Chancery Ends Experiment in Litigation Financing
Forsythe v. ESC Fund Management Co. (U.S.), Inc., C.A. 1091-VCL (Del. Ch. Feb. 6, 2013).
Issue addressed: Whether the court would allow objectors to the settlement of a derivative suit to guarantee the amount of the settlement and “take a chance” at pursuing a higher recovery at trial or in a later, new settlement, in the nature of a “market test” of the settlement. Short answer: In a prior decision the Court of Chancery entertained the idea on a conceptual level, but the court now explains in this decision why it would not allow a litigation finance company to pursue a “better deal”, based on the record presented. Thus, the original settlement was finally approved.
In its May 2012 decision in this case, highlighted on these pages here, the Court of Chancery provisionally approved the settlement in this derivative case as “within the range of fairness, albeit at the low end.” Due to the closeness of the call, the court gave the objectors the opportunity to present a superior alternative and take over the case. The objectors failed to “convert” that opportunity and thus the court formally and finally approved the original settlement and dismissed the case.
This pithy opinion is rich with extended footnotes that constitute a large portion of the decision which includes citations to scholarly writings on the public policy and doctrinal issues raised in this case. For example, the court observes that in the context of the requirement that it approve derivative settlements, it plays the role of a fiduciary in reviewing the final resolution of the case, and it stands in the oxymoronic position of exercising its business judgment to determine if the settlement is fair. See, e.g., footnote 1.
The Court reasoned that in its fiduciary capacity, it must be concerned with more than economic rationality. On one level, objectively one might think that it should not matter what the financing terms are if a greater settlement is obtained. For example, if the proposed financiers were to receive a fee of 99 cents for every additional dollar that the settlement were increased, why should it matter to them what the financier is receiving? The answer is similar to the reason why the court rarely approves legal fees beyond one-third of the fund created in a derivative case.
That is, for public policy reasons, the law eschews the notion that “anything for the client is better than nothing.” Slip op. at 9-10. The Court explained the terms of the proposed financing and observed that the proposed litigation finance company, Burford Capital, made its proposal based in part on “business development considerations” which led the court to conclude that “the market therefore does not support continuing the litigation.” Thus, this “market test” experiment will need to wait for another day and another case.