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".