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”).
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.
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.
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 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.
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.’”