Delaware Corporate and Commercial Litigation Blog : Delaware Litigation Lawyer & Attorney : Francis G. X. Pileggi : Corporate, Business, Commercial, Delaware Chancery Court

CME Group Inc. v. Chicago Board Options Exchange, Inc., No. 2369-VCN (Del. Ch., June 3, 2009), read opinion here. Prior Chancery Court opinions in this case were summarized on this blog here.

 This action began in order to establish the economic and trading rights of the Board of Trade of the City of Chicago (“CBOT”), now under the auspices of CME Group, Inc., as Exercise Members or Exercise Member Delegates of defendant Chicago Board Options Exchange (“CBOE”). CBOT established and financed the CBOE, which as a national securities exchange, is regulated by the Securities and Exchange Commission (“SEC”).

Procedural Background

The prior Chancery Court decisions in 2007, linked above, denied an application for injunctive relief and also stayed this action pending a decision by the SEC about whether the Certificate of Incorporation of CBOE should be interpreted to the effect that the demutualization of CBOT resulted in the loss of Exerciser Member status.

On January 22, 2008, the SEC approved the CBOE’s interpretation that no person could qualify as an Exerciser Member of CBOE after the CBOT-CME merger.

The SEC decision of January 2008 also indicated that the Chancery Court had jurisdiction in this case to decide the state law issues among the parties, which were generally understood to involve breach of contract and fiduciary duty claims. In February 2008, the plaintiffs filed a Third Amended Complaint against CBOE and certain of its former directors. Shortly before summary judgment motions were scheduled to be argued in June 2008, the parties reached an agreement in principle resolving this litigation. A Stipulation of Settlement was submitted to the court in August 2008 and a Scheduling Order was thereafter entered which certified a temporary class, directing the sending of notices, and established the procedures for a hearing on the settlement and for making any objections to the settlement.

Issues Addressed by the Court

1) Whether this action should be certified as a class action;
2) Whether the settlement is fair and reasonable as between the plaintiff class and the defendants;
3) Whether the allocation of the settlement proceeds among the putative class members is fair and reasonable; and,
4) Whether the requirements imposed in order to qualify for receiving distribution of the settlement proceeds are fair and reasonable.

Without reciting the intricate factual details and overlapping claims in this 30-page decision, I will focus on the more noteworthy legal issues.

Class Certification

The court reviewed the requirements of Chancery Court Rule 23(a) which provides the four criteria that must be satisfied for certification of a class: (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation. The court reviewed the facts of this case and found that these prerequisites were easily satisfied. The court also reviewed the requirements of Chancery Court Rule 23(b) that must be satisfied by parties seeking certification of a class and the court found that the certification of a mandatory (i.e., non-op-out) class is appropriate under both Chancery Court Rules 23(b)(1) and 23(b)(2).

Adequacy of a Settlement

The court acknowledged that in approving a settlement of this nature, the court is not in a position to resolve the merits of the dispute, but rather, the court must assess the nature of the claims asserted and the defenses that might be raised in opposition and then apply its own business judgment to determine whether the proposed settlement is fair and reasonable. The court observed that there was no objection to the sufficiency of the settlement and that the objections filed related primarily to allocation.

Structural Objections

The court addressed the many objections that related to the following three categories:
1) Objections dealing with class membership cut-off and eligibility dates;
2) Objections to the verification procedures established to assure that participating members satified various requirements of Group A Settlement Class Members;
3) Objections to the allocation of value as between Group A Settlement Class Members and Group B Settlement Class Members; and
4) An objection to the scope of the release requested by CBOE.

The court addressed each of the substantive objections in turn and overruled them. Regarding allocation, the court noted that an allocation plan must be fair, reasonable and adequate (citing Schultz v. Ginsburg, 965 A.2d 661, 668 (Del. 2009)). The court observed there was no mathematical model to yield the proper division of proceeds among class members where the class members are not situated in exactly the same fashion. As part of approving the settlement, the court determined that the allocation was also fair and reasonable.

The Release

The issues regarding the release included the fact that certain person would be bound by the release although they would receive no consideration. The court cited authority at footnote 41 for the position that receiving no consideration is not necessarily a sound basis for objecting to a settlement because a party funding a settlement reasonably can expect to put all claims relating to the subject matter of the litigation (both real and theoretical) behind it.

