In Re Revlon, Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL (Del. Ch. March 16, 2010), read opinion here. This is a Court of Chancery opinion that is certain to generate copious commentary. The Court removed the original Co-Lead Counsel and appointed new Co-Lead Counsel for the class.
A cursory review makes it clear that this opinion is destined to be cited often for several reasons. For example, it describes the practice and some history of firms who file class actions in the Court of Chancery very soon after a public announcement of a transaction and the ensuing battle for lead counsel among firms filing competing complaints involving the same contested transaction. Footnotes refer to law review articles and prior Chancery decisions that chronicle the issues that arise in this context, often involving the same firms that the Court refers to as "frequent filers" in this Court. The Court also refers to this phenomenon as the "opening steps in the Cox Communications Kabuki dance." (Slip op. at 8.)
The opinion includes scholarly analysis regarding the criteria employed by the Court in its selection of lead counsel in class actions, noting that the size of plaintiff’s holding is not always determinative. Without any intent to "name names" and having no interest in identifying firms on this blog that suffered in this case, it must be noted that the Court concluded that original counsel did not "provide adequate representation."
The Court cites to many academic sources that discuss the policy issues that arise in these types of cases, as well as the "pros and cons" of what the Court refers to as "entrepreneurial litigators" who have a portfolio of class action cases. There is much more to commend this decision as must-reading for any lawyer or plaintiff who files a representative action in the Delaware Court of Chancery. A fuller synopsis will follow soon.
Although this remarkable opinion is only 44-pages in the “slip opinion format,” it speaks volumes about the practical and theoretical aspects of representative litigation, as well as the standards that the Court enforces on all counsel that appear before it.
Much of the opinion discusses the types of class actions that arise in the context of what the Court referred to as the Cox Communications ritual, referring to the case of In re Cox Communications, Inc., 879 A.2d 604, 608 (Del. Ch. 2005). That “ritual” as to the Court describes it, involves a common practice in many representative suits that are hastily filed very shortly after the announcement of a controlling shareholder transaction. The Court has referred to these hastily prepared and hastily filed complaints as part of the “medal round of filing speed Olympics to seek lead counsel status.” See footnote 2. In footnotes 1 and 4, the Court cites to a law review article that refers to an academic analysis that concluded: “Firms who are early filers are frequently early settlers,” (leading some wags to label them “Pilgrims.”) In addition to referring to it as a ritual, the Court also refers to the situation in this case as “part of a Cox Communications Kabuki dance which involves two tracks.” The first track involves representative counsel doing “not very much” in the litigation, while the controlling shareholder and the special committee for the company move forward along the transactional track.
That procedure followed form in this case with a twist. The financial advisor for the Special Committee indicated that it would not be able to render a fairness opinion for the transaction and the Special Committee therefore could not recommend the proposed transaction. However, the controlling shareholder in the company did a “end run” around the Special Committee by proposing a slightly new transaction to the whole entire board and not the Special Committee. Thus, the Special Committee declared that its work was complete and disbanded.
Although the board declined to make any recommendation to stockholders on whether or not to tender their shares, the board did authorize Revlon to proceed with the proposed transaction.
The Litigation Track Restarts and the Parties Enter into a Memorandum of Understanding
The Cox Communications ritual was described by the Court as follows: Once the corporation and the controlling shareholder reached an unofficial agreement on the terms of the transaction, the plaintiffs were brought in to “bless the deal.” The transaction provided for consideration for a settlement and the payment of attorneys’ fees and a broad transaction-wide release for all defendants. The minor tweaks in the transaction followed in what the Court called this “traditional choreography.” The transactional tweak traditionally involves lowering the termination fee which would only become operative in the event of a topping bid and supplemental disclosures which provide convenient ways to settle litigation over a deal that has already been exposed to the market for some time, by which point it is relatively clear to the parties that an interloper is unlikely to appear.
Importantly, one of the tweaks made in this case by the parties was already required by Delaware case law in order to render a controlling stockholder tender offer as non-coercive. The court suggested that the provision would have been included anyway as a requirement under Delaware law that a controlling stockholder tender offer be conditioned upon tenders from a majority of the outstanding unaffiliated shares. The Cox Communications case is known for requiring that if a tender offer by a controlling shareholder is to be considered no-coercive, when enough shares are tendered such that the remaining holders can be eliminated for a short-form merger, then the squeezed-out stockholders would receive securities and the surviving corporation substantially identical to the shares it would have received.
