Lead Plaintiff Sells Shares After Tender Offer But Before Merger Closed; Court Still Approves Plaintiff as Class Representative
In In Re Celera Corporation Shareholder Litigation, C.A., No. 6304-VCP (Del. Ch. March 23, 2012) , the putative lead plaintiff in a class action, New Orleans Employees’ Retirement System (“NOERS”), brought an action accusing various defendants of breaching their fiduciary duties in connection with the acquisition of Celera Corp. by Quest Diagnostics Inc. After some discovery, the parties entered into a settlement with a Memorandum of Understanding (“MOU”) and asked the Court to certify the class, approve the class representative and award the amount of attorneys’ fees requested by class counsel. Celera’s largest shareholder filed objections claiming that NOERS was not an adequate class representative because it was susceptible to a unique defense atypical of the class in that it acquiesced in defendants’ alleged wrongful conduct by selling its shares at a premium in the secondary market before the merger closed.
LexisNexis interviewed Kevin Brady about this case and his videocast is available here.
The Court issued an 85-page opinion addressing the issue of certification of a shareholder class with NOERS as a class representative, approval of a settlement and a request by class counsel of an award of $3.6 million for attorneys’ fees and expenses.
The Court certified the class with lead plaintiff, NOERS, as class representative noting that “notwithstanding its questionable conduct, NOERS still satisfies, if only barely, the requirements for an appropriate class representative.” The Court also approved the settlement as fair and reasonable, and awarded attorneys’ fees to class counsel in the reduced amount of $1.35 million.
The two-tiered acquisition of Celera by Quest involved a tender offer by Quest for any and all shares of Celera at $8.00 per share followed by a back-end squeeze-out merger at the same price. Celera also provided Quest a top-up option, which permitted Quest to effect the back-end merger under 8 Del. C. § 253 without a shareholder vote. Approximately a month after NOERS filed its complaint and did some discovery, the parties entered into an MOU conditionally settling the dispute for non-monetary “therapeutic” benefits, including: (i) reduction of the termination fee from $23.45 million to $15.6 million; (ii) modification of the no solicitation provision in the confidentiality agreement prohibiting a company from making offers for Celera shares without an express invitation from the Board, and the provision that prohibited the signing parties from asking the Board to waive that restriction (the “Don’t Ask – Don’t Waive Standstills”); (iii) extension of the tender offer for seven days; and (iv) supplemental disclosures. There was no agreement to increase the merger price. Thereafter, the tender offer succeeded, Quest exercised its top-up option, and the merger closed.
Before the remaining shareholders were cashed out in a short-form merger, NOERS sold all of its shares on the secondary market at $8.05 per share, a slight premium to the merger consideration. The MOU, however, conditioned the settlement on confirmatory discovery, permitting NOERS to rescind the MOU and continue litigating on behalf of the class if the strength of those claims or the fairness of the settlement’s terms required re-evaluation. Celera’s largest shareholder,BVFPartners L.P., objected arguing that NOERS: (i) was neither a typical nor an adequate class representative because it suffered no transactional damages because it sold at a premium; and (ii) lacked the economic incentive to conduct meaningful confirmatory discovery or to rescind the MOU if it uncovered facts undermining the settlement’s fairness.
The Court discussed the four prerequisites for class representatives mandated by Rule 23(a) (numerosity, commonality, typicality and adequacy of representation). The proposed class was defined as “[a]ny and all record holders and beneficial owners of any share(s) of Celera common stock who held any such share(s) at any time [between February 3, 2010 and May 17, 2011, inclusive], but excluding the Defendants.” The Court noted that while there was no dispute that numerosity and commonality of questions of law or fact were satisfied, BVFchallenged whether NOERS satisfied the requirements of typicality and adequacy of representation.
