Justin M. Forcier, an associate in the Delaware office of Eckert Seamans, prepared this overview.
This case provides guidance to any attorney who would seek an appointment as lead counsel. In re Appraisal of Rouse Props., 12609-VCS (Del. Ch. Dec. 8, 2016)
Background: On July 6, 2016, Rouse Properties, Inc. (“Rouse”) merged with an affiliate of Brookfield Asset Management, Inc. (“Brookfield”) in an all-cash merger for $18.25 per share. Following the merger, a group of beneficial owners of Rouse, representing 21% of the pre-merger outstanding stock (the “Minority Petitioners”), filed a complaint seeking appraisal. In August 2016, a group of former investors who represented 75% of Rouse’s beneficial owners (the “Majority Petitioners”) filed a similar complaint seeking appraisal. Both groups were represented by different counsel.
During communications between the two parties’ counsel, the Minority Petitioners made clear that, despite any consolidation, they intended to engage and call their own valuation witness and would be free to deviate from the Majority Petitioners’ litigation strategy if they chose to. Also, the Minority Petitioners would only agree to compensate their counsel, even if the Majority Petitioners’ counsel was chosen as lead. Counsel for the Majority Petitioners filed a motion for appointment of lead counsel (the “Motion”).
Analysis: In their opposition to the Motion, the Minority Petitioners argued that the court could not grant the Motion because forcing the Majority Petitioners’ counsel on them would deprive the Minority Petitioners the right to “fully participate” in the appraisal action pursuant to 8 Del. C. § 262(h). They also opposed the Motion because appointment of the Majority Petitioners’ counsel would deprive them of the right to be represented by the counsel of their choice. Finally, the Minority Petitioners argued that granting the Motion would create negative incentives which should be avoided because their counsel fully intended on carrying their fair share of the workload.
Court’s Holding: The court examined 8 Del. C. § 262(h) and determined that it did not preclude it from overriding an active petitioner’s choice of counsel. Citing Merriam-Webster’s Dictionary, the court noted that the verb “participate” means to take part in or to share. It then held that nothing in the court’s order would preclude the Minority Petitioners from “taking part in” the appraisal litigation because their interests are perfectly aligned with the Majority Petitioners.
Next, the court found that the Minority Petitioners’ interests would be protected even if the counsel that was appointed was not the one they would have preferred. First, Section 262(k) requires that the court approve the dismissal of an appraisal proceeding against any stockholder. Second, Section 262(j) incorporates common-fund principles to attorneys’ fees. And third, any counsel appointed as lead would owe every member of the class fiduciary duties.
Finally, weighing the Hirt factors, the court found that the Majority Petitioners’ counsel was well-suited to serve as lead counsel. The court held that the quality of the pleadings was not a factor that weighed heavier in either direction. Second, the enthusiasm and vigor with which the case was prosecuted so far was neutral towards both the Majority Petitioners’ counsel and Minority Petitioners’ counsel. Third, no conflict existed with either parties’ counsel. However, the competence of the Majority Petitioners’ counsel was a factor that weighed in their favor because of their extensive track record. Finally, the Majority Petitioners comprised of 75% of the ownership; and therefore, they had more at stake to incentivize active litigation. Therefore, the court held that the Majority Petitioners’ counsel should be appointed lead.