however, that they could not possibly file such a complaint without first inspecting the Freeport books and records they currently seek. The Court agreed with the Proposed Intervenors, noting that the real dispute was not framed by the derivative complaint but instead by the plaintiffs’ organizational structure and whether it is prudent to pursue a derivative action without the benefit of having reviewed Freeport’s books and records. Thus, in the Court’s eyes, the Proposed Intervenors’ books and records complaint met the objectives of Court of Chancery Rule 24(c) and the motion to intervene should be granted.
Turning to the Proposed Intervenors’ application for the certification of an interlocutory appeal, the Court noted that such an application is governed by Delaware Supreme Court Rule 42(b) which requires that the order from which the appeal is sought: (1) establishes a legal right; (2) determines a substantial issue; and (3) satisfies one of several other criteria, including whether review may “otherwise serve considerations of justice.” Although the Court’s determination of plaintiffs’ leadership structure in the derivative action did not resolve any legal rights of the Proposed Intervenors, the Court observed that the establishment of an orderly plaintiffs’ management structure does not fit well within the procedural rules. However, the Court noted that approval of plaintiffs’ leadership structure could very well have the effect of denying the Proposed Intervenors (and their counsel) a meaningful and material role in Freeport’s derivative litigation. Thus, the Court found that the Proposed Intervenors met the “legal right” requirement of Delaware Supreme Court Rule 42(b).
Regarding the “substantial issue” requirement, the Court found that although its prior decision did not resolve “a main question of law which relates to the merits of the case,” it did have implications regarding the “extensive jurisprudence urging the use of the ‘tools at hand’ before a derivative action is commenced.” Noting that the question of when must a potential derivative plaintiff first undertake a books and records inspection is an important one under Delaware law, the Court found that its decision not to delay the derivative action potentially established a disincentive for future derivative plaintiffs to use the books and records inspection process. Thus, the decision of how derivative cases which may have the need for expedited treatment are interfaced with books and records inspections constitutes a substantial issue for purposes of interlocutory certification. Finally, the Court noted that one of the pertinent “other factors” prescribed by Delaware Supreme Court Rule 42(b) that warrants appellate review is considerations of justice. The Court found that its decision regarding plaintiffs’ leadership structure was one that implicated the considerations of justice based upon the “coalescence of important policies,” including: case management; designation of plaintiffs’ organizational structure; when a books and records inspection is a necessary or prudent prerequisite to the filing of a derivative action; and how a disappointed party can ever obtain effective appellate review of the determination of matters such as these. The Court found that these factors, collectively, elicited important questions for the considerations of justice sufficient to satisfy the requirements of Delaware Supreme Court Rule 42(b). The Court, therefore, certified the Proposed Intervenors’ application for an interlocutory appeal.
The full opinion is available here.