Typicality — Court Finds NOERS Not Susceptible to Acquiescence Defense
The test for typicality is that the legal and factual position of the class representative must not be “markedly different” from the rest of the class members. BVFargued that NOERS position was markedly different because NOERS was susceptible to a unique defense atypical of the class in that it acquiesced in defendants’ allegedly wrongful conduct by selling its shares at a premium on the secondary market four days before the merger closed. The Court noted that “to be susceptible to an acquiescence defense, the plaintiff must: (1) have full knowledge of his [or her] rights and all material facts; (2) possess a “meaningful choice” in determining how to act; and (3) act voluntarily in a manner show[ing] unequivocal approval of the challenged conduct.”
As the Court noted, NOERS filed an initial, a consolidated, and an amended consolidated class action complaint alleging that the Board breached its duty of loyalty by agreeing to sell the Company after a defective process. It also conducted expedited discovery regarding the allegations made in those complaints. As a result, the Court found that NOERS likely possessed full knowledge of its rights and all material facts regarding its challenge to the merger. The Court also highlighted the stage of these proceedings and asked “[w]hile NOERS’s willingness to settle indicates a degree of acquiescence,  does that preclude NOERS from continuing to litigate its claims if it had uncovered additional information during confirmatory discovery suggesting that the proposed settlement was not fair, reasonable, adequate, or in the best interests of the class?” The answer was no, and so “[f]or this reason alone, the acquiescence defense would not have barred NOERS from continuing to litigate had it uncovered new information strengthening its claims.”
Moreover, the Court found that “NOERS arguably did not have a meaningful choice when it sold its shares. Where a squeeze-out merger extinguishes the minority‘s legal right to remain shareholders of the corporation ― the choice between accepting the possibly inadequate merger consideration and pursuing a possibly inadequate appraisal remedy is not a meaningful choice…. Although NOERS may have chosen rationally, from its perspective, the lesser of two evils, the marginal market premium NOERS obtained does not necessarily reflect acquiescence in the approximately $8 Merger price or negate or resolve the concerns of inevitability that animate the controlling shareholder cases….” As to the final element, the Court noted that NOERS technically evidenced its disapproval by accepting a slightly higher offer from the secondary market for its shares.
The Court continued:
Furthermore, to the extent that the five cent premium NOERS received may be characterized as de minimis or effectively equivalent to accepting the challenged consideration, NOERS’s decisions not to tender its shares to Quest on the front-end and to hold its shares until the Merger became a certainty on the back-end, all while simultaneously pursuing this action, belies an unequivocal showing of acquiescence. Indeed, in the ordinary 8 Del. C. § 251 context, only shareholders ― who cast yes votes are barred by the doctrine of acquiescence, because they cannot assume a pose of approval in the voting process and then seek to litigate under a contrary position in a Court of Equity. In the context of a two-tiered tender offer and squeeze-out merger, the closest analogy to a shareholder vote essentially is the decision to tender on the front-end. NOERS, however, did not tender its shares. Instead, it withheld its approval of the challenged transaction and accepted the rough equivalent of the Merger consideration only after becoming powerless to do anything about the Merger. Other than by accepting a marginally superior offer and conditionally settling this action, NOERS showed no support for the Merger, let alone unequivocal support.
The Court also noted that NOERS was susceptible to any unique acquiescence defense, because it had done the same thing that a majority of the class had also done – sold or tendered their shares before May 17, 2011. Moreover, the Court stated that “[a] representative’s claim or defense will suffice if it arises from the same event or course of conduct that gives rise to the claims [or defenses] of other class members and is based on the same legal theory. Here, NOERS’s claims are identical to those of the other class members. Because all [c]lass members face the same injury flowing from the defendants’ conduct in connection with the merger, the typicality requirement is satisfied.”
