In Re SS&C Technologies, Inc., 2006 WL 3499748 (Del. Ch., Nov. 29, 2006), read opinion here. The Chancery Court refused to approve a settlement in this derivative case, despite agreement of the parties to the settlement terms. This result reminds me of the phrase, (often attributed to themes in some operas) that "it is not over until the fat lady sings". (Cartoon courtesy of Charles Fincher at www.LawComix.com).
The Chancery Court reviewed a Memorandum of Understanding prepared by the parties for the settlement of the case based entirely on the inclusion in the merger proxy statement of certain supplemental disclosures in connection with a challenge to a management led cash-out merger. The Settlement Agreement was reached after a document demand was served but before any depositions were taken. The proxy supplement was mailed and the merger closed on November 23, 2005, the day after the stockholder meeting. At no time before the transaction closed did the parties advise the court of their agreement to settle or ask leave to present the settlement for approval after the conclusion of the transaction. The parties conducted confirmatory depositions in early 2006, but waited until July 7, 2006 to finalize the stipulation of settlement. The settlement hearing did not occur until September 13, 2006.
The court provided the following instructive lesson for counsel’s observance:
“For some years, this court has sought to impress on parties to representative litigation the imperative to present settlements for approval before the terms of the settlement are performed. Where litigation challenges a pending transaction and the settlement involves a change in its terms reached before the transaction is completed, court approval of the settlement should, where possible, occur before the transaction closes. At a minimum, where circumstances warrant closing the transaction first, leave of court should be obtained for a delay in presenting the settlement, and the settlement should be presented promptly thereafter.”
The court disapproved the settlement in this case for two independent reasons. First, the court found that the parties were dilatory in presenting it for approval and therefore as a result of the performance of the settlement terms prior to court approval, the publication of supplemental disclosures followed by the conclusion of the transaction made the approval by the court in the review of the settlement terms devoid of meaning or purpose. Second, the court was not able to conclude from the presented record that the potential claims belonging to the class were adequately or diligently investigated or pursued. Basic questions concerning the fairness of the process pursued in arranging the management buyout, according to the court, were left unexplored and unanswered: “Thus preventing the court from reaching any conclusion that the very modest settlement terms secured fairly, reasonably, or adequately support the dismissal of this action.”
The court noted that the plaintiffs did not move for expedited treatment and never sought preliminary injunctive relief. Shortly after the complaints were filed, based on several phone calls and an apparent consultation with an expert, the parties began settlement discussions leading to the execution of a Memorandum of Understanding and the dissemination of a supplement to the proxy materials containing additional disclosures.
The parties neither advised the court of these developments nor asked leave of the court to present their settlement after completion of a transaction.
The court relied on the decision of Chancellor Duffy in Chickering v. Giles, 270 A.2d 373 (Del. Ch. 1970), as the basis for prior instructions to counsel of the need to present settlements quickly and to advise the court when some exigent circumstance makes it difficult to give the necessary notice and seek formal approval before the performance of some part of the agreement.
The court was bothered by the fact in this case that the proxy supplement that formed the basis of the settlement was both mailed and the transaction closed, without any notice to the court. At the time of the settlement hearing almost one year later, the only remaining part of the settlement that had not been performed was the payment of plaintiffs’ counsel fees. (The court had approved lead counsel approximately one month after the complaint was filed which was approximately one year prior to the settlement hearing.)
The court was also unhappy with what it viewed as the representative counsel’s inability to correctly identify basic terms of the disputed transaction. The court raised several issues about the transaction that were not answered and also observed that one officer who had the opportunity to take over $72 million in cash from the transaction and roll a portion of that equity into a large equity position in the surviving entity “has a different set of motivations than one who does not.”
The court further observed that “where the terms of the proposed settlement are entirely non-economic, as here, with a supplemental disclosure supplying all of the consideration for the proposed settlement,” the court can have no confidence that the interest of the class were adequately represented if counsel is not able to identify basic terms of the transaction or a basic set of legal issues raised thereby. Although the court acknowledged that it may be possible that strong, economic settlement terms would permit the court to overlook a weakness in the presentation of counsel, the court found that this was not the case here.
Thus, counsel in the case are now left in the unenviable position of “returning to the drawing board” to try to recreate a revised settlement based on terms that the court would approve, or alternatively, to bring the case to trial and somehow deal with the awkward situation of pursuing a case that they thought was settled. This case will likely go down in history as an example of the importance of coordinating with the court those settlements that require court approval, or in more colloquial terms, it is an example of the motto that “the opera is not over until the fat lady sings."