The court regarded the changes to the ultimate terms of the deal as being the result of very little if any influence by the plaintiff’s counsel and the Memorandum of Understanding (MOU) exaggerates the role of counsel in obtaining settlement. The Court refers throughout the opinion to “Old Counsel” as the counsel that it replaced.
New Actions Filed
After the MOU was entered into, new representative actions were filed that challenged the transaction. Unlike the original actions filed by Old Counsel, Fox challenged a negotiable proposal, the new actions challenged in actual transaction. New counsel argued that there was a conflict between the positions of the tendering stockholders that they represented and the non-tendering stockholders represented by the Old Counsel.
The Court quoted extensively from terms of the Amended Complaint filed by plaintiffs’ Old Counsel with a purpose to protect “defendant’s turf and the settlement” which was inconsistent with the record before it.
The Court was also critical of defense counsel who supported the settlement and also made statements to defend the settlement that the Court regarded as “not quite accurate” (my phrase).
The Court cites to a treatise and to several federal decisions to support its statement that the Court has both the power and the duty to either select or remove class counsel. Although there may not be substantial case law in the Court of Chancery on this topic, comparatively speaking, the Court cited to several cases which list the factors that are important in choosing lead counsel, such as the quality of the pleading, the willingness and ability to litigate vigorously on behalf of an entire class, and the enthusiasm or vigor with which the various contestants have prosecuted the lawsuit. See Hirt v. U.S. Timberlands Serv. Co., 2002 WL 1558342 at *2 (Del. Ch. July 3, 2002) and Wiehl v. Eon Labs, 2005 WL 696764, at *1 (Del. Ch. May 22, 2005). Notably, the Court emphasized that the size of plaintiff’s share ownership is not a determinative factor in selecting lead counsel.
Transaction was not a Voluntary, Non-coercive Tender Offer that Avoided Entire Fairness Review
The Court made it clear that this was not a transaction that avoided entire fairness review based on the case of In Re Siliconix, Inc. Shareholders Litigation, 2001 WL 71677 (Del. Ch. June 19, 2001). The Siliconix case rests in part on the non-involvement of the target board from the Delaware corporate law perspective. Rather, as a series of cases noted, corporate action by the target board takes a transaction out of the Siliconix framework. See, A.G. Andra v. Blount, 772 A.2d 183, 195 n. 30 (Del. Ch. 2000).
The Court also noted other reasons why the entire fairness standard would apply to the deal in this case in part because none of the following safe harbor provisions applied: (1) There was no affirmative recommendation from an independent committee of the target board; (2) It was not subject to a non-waivable condition that a majority of outstanding unaffiliated shares tender; and (3) There was no commitment by the controller to effect a prompt back-end merger. Moreover, in this case the outside directors believed that they could not obtain a fairness opinion for the deal. The Court observed that if there was ever a case that warranted the entire fairness review standard, this may be one of those cases.
The Court recognized the important role of representative cases as a check on management, and that many cases achieve meaningful results. The Court recognized also the sound policy reasons for the Court to police representative counsel.
At footnote 6, the Court cited to multiple law review articles, and addressed the pros and cons of representative cases and what the Court refers to as “entrepreneurial litigators” who specialize in handling these types of cases. This opinion made it clear that the Court will act as a very “strict policeman,” and the Court recognizes that one possible consequence of that approach would be that “frequent filers” may accelerate their efforts to populate their portfolio of cases by filing in other jurisdictions. The Court recognized also that while “in the short run policing frequent filers may cost some members of the bar financially, in the long run it enhances the legitimacy of our State and its law not to facilitate a system of transactional insurance through quasi-litigation.”
The Court requires New Counsel to Perform Confirmatory Discovery
In addition to appointing new lead counsel, the Court specifically at pages 43 and 44 outlined in detail minimum discovery that new counsel had to conduct through both traditional written discovery methods and through depositions in this case. The itemized description on pages 43 and 44 of the slip opinion is in some ways unique to this case, but it provided a road map for confirmatory discovery that will be a useful reference in some respects for representative counsel seeking to have the Court approve class action settlements in the future.
UPDATE: I want to draw readers’ attention to two transcripts of subsequent hearings in separate, unrelated cases by the same author of this opinion, here and here, where the Court "softened the impact" of the references in this opinion to some of the firms involved in this case in a manner that would tend to prevent use of the opinion against those firms in the future. The ruling in this case, and the above-linked transcripts, are indications of the special emphasis that the Court places on the role of Delaware lawyers in a case populated with many "out of town counsel".