When evaluating a lead plaintiff’s adequacy, courts generally accord the greatest weight to the presence or absence of conflicts of interest or economic antagonism. BVFargued that, because NOERS voluntarily sold its shares on the secondary market, NOERS suffered no transactional damages from any alleged wrongdoing. Thus, NOERS could not recover monetary relief from either a settlement or final judgment and, as a result, NOERS lacked the economic interest to conduct meaningful confirmatory discovery or to rescind the MOU and pursue a monetary recovery. Therefore, it argued, the class lacked an adequate plaintiff and the proposed settlement could not be approved. The Court, however, was not persuaded byBVF’s argument, noting that:
Because the claims involved in this case are both personal and direct, however, NOERS is not categorically barred from receiving monetary relief, even though it no longer owns Celera stock. Furthermore, this may be true even if NOERS suffered no transactional damages. ‘Once disloyalty has been established, [Delaware law] requires that a fiduciary not profit personally from his conduct, and that the beneficiary not be harmed by such conduct.’ Indeed, this Court ‘can, and has in the past, awarded damages designed to eliminate the possibility of profit flowing to defendants from the breach of the fiduciary relationship.’ In a counter-factual world, NOERS could have found irrefutable evidence during confirmatory discovery that the $8 per share merger consideration was grossly inadequate and, in that case, arguably might have found it more difficult to prove its entitlement to a damages award. Alternatively, NOERS could have found irrefutable evidence that $8 per share was fair, but that the Celera Board conducted a disloyal sales process designed to extract grossly excessive personal benefits. In this latter case, the members of the class might not have suffered transactional damages, but they and NOERS still might be entitled to share in an equitable disgorgement remedy. Thus, as a class member, NOERS continued to have an incentive to pursue vigorously any monetary relief that might flow to the class.
As a result, the Court found that NOERS had a continuing economic interest in prosecuting its claims and that there was no evidence of actual antagonism between NOERS and the other class members. Thus, the Court concluded that NOERS was an adequate class representative under Rule 23(a)(4).
Rule 23 – Opt Out Class?
The Court also discussed in great detail the type of class at issue and in particular Rule 23(b)(1), (b)(2) and (b)(3) classes and whether or not there should be any opt-out rights. In the end, the Court determined that certification under subdivisions (b)(1) and (b)(2), without opt-out rights, was proper in this case.
Approval of the Settlement
The Court analyzed the benefits provided and the claims extinguished by the proposed settlement and concluded that they reflected “a fair, adequate and reasonable exchange.” In reaching that conclusion the Court discussed the following:
1. The waiver of the “Don’t-Ask-Don’t-Waive Standstills;”
2. The reduction of the termination fee from $23.45 million to $15.6 million; and
3. The extension of the closing of the tender offer by one week.
The Court stated:
To be clear, I do not find, either in the circumstances of this case or generally, that provisions expressly barring a restricted party from seeking a waiver of a standstill necessarily are unenforceable. Such a ruling should be made, if ever, only on the merits of an appropriately developed record, especially because these provisions may be relatively common. Rather, based on the issues it redresses, I find this aspect of the settlement consideration to be valuable. Had Plaintiffs succeeded on this claim, the likely remedy would have been an injunction against enforcing the Standstill agreements. Therefore, Defendants’ agreement to waive voluntarily those problematic contractual provisions mooted Plaintiffs’ claims in this regard.
Similarly, to the extent that Plaintiffs complained of a deficient or disloyal market check, the likely remedy would have been limited injunctive relief, long enough to recreate an active market check but–without blocking the deal and sending the parties back to the drawing board. Where a company has been exposed to the market and potential transactions shopped for some time, even an egregious case of process defects probably would have led to an injunction of only twenty days or so. Furthermore, where no rival bidder has made its presence known, preliminary injunctive relief may be completely illusory. Although post-closing damages still may be available if preliminary injunctive relief is only limited in nature or denied altogether, the alleged process violations here [ ] were significantly less severe than in Del Monte or El Paso. Hence, the one-week extension arguably obtained all the relief that was likely.
The Court also analyzed the supplemental disclosure regarding, among other things, the discounted cash flow analysis that Credit Suisse performed. In the end the Court concluded that the supplemental disclosures assisted the shareholders’ ability to assess the fairness of the consideration that Celera offered.