Brief Postscript

In a final section of the opinion entitled “Brief Postscript,” the court concluded that: “This was a difficult matter.” Nonetheless, the court explained that it was “in no position to reach any conclusion other than that the Settlement, including its allocation plan, was, in the words of Schultz, ‘fair, reasonable, and adequate.’”
 

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 Schultz v. Ginsburg and Philadelphia Stock Exchange, (Del. Supr., Feb. 3, 2009), read opinion here. The Delaware Supreme Court affirmed the Chancery Court's decision in connection with the allocation of  proceeds from a settlement that ended a class action against the Philadelphia Stock Exchange. The settlement and the allocation were separately approved by the Chancery Court. 

Highlights of five (5) prior decisions in this case, which provide more background, are available here.

This appeal of the allocation of the settlement proceeds raised the following arguments (all of which were rejected):

1. Monetary relief should be available only to those who suffered actual damage (although nonmonetary relief should be given to remedy a violation of charter provisions).
2. The Chancellor should have created subclasses to take cognizance of competing economic interests.
3. The Chancellor erred by not granting a larger allocation of the proceeds to the Objectors.
4. If a larger allocation is awarded, the Objectors' counsel should be entitled to a larger portion of the attorneys' fees awarded.

Class counsel defended the allocation plan by arguing that the allocation plan appropriately valued the charter violation more than the economic dilution claims.

The appellate standard of review for these types of issues is abuse of discretion. None was found.

Initially, Delaware's High Court observed that the Chancellor appropriately considered the merits of the various claims in terms of which had a better chance of success. Also, the Supreme Court held that as a matter of law, the charter violation claims transfer to a later purchaser because the injury is to the stock and not the holder. By contrast, the economic dilution claim was personal.

Thus, the violation of the charter, a contract between the stockholders and the corporation, was a direct claim. Conversely, the dilution claim, based on the facts of this case, was likely to be considered derivative. If considered derivative, the shareholders would not be entitled to a money recovery resulting from a successful derivative action and the corporation (in which they no longer held stock) would receive the relief. There was also a concern about the barrier to relief posed by DGCL Section 102(b)(7). It was also observed by the trial court that demutualization claims, as other actions have demonstrated, "have little or no chance of succeeding".

The Court acknowledged Delaware policy that opposed the "buying of a lawsuit" but did not find that to have taken place here. Moreover, the Court distinguished the argument that "actual damages are required in order to recover money from a settlement fund". Distinguishing the case of Wit Capital Group v. Benning, 897 A2d. 172 (Del. 2006), a Rule 23(b)(3) opt out case based on New York law, the Court noted that the Wit case involved a prima facie requirement of injury under New York law. In contrast, the instant case was requesting equitable relief.

Moreover, the Court held the the Chancellor did not abuse his discretion by certifying the class without subclasses and it was appropriate under the circumstances to rely on the thorough and unconflicted process of the unbiased class representative.

Delaware's High Court also explained that the allocation to class members with a demutualization claims was appropriate. Therefore, the Court rejected any change in the share of attorneys' fees, acknowledging also that "an objector to a class action settlement is not entitled to attorneys' fees unless his efforts improved the final settlement or he conferred a benefit on the class".

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In re Wm. Wrigley Jr. Co. Shareholders Litigation , (Del. Ch., Jan. 22, 2009), read opinion here. (Hat tip to Potter Anderson & Corroon  LLP, for their eDelaware case summary, also posted on their website).

Instead of providing a conventional summary of the court's decision, this is one of those cases for which I will just highlight the key issues decided and any interested reader can read the whole opinion at the above link.

• This case started as a class action challenging the merger between the Wm. Wrigley Company of gum fame and the Mars candy company, based on Revlon claims, disclosure claims and related challenges to the merger.
• Although the plaintiffs dropped their Revlon claims, still the parties settled shortly before the scheduled closing on terms that included modification of the merger agreement such as the termination fee and certain disclosures.
• This opinion is helpful for several practical reasons, such as counsel's use of best practices by immediately sending the settlement memorandum to the court and asking for the court's consent to schedule a hearing to approve the settlement after the date of the merger so as not to delay the merger, in light of the abbreviated timetables involved.
• Also of practical value is the court's discussion of the criteria used to certify the case as a class action under Rule 23 as part of the settlement process
• The court also addressed and rejected objections to the settlement by those persons who argued that it was not fair that they would not be entitled to opt out of the settlement.

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