Special Counsel Addresses Delaware Law on “Forum Shopping” and Collusive Settlements in Class Actions

Scully v. Nighthawk Radiology Holdings, Inc., C.A. No. 5890-VCL (Mar. 11, 2011)(Report of Special Counsel). This Report concluded that there was neither forum shopping nor collusive behavior in the settlement of a class action related to the $170 million merger of Nighthawk Radiology and Virtual Radiologic Corporation.

Issues Addressed (as quoted from the Special Counsel’s Report):

1. Is forum-shopping for purposes of securing an advantageous settlement a wrong under existing law, taking into account Prezant v. De Angelis, 636 A.2d 915 (Del. 1994), and other authorities? What is (or should be) the standard for determining when a settlement is collusive?

2. What role, if any, should the disfavored forum (here, the Court of Chancery) have when it receives notice of what appears to be a collusive
settlement?

3. My principal concern has been that, given the manner in which representative action settlements typically are presented, the court in the favored forum (here, the Arizona Superior Court) would not have reason to learn about (i) forum shopping efforts or (ii) prior adverse rulings or commentary by the court in the disfavored forum. Is this concern valid and, if so, how should it be addressed?

4. Lawyers are the repeat players in the multi-jurisdictional litigation process. What remedy, if any, should there be if counsel is found to have engaged in a collusive settlement? Should the pro hac vice status of forwarding counsel be revoked? Should the revocation go beyond the civil action relating to the collusive settlement? If Delaware counsel participates in a collusive settlement, what action should be taken?

5. How should the answers to the foregoing questions be applied to the facts
of this case? 

Procedural Setting

The Delaware Court of Chancery appointed a Special Counsel to address the above issues "from the point of view of Delaware and the public interest". If not sui generis,  the appointment of a Special Counsel in this context is unusual for corporate litigation in Delaware, and may be compared in the world of corporate law, in an academic sense, with the unfortunate tremors experienced in Japan a few days ago. The genesis of the Special Counsel’s decision was a status conference in December, held in the Court of Chancery in connection with the approval of a class action lawsuit in Arizona. The status conference was memorialized in a transcript ruling here. The class action involved in this matter related to the merger of Nighthawk Radiology and Virtual Radiologic Corp. The Court of Chancery raised issues sua sponte about a possible "reverse auction" and the exploitation of several cases pending in multiple forums (or fora). The Court of Chancery was concerned about whether a settlement reached in a related Arizona case was intended to avoid the scrutiny of the Delaware Court and if there was pressure for the Delaware counsel to join the Arizona settlement or "lose out on fees."

The Special Counsel’s Report (the "Report")

The Special Counsel appointed by the Court of Chancery in this matter was the highly-regarded veteran corporate litigator Gregory P. Williams of Richards Layton and Finger in Wilmington. The Report was filed with the Court two days ago in the form of a "Brief of Special Counsel" authored by the Special Counsel and Richards Layton associate Blake Rohrbacher. Their 42-page magnum opus is available here. Likely to be as widely read as a major decision from the court, it includes a reference to many transcript rulings from the Court of Chancery in recent cases. Transcript rulings are often cited in briefs to the Court of Chancery in corporate litigation. An index to the voluminous Compendium of transcript rulings referred to in the brief is available here, and the actual Compendium of transcript rulings (weighing in a 627-pages) is available here.

Short Overview of the Special Counsel’s Report

The AmLaw Daily blog has a short post that provides a brief synopsis of the Special Counsel’s brief, which we refer to as the Report, here.  According to The AmLaw Daily, the stakes involved in the outcome of the Report included at least one lawyer’s continuing ability to "litigate in the country’s most important business court" as well as "the rules and guidelines for plaintiffs’ and defense lawyers litigating a swell of merger-related class actions." This momentous Report could easily stimulate a long commentary the length of a typical law review article, but the goal here is much more modest. I will attempt merely to highlight a few of the key aspects of the Report and encourage readers to make time to read the entire document linked above. It is truly "must reading" for anyone interested in the latest developments in Delaware law on this topic.

The Special Counsel describes the three-part background of the Report, before he addresses the issues listed above, as follows: 

First the brief discusses forum-shopping in the context of multi-jurisdictional class actions, including the “reverse auction” phenomenon, in which plaintiffs’ counsel are said to underbid each other to settle with defendants and secure higher attorneys’ fees. Next, the brief discusses the effects of the “settlement class” procedure, in which the Court does not certify a class until the settlement is approved. Then, the brief addresses the Court’s review of settlements, particularly those involving issues of potential collusion.