The Court has discretion to determine the reasonable amount of a fee award, guided by the seven Sugarland factors (the last two of which carry the most weight) (Sugarland Indus., Inc. v. Thomas, 420 A.2d 142, 149-50 (Del. 1980):
(i) time and effort applied to the case by counsel for the plaintiffs;
(ii) the relative complexities of the litigation;
(iii) the standing and ability of petitioning counsel;
(iv) the contingent nature of the litigation;
(v) the stage at which the litigation ended;
(vi) whether the plaintiff can rightly receive all the credit for the benefit conferred or only a portion thereof; and
(vii) the size of the benefit conferred.
Plaintiffs’ counsel sought an award of approximately $3.6 million. Defendants responded that the modest benefits conferred by the Settlement Agreement compelled a fee of no more than $1 million, and that plaintiffs’ counsel’s expenses were excessive because they included “the redundant efforts of seven different plaintiffs firms and over 100 lawyers and other professionals who billed time on this matter.” As a result, defendants argued that plaintiffs’ counsel should only get “that portion of the more than $100,000 in expenses claimed that was necessary for the prosecution of this action.”
The Court concluded that the value of the therapeutic benefits the class received was approximately $1.6 – $3.0 million of which a fee award of 25% or $400K – 750K was reasonable for the benefit conferred by modifying the deal terms. As to the supplemental disclosure, the Court concluded that an award of $550K – $650K was reasonable.
In an attempt to address the argument raised by the defendants about “unnecessary and duplicative efforts,” the Court said:
Defendants also contend that the expenses Plaintiffs’ counsel incurred, which exceeded $100,000, resulted from unnecessarily duplicative efforts by the various Plaintiffs’ firms involved in this matter. Therefore, Defendants urge the Court to allow reimbursement of only that portion of those expenses that Plaintiffs needed to incur. Having already allocated a significant amount of the Court’s – and taxpayers’ – resources to this settlement, the Court declines to entangle itself further in any attempt to parse ‘necessary’ from ‘unnecessary’ expenses. Rather, I consider it more productive and principled to treat the reimbursement of expenses as being subsumed within the analysis of Plaintiffs’ counsel’s request for attorneys’ fees. Such an approach provides a better incentive to counsel to manage their litigation expenses efficiently. Using that approach and for reasons discussed above, I award Plaintiffs’ counsel their attorneys’ fees and expenses at the upper end of the range that I have identified as reasonable, namely, $700,000 for the therapeutic changes and $650,000 for the supplemental disclosures, for a total of $1.35 million.
Practice Tip and a Warning from the Court
The Court made two interesting observations about the status of the case pending before it. First, the Court said that its analysis of this settlement issue would be very different, and much shorter, if this were a derivative action because 8 Del. C. § 327 and Court of Chancery Rule 23.1 require representative plaintiffs to maintain their status as shareholders throughout the derivative action, citing Lewis v. Anderson, 477 A.2d 1040, 1049 (Del. 1984). In a direct action such as this, however, there is no contemporaneous and continuous ownership requirement. In addition, the Court gave counsel of glimpse of what is going to change, at least for Vice Chancellor Parsons. The Court warned that next time things might be different:
The frequency with which Delaware courts have had to address the conduct of lead plaintiffs in recent months is troubling. When a class representative purports to object on behalf of itself and all others similarly situated only to decide later that the objected-to conduct may not have been all that bad, that representative is prone to appear more concerned about its own interests than those of the class. That appearance undermines the trust shareholders place in lead plaintiffs and, in turn, effaces courts’ confidence in the adequacy of the representation that a lead plaintiff is capable of providing. Although I conclude ultimately that NOERS is an adequate class representative in this case, I do not reach that conclusion lightly. Lead plaintiffs must remain committed to fulfilling their obligations to those they represent throughout the litigation. Among other things, that should include thinking about more than the technical permissibility of their conduct, but also how their conduct is likely to be perceived. Here, NOERS engendered a host of legitimate criticisms to its commitment to this case by choosing to take advantage of a ‘risk-free arbitrage’ opportunity. Technically permissible or not, that choice failed to reflect an appropriate level of regard and respect for NOERS’s position as a fiduciary for the class. As this case demonstrates, Delaware courts have good reason to expect more from those who would serve as lead plaintiffs in representative litigation. Accordingly, I may well employ a more bright line test in the future.