New Jersey Carpenters Pension Fund v. infoGROUP, Inc., C.A. No. 5334-VCN (Del. Ch. Feb. 13, 2013).
Issue: Whether the Court should certify a proposed class under Rules 23(a), 23(b)(1), and 23(b)(2), and whether the class representatives have satisfied the adequacy and typicality requirements of Rule 23(a)?
Short Answer: Yes to both.
New Jersey Carpenters Pension Fund (the “Plaintiff” or the “Fund”), a former stockholder of infoGROUP, Inc. asserted claims arising from the merger agreement involving infoGROUP and CCMP Capital Advisors LLC for $8.00 per share. The Complaint alleges that the defendants breached their fiduciary duty of loyalty and good faith by selling the company at an unfair price after conducting a flawed process so that defendant-director Vinod Gupta could liquidate his interest in the company. The plaintiffs argued that “the director [d]efendants abdicated their fiduciary duty in the face of relentless harassment and pressure from Gupta to sell the [c]ompany.” Suit was filed three days after the merger was announced. Plaintiff moved for class certification and defendants opposed the motion as well as the class representatives (the Fund and Robert Kistner) and sought to narrow the scope of the proposed class to exclude, in particular, shareholders who purchased their shares after the Merger was announced.
While the Court heard oral arguments on class certification, it reserved decision on whether the Plaintiff’s proposed class representatives—the Fund and Ronald E. Kistner (“Kistner”)—satisfied the adequacy and typicality requirements of Court of Chancery Rule 23(a), but, as to all other requirements for class certification under Court of Chancery Rules 23(a), 23(b)(1), and 23(b)(2), the Court held that those requirements have been satisfied. The Court deferred addressing the typicality requirement because defendants had identified certain defenses that were potentially applicable to the proposed class representatives that might not be asserted against other class members.
Typicality and Adequacy Analysis
Whether a class should be certified depends upon two sections of Rule 23(a): “(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.” The test of typicality is that the legal and factual position of the class representative must not be markedly different from that of the members of the class.” The Court noted:
Typicality is generally deemed satisfied if the representative’s claim or defense “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.” However, a proposed class representative may not be typical if he is potentially subject to unique defenses not applicable to other class members. Furthermore, typicality may be defeated if a conflict or a potential conflict exists between the legal and factual positions of the proposed class representative and class members.
The test of adequacy requires that the class representative “fairly and adequately” protect the interests of the class and factors include, among others: (i) whether a plaintiff’s attorney is qualified, experienced, and competent to prosecute the litigation; (ii) an “assurance of ‘vigorous representation’” and “an absence of conflict” between the class representative and the class members; and (iii) a basic familiarity with the facts and issues involved in the lawsuit.
Robert Kistner — Typicality and Adequacy
The defendants argued that Kistner’s “claim” was atypical of the class claim because it was not based on the failure of the defendants to maximize the sale price of the company (the basis asserted in the complaint). Kistner purchased infoGROUP shares before the announcement of the merger, based on rumors that a bidding war would likely increase the Company’s share price. However, as the Court found:
Kistner’s reasons for purchasing infoGROUP stock do not form the basis for his legal claim, nor do they necessarily preclude it. It is well settled that class representatives are not required to articulate the legal theories supporting their underlying claims. That is the role of plaintiff’s counsel.
Moreover, as the Court noted, the defendants had not asserted a substantive conflict between Kistner’s actual legal claims and those of other class members. Because Kistner’s claims arose from the same events and conduct as other class members, the Court found that the plaintiff had satisfied its burden to show that Kistner’s claims were not markedly different from the legal and factual positions of other class members.
As to the adequacy test, the defendants argued that Kistner was not an adequate class representative because: (1) Kistner decided to pursue a lawsuit only because someone else had filed suit; (2) he could not remember whether he had read the Complaint before it was filed or after it was filed; (3) he did not know who the director defendants were other than the fact that they were board members of infoGROUP; (4) he was unable to respond with specific events when counsel asked what had transpired in the litigation during the last two years; and (5) he expected his attorneys to be the ultimate decision makers on whether to accept a settlement offer. However, the Court also noted that Kistner was aware of the allegations that Gupta had a conflicting motive to sell the Company at a discount for liquidity purposes. Additional factors included: (i) he knew about the go-shop period, the competing bidders, and that he had voted against the Merger; (ii) he had spent almost twenty hours reading the complaint and talking with lawyers: (iii) he seemed to have a basic understanding of his role as a class representative, as well as an appreciation of the various motions filed by the parties and the actions taken by the Court in the litigation. Based upon these factors, the Court found that “[a]lthough Kistner perhaps may not be an ideal representative, the Court is satisfied that he, as well as his counsel, will adequately represent the proposed class.”
The Fund– Typicality and Adequacy
The defendants argued that the Fund, and more specifically, its representative overseeing the litigation, George Laufenberg, was an inadequate class representative because: (i) the Fund verified an inaccurate complaint; (ii) Laufenberg has spent only ten to fifteen hours on the matter; (iii) the Fund failed to check for accuracy any of the claims its counsel made in the complaint; (iv) Laufenberg never reviewed any of the documents cited in the Complaint; and (v) the Fund sold shares of infoGROUP stock after it filed this action.
The Court, however, was not persuaded noting that the Fund’s interests were not antagonistic to those of other class members and that there were portions of Laufenberg’s deposition which provided a sufficient basis to conclude that he has an understanding of the claims asserted against the defendants. In short, the Court found that “[t]he Fund may not be a perfect representative in this regard, but it need not be to qualify as a class representative.”
As to typicality, the defendants argued that the Fund was subject to an affirmative defense because it sold almost all of its shares for $7.87 per share before the merger was consummated, which substantially undermined the Fund’s claim that the Merger price of $8.00 per share was inadequate. The Court, however, disagreed noting that a recent decision in In re Celera Corporation Shareholder Litigation, the Supreme Court concluded that the stockholder nonetheless had standing because it owned stock at the time the Merger agreement was approved, and because it challenged the terms of the Merger.
The Proposed Class and the Acquiescence Defense
The defendants sought to limit the proposed class by excluding infoGROUP stockholders who (1) voted in favor of the Merger, and therefore are potentially subject to an acquiescence defense, or (2) purchased their shares after the date the merger was announced.
Under Delaware law, a fully informed, uncoerced shareholder is precluded from challenging a merger if he has voted in favor of the transaction. However, the Court stated that “[u]ltimately, the question turns on whether the Court can determine—before trial— if the acquiescence defense is a conclusive bar to stockholders who voted in favor of the Merger…. At this stage, the Court cannot determine whether infoGROUP stockholders that voted in favor of the merger were fully informed of all material facts at that time.” The Court found that “[b]ecause the acquiescence defense may, if necessary, be addressed in a relatively easy fashion, through establishing an appropriate subclass, and because the Court is unable to determine whether infoGROUP stockholders were fully informed, the Court declines at this point to narrow the proposed class to exclude stockholders who voted in favor of the Merger.”
In addition, the defendants argued that the proposed class should be narrowed to include only infoGROUP stockholders of record as of the day the Merger agreement was signed. The Plaintiff responded arguing that it had alleged a continuing breach of fiduciary duty that extends beyond the execution of the Merger agreement and into the go-shop period. Because that allegation challenged the defendants’ actions during the period after it approved the Merger, but before the transaction was consummated, the Court rejected the defendants’ attempt to narrow the class to the date the Merger agreement was executed.