The Delaware Supreme Court has reversed a portion of a 2012 Delaware Court of Chancery decision and, in doing so, granted a plaintiff the right to opt out of a class action settlement reached between two defendants and the shareholders of one of the defendants. Although some have alleged that the decision could make it more difficult for corporations to end litigation, two legal analysts say the Supreme Court’s ruling will not have a major impact on future shareholder litigation because facts in the case before the high court were unique and unlikely to be duplicated.
The en banc court, which included President Judge James T. Vaughn Jr., who was sitting by designation for Chief Justice Myron T. Steele, issued the 34-page opinion December 27 in BVF Partners L.P. v. New Orleans Employees’ Retirement System. When the case appeared before the Court of Chancery, it was captioned as In re Celera Shareholder Litigation.
Quest Diagnostics Inc., a Madison, N.J., medical company incorporated in Delaware, purchased Celera Corp., an Alameda, Calif., health care company also incorporated in Delaware, for $8 per share, or $680 million, in 2011. Several of Celera’s shareholders, including BVF Partners L.P. and New Orleans Employees’ Retirement System (NOERS), objected to the merger, alleging that the per-share merger price undervalued the company.
NOERS filed a class action complaint in the Chancery Court less than a week after the merger was announced in March 2011. The pension fund alleged breaches of fiduciary duty by Celera’s board and aiding and abetting claims against Quest. Eventually, the defendants settled with the plaintiffs in September 2011, four months after the merger was completed.
Under the settlement’s terms, the class action plaintiffs did not receive any money. Instead, Celera agreed to “therapeutic measures” such as extending the tender offer period and disclosed information about the board’s financial analysis. The settlement named NOERS as the class representative and the class was defined as any entity that owned Celera common stock between February 3, 2010, and May 17, 2011. The settlement agreement was expressly conditioned on the class being certified with no opt-out rights so that members of the class could independently pursue legal claims against the defendants.
BVF, a San Francisco-based hedge fund, objected to the settlement and filed a claim in the Chancery Court, which was denied in March 2012, by Vice Chancellor Donald F. Parsons Jr., who certified the class as a non-opt out class.
BVF appealed Parsons’ decision to the Delaware Supreme Court, asserting that the Chancery Court should not have approved NOERS as class representative because it sold all of its Celera stock by the time the merger was completed and that the court erred by not permitting members of the class to opt out of the settlement.
The Supreme Court affirmed Parsons’ decision to allow NOERS as class representative because the pension fund was defined as a class member under the settlement’s terms. However, the high court held that Parsons erred by not permitting BVF to opt out.
In reversing the Chancery Court’s decision, the Supreme Court held that BVF must be given an opt-out because it owned roughly 25 percent of Celera stock, was ready to pursue identified claims, and NOERS had sold all of its stock four months before a settlement was reached.
“Here, the class representative was ‘barely’ adequate, the objector was a significant shareholder prepared independently to prosecute a clearly identified and supportable claim for substantial 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,” wrote Justice Henry duPont Ridgely in the court’s opinion. “Under these particular facts and circumstances, the Court of Chancery had to provide an opt-out right.”
The Supreme Court’s decision could make it more difficult for corporations to settle shareholder lawsuits because class members could attempt to pursue an opt-out, resulting in defendants attempting to negotiate with multiple plaintiffs instead of an entire class. However, two Delaware legal analysts say that in order for a class member to successfully opt out of a settlement, the claim would need to replicate the unusual facts in BVF Partners.
“I don’t think the Supreme Court’s decision will impact attempts to settle future class action lawsuits at all,” said Stuart Grant, a partner with Grant & Eisenhofer who argued on behalf of NOERS before the Supreme Court. “Here, you have a shareholder who owns 25 percent of the corporation’s stock objecting to the settlement. It’s a very rare factual situation for one entity to have that many shares at all. This case was pretty unique.”
Lawrence A. Hamermesh, the Ruby R. Vale Professor of Corporate and Business Law at Widener University School of Law, agreed with Grant.
“My instinct is that this decision will not change class action litigation that much,” he said. “The Supreme Court had a delicate situation here and found a way to resolve it. I’m inclined to think this case will be limited in its impact.”
Both Hamermesh and Grant said the fact that BVF owned such a large share of Celera stock was clearly the most unique aspect of the case and likely influenced the Supreme Court decision that barring BVF from opting out of the settlement violated the appellant’s due process claims.
“In most class action settlements, permitting opt-outs is not very significant,” Hamermesh said. “In this case it was significant because BVF owned 25 percent of the stock. It was hard for the Supreme Court to foreclose on a 25-percent stockholder that put the maximum pressure on the whole process.”
“I don’t think this decision will make it more difficult for corporations to settle shareholder lawsuits,” Grant said. “It’s a very unique situation. It could happen again, but given that it is such a unique situation, it is unlikely to happen again.”
“Settlements will go on as they always have,” he said.
Martin S. Lessner, an attorney with Young Conaway Stargatt & Taylor, was one of the lawyers who represented BVF. He declined to comment on the Supreme Court’s decision.
This article first appeared in Delaware Business Court Insider, a Legal sibling publication.