Forum Shopping

Regarding the topic of forum-shopping in the context of multi-jurisdictional class actions, the Report quotes from a recent Chancery transcript ruling as follows:

"Plaintiffs gain some leverage by filing deal litigation in multiple courts. As this Court has recognized, plaintiffs’ lawyers may choose multiple forums to gain advantage in the contest for lead counsel status; they also do so to force defendants to engage with their individual suits.See, e.g., In re Compellent Techs., Inc. S’holder Litig., C.A. No. 6084-VCL, at 20 (Del. Ch. Jan. 13, 2011) (TRANSCRIPT) (“[W]hen everybody is filing in the same forum, you’re not guaranteed to get control of a case. But if you then go and file in another forum, you do have control of that case and then the defendants have to deal with you. You may get control of the entire action but, at a minimum, you get control of a piece of the litigation for purposes of the fee negotiations.”)."  Report at 2.

The Report also cites to the duty of an attorney to zealously represent her client as required by the Rules of Professional Conduct, as a consideration in determining the best forum in which to file suit. See also Delaware Principles of Professionalism at A(4).

Related to the discussion of forum-shopping in corporate litigation, is the increased attention given by scholars and practitioners to non-Delaware courts deciding issues of Delaware law–perhaps due to the aversion that some plaintiffs may have to the greater scrutiny they might find in Delaware. See, e.g., Professor Larry Ribstein’s discussion of this topic and the related issue of jurisdictional competition, available here. See also the discussion available here, of a related article by Professors John Armour, Bernard Black and Brian Cheffins. Also notable is the analysis by Professor Joseph Grundfest here and Professor Stephen Bainbridge’s discussion here of a somewhat related issue of "choice of forum provisions" in bylaws and corporate charters. See also the draft article by Professor Brian Quinn here about plaintiffs bringing Delaware-law based claims in non-Delaware courts.

The Special Counsel concludes that: "… forum-shopping for purposes of securing an advantageous settlement is not an independent wrong under existing Delaware law. That is, such forum-shopping should not be equated with a collusive settlement".

Collusion

After a review of the leading commentary by scholars as well as court decisions from around the country, the Special Counsel formulated the following definition:

a collusive settlement in the context of stockholder deal litigation appears to involve, at its core, an explicit or implicit agreement between counsel for plaintiffs and counsel for defendants to require less consideration for the settling class in exchange for (1) exclusive dealings with particular plaintiffs’ counsel and/or (2) more consideration for plaintiffs’ counsel.  Factors that should give rise to heightened scrutiny for collusiveness include the following: settlement consideration disproportionately weak in comparison to the strength of the claims asserted; settlement with a plaintiff’s firm that typically does not litigate aggressively when other, more formidable, firms are involved in the litigation; and an agreement to pay attorneys’ fees significantly higher than are typical given the settlement consideration.  Report at 26-27.

The Report explains with detailed reasoning why there was no collusion based on the facts of this case. Advice on best practices is also provided for those involved in multi-jurisdictional deal litigation that is pending in the Delaware Court of Chancery and is courts of another state:

… all counsel should be aware that this Court will play some role, either in reviewing a potential settlement or in dismissing a case following a settlement approved by another court.  Therefore, best practice for counsel negotiating a settlement of such litigation in a jurisdiction outside of Delaware—recognizing this Court’s focus on representative settlements—would be to substantively involve Delaware counsel in the negotiations. 

The Report also discussed the public policy aspects of the role that state courts play in multi-jurisdiction settlements within our system of federalism. See, e.g., footnote 12 (citing several transcript rulings within the last few months in which the Court of Chancery addresses the public policy issues.)

The Role of the Non-Settlement Forum

At the request of the Court, the Special Counsel made the following suggestions for the role of the non-settlement forum in multi-jurisdiction deal litigation:

1). The non-settlement forum should ensure that all courts involved in the multi-jurisdictional case are operating on the same information. The Special Counsel is also the Chair of the Court of Chancery Rules Committee and will follow-up to determine if the Court of Chancery is amenable to a new rule that would require disclosure to the settlement forum where the Court of Chancery is the non-settlement forum.

2). The non-settlement forum could maintain an open line of communication with the settlement forum.

3). The non-settlement forum could require the common parties to provide it with copies of the settlement documents filed in the settlement forum.

Remedies for Collusive Behavior and Basis for Revocation of Pro Hac Vice Admissions

Because the Special Counsel did not find the need for any remedies or revocations in this case, I will merely commend the last section of the Report for future reference on the following topics, the second one being of wide applicability beyond the world of class action settlements:

1).  What penalties, if any, can or should courts impose upon a finding of collusive behavior; and

2).  What is the standard for the Court revoking the grant of a motion for admission pro hac vice.

Supplement: Though not related to this particular matter, conceptually relevant to the general topic is an article in Forbes here that discusses from a business columnist’s point of view, some of the merger litigation issues generally addressed in this post.

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    Chancery Refuses to “Keep Delaware Case Open” Pending Application for Attorneys’ Fees in Related Texas Class Action

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