On December 27, 2012, the Delaware Supreme Court overruled in part and remanded a decision of the Court of Chancery which denied a large investor, BVF Partners L.P. (“BVF”), the right to opt-out of a shareholder class action settlement. In the case of In Re Celera Corp. Shareholder Litigation, No. 212, 2012 (Dec. 27, 2012), the Delaware Supreme Court, en banc, addressed the issue raised on appeal by objector-appellant BVF of the Court of Chancery’s certification of plaintiff/appellee New Orleans Employees’ Retirement System (“NOERS”) as class representative in an action challenging the acquisition of Celera Corporation (“Celera”) by Quest Diagnostics, Inc. (“Quest”). BVF also appealed from the Court of Chancery’s approval of a class action settlement without an opt out right for BVF.
This decision is likely to have a significant impact on efforts to bring closure to class action settlements of litigation that involve objectors with substantial holdings. For a more detailed discussion of the background of the case and the procedural history, the highlights of the trial court’s decision are summarized on these pages HERE. Reuters published a short overview of the case HERE.
Issues Highlighted on Appeal
BVF argued that the Court of Chancery erred in certifying NOERS as the class representative, because NOERS, which had sold it shares of stock before the merger, lacked standing to represent the class. BVF argued that “when NOERS sold its stock in Celera on the public market—several days before the merger was actually consummated and nearly a year before the Court of Chancery certified the class—NOERS no longer had a legally cognizable stake in the outcome of the litigation.”
BVF also argued that the Court of Chancery erred in certifying the class as a non-opt-out class under Court of Chancery Rules 23(b)(1) and 23(b)(2), and in the alternative, 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.
The Supreme Court affirmed the Court of Chancery’s finding that NOERS had standing to represent the class and noted that the definition of class in the settlement agreement between NOERS and the defendants included NOERS within that broad definition. It is important to note that the Supreme Court stated that it would not 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. While the Supreme Court found that the Court of Chancery did not abuse its discretion in certifying the class under Rules 23(b)(1) and (b)(2), it did find 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.
Court of Chancery Rule 23 on class certification requires that “[a]s soon as practicable after the commencement of an action brought as a class action, the Court shall determine by order whether it is to be so maintained.” Also it is “commonplace for the definition of a class to include members who held shares as of a given date.” In the Settlement Agreement in this action, the proposed class was broadly defined to include “[a]ny and all record holders and beneficial owners of 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 Supreme Court found that this definition was “in accord with the definitions in similar class action cases, citing to the prior Supreme Court decision of In Re Beatrice Cos., Inc., Litig., and Schultz v. Ginsburg. The Court noted that:
NOERS did sell its shares in Celera four days before the merger was consummated, and approximately ten months before the settlement was approved. But NOERS still owned its stock at the time the Board approved the merger and when the MOU was executed, and it fits squarely within the broad definition of the class contained in the Settlement Agreement. Thus, NOERS satisfies the three prong test of standing: it had a cognizable injury in fact at the time the merger was approved; the alleged breach of fiduciary duties was traceable to the defendants, and the Court of Chancery could address that injury in the form of a preliminary injunction and the subsequent settlement.
With respect to certifying the class, Rule 23(b) divides class actions into three subdivisions:
(b)(1) applies to class actions that are necessary to protect the party opposing the class or members of the class from inconsistent adjudications in separate actions.
(b)(2) applies to class actions for class-wide injunctive or declaratory relief, and
(b)(3) applies when common questions of law or fact predominate and a class action would be superior to other means of adjudication.
Class actions may be certified under more than one subdivision of Rule 23(b) but if a class is certified under Rule 23(b)(3), class members have an unqualified right to opt out of the class. They do not have such a right under (b)(1) or (b)(2). Rule 23 does not contain any provision that specifically authorizes the court to grant opt-out rights to class members of any class other than a (b)(3) class, but it does have discretion to do so.
In certifying a class, Delaware courts, like their federal counterparts, are required to engage in a “rigorous analysis” and an “explicit determination on the record of the propriety of the class action according to the requisites of Rule 23(a) and (b).” The Delaware Supreme Court went on to note that:
Delaware courts “repeatedly have held that actions challenging the propriety of director conduct in carrying out corporate transactions are properly certifiable under both subdivisions (b)(1) and (b)(2).” The availability of potential damages alone does not automatically require certification under Rule 23(b)(3). Nor does certification under Rule 23(b)(2) require that a class action seek injunctive or declaratory relief as an exclusive remedy. Rather, certification under Rule 23(b)(2) is appropriate when the rights and interests of the class members are homogeneous. A Rule 23(b)(2) class may seek monetary damages in addition to declaratory or injunctive relief, so long as the claim for equitable relief predominates.
In its order certifying the class under Rule 23(b)(1) and (b)(2), the Court of Chancery relied on ‘well-settled Delaware precedent,’ including our opinion in Nottingham Partners, which we here reaffirm. We hold that the Court of Chancery did not abuse its discretion in certifying the class under Rule 23(b)(1) and (b)(2).
The Supreme Court stated that the Court of Chancery’s role in approving class action settlements under Rule 23 “is intended to balance policies favoring settlement with concerns for due process” and that Rule 23 is designed to protect the due process rights of absent class members.
In finding that the Court of Chancery should have provided an opt-out right, the Supreme Court reasoned:
Class certification must be assessed based on the facts and circumstances at the time of the settlement/certification hearing. As originally filed, this case presented claims that were primarily for equitable relief. Therefore, in somewhat unique circumstances, the parties agreed to a de facto settlement of those equitable claims without formal court approval, leaving only monetary damage claims as the subject of a later formal, de jure application for a court-approved settlement . . . In approving such a settlement — and the nature of the class certification as part of that settlement — the Court of Chancery should not — and indeed cannot — blind itself to that reality and treat the settlement as one in which the equitable claims were still viable and predominant. The “posture of the case as it realistically exists” must be considered, if only because due process concerns permeate any settlement of claims that by that time were essentially for monetary damages. We recognize, and have held, that the Court of Chancery was not required in this case to certify the class under (b)(3). The court could properly certify under (b)(2) because claims for equitable relief were originally predominant. But, having done that, 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.
Supplement: Professor Larry Hamermesh provides scholarly insights about the case here.