Professor Lawrence A. Hamermesh
The Delaware Supreme Court handed down an interesting decision on December 27, 2012 in the Celera merger class action litigation. The underlying litigation was a challenge to a squeeze-out tender offer and merger, and involved some hot button issues (“don’t ask/don’t waive” standstill agreements and a top-up option), but the opinion wasn’t really about them.
The Supreme Court’s opinion instead reviewed a decision by the Court of Chancery to approve a class action settlement without opt-out rights. The original plaintiff, New Orleans Employee Retirement System (NOERS), had owned 10,000 Celera shares, which it sold in the market (at a price slightly higher than the $8.00/share deal price) before the second-step merger was completed. The settlement, reached a year or so after that merger, when any possibility of injunctive relief was pretty much history, would as usual have barred all other stockholders from pursuing further litigation challenging the deal.
That bar would have affected BVF Partners, which owned over 5% of the stock when the deal was announced, and 24.5% by the time of the merger. BVF objected to the settlement on a variety of grounds, including the lack of opt-out rights in the settlement.
As is common in Delaware in this sort of litigation, the Court of Chancery certified a class, for settlement purposes, under Court of Chancery Rules 23(b)(1) and (b)(2), under which opt-out rights aren’t required. The Supreme Court didn’t find fault with that certification; it didn’t reverse the determination to accept the settlement; and it didn’t accept BVF’s arguments that NOERS lacked standing because it sold its shares before the merger, or that NOERS was an inadequate class representative because it was a “frequent filer,” a term that the Supreme Court said it has not yet even recognized.
What the Supreme Court reversed was the determination not to require opt out rights. In the following short analysis, the Court found that determination to have constituted an abuse of discretion:
The court could not deny a discretionary opt-out right where the policy favoring a global settlement was outweighed by due process concerns. Here, the class representative was “barely” adequate, the objector was a significant shareholder prepared independently to prosecute a clearly identified and supportable claim for substantial money damages, and the only claims realistically being settled at the time of the certification hearing nearly a year after the merger were for money damages. Under these particular facts and circumstances, the Court of Chancery had to provide an opt-out right.
What’s intriguing–and perhaps unsettling–about this brief analysis is whether it has logical limits in future litigation challenging mergers that are consummated after the litigation begins. If there were “due process concerns,” why should it matter that the objector was a “significant shareholder?” Are those concerns less pressing when the objector has only 100 shares? Why so, when even a 100-share holder can hire effective class counsel who could pursue the litigation effectively? Is adequacy a sliding scale? If so, what are the measuring marks on that scale, if, as the Court held, NOERS clearly had standing because it held shares when the merger was approved?
And most important, what do future settlement hearings now have to evaluate? Before denying opt-out rights, will the court have to examine the size of shareholdings of unrepresented class members in order to determine whether any of those stockholders own enough shares so that due process rights are offended? Or does this responsibility arise only when an objection to the settlement is lodged?
The result in this case may have been the right one: with the no opt-out condition of the settlement no longer satisfied, I imagine that the case will now proceed, perhaps to a revised settlement with BVF, or perhaps to full-blown litigation. And there surely was something unseemly about a holder of 10,000 shares that weren’t even directly affected by the challenged transaction being able to achieve preclusion of the claims of a 24.5% stockholder. But in achieving what may have been a good result, the Court has perhaps created an element of uncertainty over how to handle settlements in common deal litigation.