A recent blog entry (“Delaware Chancery Court Chides Pension Fund for Boosting Returns”) discussed the March 23, 2012 Chancery opinion in the Celera case that didn’t get much attention when it came out. [See also Francis Pileggi’s blog entry]. I’m told that the case is on appeal now, however, and it may get a great deal more play going forward.
The blog quoted me (fairly, I might add) as questioning why the opinion was so critical of the plaintiff’s sale of its shares shortly before the challenged acquisition’s second step merger. I suggested that the plaintiff’s obligations to its own beneficiaries may have justified or even compelled that sale, and that it didn’t make a lot of sense to force a plaintiff to forego such a sale in order to maintain status as class representative.
As they say, however, it’s complicated. I still don’t see why the plaintiff’s sale ought to be viewed darkly, as an inequitable manipulation unsuited to its fiduciary status. That sort of criticism doesn’t in my view adequately acknowledge the plaintiff’s institutional obligations as a money manager. Thus, the Vice Chancellor’s ruling that the plaintiff was not barred by the doctrine of acquiescence, given that the transaction was a “fait accompli,” seems perfectly reasonable to me.
The problem, however, is that it’s unclear whether or how a stockholder who neither tenders in a first step offer nor is forced to sell in a second step merger — but who sells in the market in between those two events — could participate in any recovery on behalf of the class, which is usually defined as those who tender and those whose shares are acquired in the second step merger. And if the plaintiff doesn’t fit in either subgroup and wouldn’t be entitled to share in any recovery, can it properly represent those stockholders who would be entitled? And if it can’t, does its position as a class representative, once that mantle is seized, require it to forego a sale opportunity that its obligations to its beneficiaries might otherwise require it to pursue?
There’s an argument that the plaintiff’s sale in the market was at a price that necessarily reflects the value of the class claim, and therefore market sellers shouldn’t be entitled to participate in the class, because they reap the benefit of the litigation claims when they sell in the market. If that premise is correct, then there’s good reason to argue that the plaintiff, having asserted the right to act as a class representative, should have awaited the outcome of the litigation rather than obtaining the present-value benefit of selling in the market. That’s also a good reason for limiting the class to those who sell in the first step offer or the second step merger, but excluding those who sell in the market in anticipation of either part of transaction.
But what if the market doesn’t perfectly value pending claims? Are market sellers adversely affected by the anticipation of challenged transactions? If so, should they have standing to pursue fiduciary duty claims against such transactions? And if so, what practical means could be used to evaluate how to allocate amounts paid in settlement or judgment among those who sell in the market and those who sell in the challenged transaction itself?