Delaware Business Litigation Report

Chancery Finds Stockholder Representative Did Not Control Former Stockholders’ Discoverable Material

Fortis Advisors LLC v. Allergan W.C. Holding Inc., C.A. No. 2019-0159-MTZ (Del. Ch. May 14, 2020).

Plaintiff, as representative for the former stockholders of Oculeve, Inc., sued Defendant Allergan for alleged material breaches of the Merger Agreement between Oculeve and Allergan by failing to make a necessary milestone payment to the former stockholders and for failing to use commercially reasonable and good faith efforts to achieve the milestone. During discovery, Defendant demanded documents from over fifty non-party selling stockholders without resort to third-party subpoena discovery and moved to compel after Plaintiff objected.

In denying Defendant’s motion, the Court first evaluated the Merger Agreement’s language and found that Plaintiff’s appointment as the shareholder representative made the Plaintiff the real party in interest in the litigation. To hold otherwise “would be contrary to the language and purpose of the Merger Agreement’s shareholder representative structure” and would deny the parties the efficiencies they had bargained for. Applying the Delaware law standard for legal control over records, i.e., that the party “has the power, unaided by the court, to force production of the documents,” the Court found that the Merger Agreement did not grant Plaintiff the right to compel and thus control over the former stockholders’ documents.  Accordingly, Plaintiff could not be compelled to produce them.

This is the first Delaware decision addressing the scope of a shareholder representative’s control over other shareholder documents. The Court distinguished several decisions from outside of Delaware advanced by Defendant because they concerned agents under credit agreements where no litigation arrangement was delineated, whereas the Merger Agreement in this case specified that Plaintiff would act with regard to all matters pertaining to the milestone payments, including litigation. In reaching its conclusion, the Court also noted a lack of prejudice to Defendant, since it could obtain the desired discovery using normal third-party discovery procedures.

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