Closing the books on merger-related shareholder class-action litigation just got more complicated.
That's because Delaware's highest court ruled last month that a major investor can opt out of a class-action settlement in order to pursue a separate legal action related to a faulty merger deal. Litigation connected to merger and acquisition activity comprises the fasting growing area of shareholder class actions.
But don't put deal plans on ice just yet. Securities litigation lawyers say the narrow scope of the ruling means it may not come into play in many settlements, although it could push companies to make sure large shareholders are on board with an acquisition before signing on to the purchase.
In one of the more unusual and complex merger and acquisition cases in recent memory, the Delaware Supreme Court, in the case In Re Celera Corp. Shareholder Litigation, overruled in part and remanded an earlier ruling by the Delaware Chancery Court that had denied a shareholder the right to opt-out of the class settlement.
The ruling is highly unusual, say securities litigation attorneys. While opt outs have become more common in securities 10b-5 class actions, in which large shareholders often find it more lucrative to opt out to pursue separate legal action, says Norman Goldberger, a partner of law firm Ballard Spahr and practice leader of the firm's securities litigation group, M&A litigation is often certified as a “non-opt-out” case, removing that ability to pursue a separate settlement. This phenomenon of a major shareholder trying to opt out of an M&A litigation case is “the first I've seen in many, many years,” he says.
On its face, the ruling would appear to make it more difficult for companies to obtain blanket class-action settlements in merger-related cases that involve objectors with substantial holdings. Yet the decision contains a silver lining for companies, since it more clearly defines the circumstances where shareholders can opt out of a settlement. Shareholders can only opt out when they have “very strong facts,” says Goldberger.
“You may see more challenges and attempts to opt out,” Goldberger adds, “but I'm guessing they won't be successful, because you won't have the unique set of facts and circumstances that you have in Celera.”
Securities experts largely agree that the unique facts surrounding the case mean that other companies involved in similar class actions should not be too concerned. The case easily could be perceived as significant “if taken too literally,” says Larry Hamermesh, professor of corporate and business law at Widener's Institute of Delaware Corporate Law. “But my suspicion is that, over the long run, it's not going to affect the way companies reach settlements, and it's not going to affect the way courts review them.”
“The opinion makes an effort to decide the case on very narrow grounds,” says Stephen Lamb, a partner in the corporate and litigation departments of law firm Paul Weiss and a former vice chancellor of the Chancery Court, “I don't believe the court is trying to affect normal litigation and settlement practices in this kind of class litigation.”
Brian Pastuszenski, co-chair of Goodwin Procter's securities litigation and enforcement practice, similarly agrees that Celera will be “cabined to its particular facts and does not represent a long-term change in direction for the Delaware Supreme Court.”
The original case stemmed from Quest Diagnostics purchase of healthcare company Celera in May 2011 for $680 million. Hedge fund BVF Partners, one of Celera's largest stockholders with nearly a quarter of its stock at the time of the merger, opposed acquisition negotiations from the start, arguing that Celera's drug royalties were grossly undervalued—a claim that was later proven to be accurate.
“In an ideal world, it shouldn't matter whether you have 100 shares or one million shares, but it does. The court was quite explicit, even with its brief analysis, in identifying that factor as an important one.”
—Larry Hamermesh,
Professor,
Widener's Institute of Delaware Corporate Law
BVP was so convinced that Celera was worth more than what Quest had agreed to pay for it, that the hedge fund continued to acquire shares through the entire offer period in an attempt to block the merger—a factor that had a ”tremendous influence on the Delaware Supreme Court,” says Goldberger. The fund, “put its money where its mouth was,” he says.
Following completion of the merger, another shareholder of Celera, the New Orleans Employees' Retirement System (NOERS), filed a class action in the Delaware Court of Chancery alleging breach of fiduciary duty against Celera, Quest, and Sparks Acquisition, a subsidiary of Quest. Four months following the merger, NOERS reached a non-cash proposed settlement.
Refusing to be bound by the settlement, BVF argued that NOERS lacked standing to represent the class, because it sold its shares before the completion of the merger. BVF further argued that the Chancery Court erred in certifying the class as a non-opt-out class under Court of Chancery Rule 23(b). Class actions certified under this rule typically don't provide individual class members with the right to opt-out.
“Even if that certification was proper, the Court of Chancery should have exercised its discretionary powers to allow BVF to opt out of the class in order to pursue its individual claims for monetary damages against the defendants,” BVF argued.
Addressing BFV's first argument, the Delaware Supreme Court found that NOERS had standing to represent the class and that the Chancery Court did not abuse its discretion in certifying the class. “We decline to adopt a rule of law that a shareholder class representative in a breach of fiduciary duty action must own stock in the corporation continuously through the final class certification,” Justice Henry duPont Ridgely, who authored the decision, wrote.
CELERA CASE
The following order was rendered in the case of In re Celera Corporation Shareholder Litigation:
We agree with the Court of Chancery that NOERS has standing to represent the class. The settlement agreement executed between NOERS and the defendants broadly defines the class and NOERS falls within that broad definition. We decline to adopt a rule of law that a shareholder class representative in a breach of fiduciary duty action must own stock in the corporation continuously through the final class certification. As for BVF's other arguments regarding NOERS' certification as class representative, we find them unconvincing.
We conclude that the Court of Chancery did not abuse its discretion in certifying the class under Rule 23(b)(1) and (b)(2). We also conclude, however, that there is merit to BVF's claim that the Court of Chancery should have exercised its discretion to allow BVF to opt out of the shareholder class under the circumstances of this case. Balancing of Delaware's pro-settlement policy against concerns for due process raised by the record in this case requires this result. Accordingly, we affirm in part and reverse in part.
Source: In re Celera Corporation Shareholder Litigation.
The Delaware Supreme Court disagreed with the Chancery Court, however, that BVF shouldn't be given the opportunity to opt-out of the class, because NOERS was “barely adequate” as a class representative.
“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,” Ridgely wrote for the court. “Under these particular facts and circumstances, the Court of Chancery had to provide an opt-out right.”
Weighing Investor Influence
Hamermesh says what's also unusual about this particular M&A case is that Celera was still able to complete the deal against the will of a major shareholder. “There aren't that many class actions where there are major stockholders who aren't already on board,” he says. “Frankly, if you have someone who holds 25 percent of the stock, and you have a merger, it's kind of hard to get that deal done with that stockholder's opposition.”
“In an ideal world, it shouldn't matter whether you have 100 shares or one million shares, but it does,” Hamermesh adds. “The court was quite explicit, even with its brief analysis, in identifying that factor as an important one.”
The overall lesson that merger-minded companies should take from the case: where a substantial investor raises a counter-proposal to a proposed deal “and can point to substantive reasons why the price of the company is too low, they have to be paid attention to,” warns Goldberger. If you do choose to ignore them, he says, you're doing so at your own peril.
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