In 2011, Celera Corp. reached a non-cash settlement with shareholders who alleged that the company’s board breached fiduciary duties during Celera’s 2011 merger with Quest Diagnostics. Ever since, Celera’s largest shareholder, the private equity firm BVF Partners, has been objecting to the deal on the grounds that it accomplished little besides generating money for plaintiffs lawyers.
On Dec. 27, the Delaware Supreme Court denied BVF’s bid to scuttle the deal. But in its unprecedented 34-page opinion, the court also gave BVF a new avenue for going after Celera’s board.
The state’s highest court affirmed a March 2012 decision by Delaware Chancery Court vice chancellor Donald Parsons allowing the settlement to proceed. Parsons had reluctantly approved the Celera shareholder deal even though the lead plaintiff, the New Orleans Employees’ Retirement System, sold its shares on the secondary market for a premium. BVF Partners, which owns nearly a quarter of Celera’s shares, tried to squash the settlement on the grounds that NOERS’ stock sale made it an inadequate class representative. The Delaware Supreme Court took a split-the-baby approach: It okayed the deal, despite misgivings about NOERS’s conduct, but it also allowed BVF to opt out of the settlement so it can pursue its own claims for money damages against Celera’s board.
Quest acquired Celera, which focuses on genetic testing for disease, for $8 a share in 2011. The deal was valued at about $344 million. Several plaintiffs firms representing Celera shareholders brought derivative suits alleging that Celera’s board undervalued some of the company’s assets. A few weeks later, counsel for NOERS at Grant & Eisenhofer, Bernstein Litowitz Berger & Grossmann, and Motley Rice reached a proposed settlement with Celera’s board. No cash changed hands. Instead, Celera agreed to several “therapeutic measures,” like an extension of the tender offer period and supplemental disclosures about the board’s financial analysis. Grant & Eisenhofer, Bernstein Litowitz, and Motley Rice asked for $3.5 million in attorneys fees for their work, plus expenses.
BVF said it gained nothing from the deal, and hired Young Conaway Stargatt & Taylor to object to the deal. The equity firm tried to undo the settlement on the grounds that NOERS was unfit for the class representative role. According to BVF, NOERS had no financial stake in the settlement, since it sold its shares at a premium, and was uniquely susceptible to the affirmative defense that it acquiesced to the merger.
When vice chancellor Parsons okayed the settlement in March, he expressed misgivings over NOERS’s “troubling” conduct. “Technically permissible or not, [NOERS's decision to sell its shares] failed to reflect the appropriate level of regard and respect for NOERS’ position as a fiduciary of the class,” he wrote. He nonetheless approved the deal, in part because he noted that BVF’s claim for money damages against Celera’s board would be “either weak, difficult to prove, or both.” Parsons also declined to allow BVF to opt out of the deal, writing that “permitting BVF to litigate the identical claims being settled…would utterly defeat the purpose of the settlement.” Finally, Parsons granted the plaintiffs firms attorney fees of just $1.35 million. Celera’s lawyers at Latham & Watkins and Quest’s lawyers at Shearman & Sterling had urged Parsons to award less than $1 million.
On appeal, the Delaware Supreme Court has now ruled that Parsons was right to okay the settlement, but that he should have allowed BVF to opt out as a matter of fundamental fairness. The court has stated in previous decisions that objectors can be given opt out rights, but this decision represents the first time such opt out rights have been granted. “Here, the class representative was ‘barely’ adequate, the objector was a significant shareholder prepared independently to prosecute a clearly identified and supportable claim for money damages, and the only claims realistically being settled at the time of the certification hearing nearly a year after the merger were for money damages. Under these particular facts and circumstances, the Court of Chancery has to provide an opt-out right,” the high court wrote.
Grant & Eisenhofer name partner Stuart Grant, who argued for NOERS, was not immediately available for comment. Young Conaway partner Bruce Silverstein argued for BVF; he declined to comment.
