Shareholder Should Have Been Allowed To Opt Out of Delaware Class Settlement
Key Holding: Delaware Supreme Court affirms the settlement of a class lawsuit over Celera Corp.’s acquisition of Quest Diagnostics Inc. but says the chancery court should have allowed a shareholder to opt out of the class.
Key Takeaway: The state high court concludes that due process concerns outweigh Delaware’s pro-settlement policy.
The Delaware Supreme Court Dec. 27 affirmed the Delaware Chancery Court’s settlement of a class lawsuit over the allegedly unfair acquisition of Celera Corp. by Quest Diagnostics Inc.,(DGX) but held that the lower court abused its discretion by not providing a shareholder with the right to opt out of the class (In re Celera Corp. Shareholder Litigation, Del. C.A. No. 6304-VCP, 12/27/12).
In reversing the Chancery Court’s refusal to provide a right to opt out of the class, the en banc high court concluded that due process concerns outweigh Delaware’s pro-settlement policy.
Acquisition of Celera
Justice Henry duPont Ridgely recountcd that Quest acquired Celera, a publicly traded healthcare corporation, in May 2011. In the months leading up to the merger, BVF Partners L.P. was one of Celera’s largest stockholders as well as the most vocal objector to the acquisition.
In particular, BVF disputed the accuracy of Credit Suisse Securities (USA) LLC’s valuation of Celera, which opined that Quest’s offer of $8 per share was well within a fair acquisition price. Believing that $8 per share was substantially below Celera’s actual value, the court related, BVF continued to buy up Celera stock a in an effort to boost the market price and obtain voting control to prevent the merger.
Less than a week after the merger was announced in March 2011, Celera shareholder New Orleans Employees’ Retirement System filed a would-be class action in the Delaware Chancery Court, alleging breach of fiduciary duty by Celera executives. The Celera-Quest deal, however, successfully went through and approximately four months after the merger, NOERS and the defendants entered into a settlement agreement.
According to the court, the accord named NOERS class representative, defined the class, and expressly conditioned the agreement on the class being certified without opt-out rights, thereby preventing other class members from independently pursuing other legal claims.
Despite BVF’s objections to the settlement agreement, the Chancery Court certified NOERS as the class representative and certified the non-opt out class. BVF appealed, arguing that NOERS lacked standing to represent the class because it sold its Celera shares before the merger closed, and that the Chancery Court should have exercised its discretion to allow BVF to opt out of the shareholder class.
First, addressing the challenge against the class representative, the Delaware Supreme Court found that although NOERS sold all of its shares in Celera four days before the merger was consummated and 10 months before the settlement was approved, NOERS still owned the shares when the merger was approved and when the memorandum of understanding defining the class period was executed. Declining to adopt a rule of law that a class representative “must own stock in the corporation continuously through the final class certification,” the court held that NOERS satisfied the test of standing.
Next, the court rejected BVF’s challenges against the certification of the class and held that the “Chancery Court relied on ‘well-settled Delaware precedent’” in certifying the class under Delaware Chancery Court Rule 23(b)(1) and (b)(2).
Finally, addressing the argument for providing an opt-out right, the court noted that “[c]lass certification must be assessed based on the facts and circumstances at the time of the settlement/certification hearing.” Because the case was originally filed for equitable relief and the parties agreed to a settlement of those equitable claims, it left monetary damage claims as the only subject pending for a court-approved settlement, the court said.
Explaining that BVF was a “significant shareholder” wishing to pursue a “supportable claim for substantial money damages,” the court held that “due process concerns permeate any settlement of claims . . for monetary damages” through a settlement agreement dealing only with equitable claims. Accordingly, the court held that the Chancery Court should not have denied a discretionary opt-out right where the “policy favoring a global settlement was outweighed by due process concerns.”
Accordingly, the court remanded the judgment of the Chancery Court for further proceedings.
BVF was represented by Bruce L. Silverstein (argued), Martin S. Lessner, Richard J. Thomas, Emily V. Burton, Benjamin Z. Grossberg, and Thomas E. Williams, Young Conaway Stargatt & Taylor LLP, Wilmington, Del.
NOERS was represented by Stuart M. Grant (argued), Michael J. Barry, and John C. Kairis, Grant & Eisenhofer P.A., Wilmington, Del.; Mark Lebovitch, and Jeremy Friedman, Bernstein Litowitz Berger & Grossmann LLP, New York; and Marlon E. Kimpson and William S. Norton, Motley Rice LLC, Mt. Pleasant, S.C.
The defendants were represented by Gregory P. Williams and Kevin M. Gallagher, Richards, Layton & Finger, P.A., Wilmington, Del.; Alan S. Goudiss, Brian H. Polovoy (argued), and Michael S. Carucci, Shearman & Sterling LLP, New York; Kevin G. Abrams, Abrams & Bayliss LLP, Wilmington, Del.; and Patrick E. Gibbs and Andrew M. Farthing, Latham & Watkins LLP, Menlo Park, Calif.
To see the Delaware Supreme Court’s opinion, go to http://about.bloomberglaw.com/files/2013/01/IN-re-Celera-Corp.-Shareholder-Litigation.pdf