Delaware Business Litigation Report

Court of Chancery Divides Settlement Among Shareholders In Class Action Suit

The plan of allocation approved in Ginsburg v. Philadelphia Stock Exchange et. al., C.A. No. 2202-CC is a landmark decision for those in the business of litigation arbitrage, buying shares of a company that is involved in a class action that may lead to substantial settlement proceeds.

Class Representative, Chuck Ginsburg, filed suit alleging, inter alia, a charter violation and economic dilution, stemming from a sale of an 80% stake in the Philadelphia Stock Exchange (“PHLX”) to several investment firms. A proposed settlement was reached on June 20, 2007, requiring the return of 14% of the shares held by the investment firms, the return of the restricted stock units issued to the Chairman of the PHLX and $17.1 million in cash. The Court of Chancery used a rare bifurcated process by which the settlement was approved first, followed by a secondary approval of the allocation plan that decided the settlement among the class members.

The proposed plan of allocation in Ginsburg implemented a primary distinction between “holders” (those holding PHLX shares through the entire period by which the class is defined) and “non-holders” (those who bought and/or sold within the defined period) and a secondary distinction between “non-holders” of “buyers” and “sellers.” The non-holder distinctions were the main source of objections to the plan.

Specifically, Susquehanna Investment Groups’ (“SIG”) recovery was a primary concern to the objectors. SIG purchased its shares in the PHLX after August 16, 2005, which was the date that PHLX announced the sale of 80% of its shares to the investment firms and after suit was filed by a class of minority investors. Objectors noted that, by investing after the August 16th press release, SIG not only bought shares at a rate that reflected the market’s absorption of the press release but also bought shares with full knowledge of the wrongdoing. Objectors argued, therefore, that SIG and similarly situated purchasers had no claim of economic dilution and further could not show any actual damage. Class Counsel, however, found that such buyers possessed strong claims to the settlement fund because the equitable claim alleged in the class complaint should transfer with the stock to the buyer. Balancing the strength of the charter claim with the weakness of the economic dilution claim, Class Counsel determined that buyers like SIG should recover 60% of the per share allocation under the plan.

The Chancellor agreed with Class Counsel and approved the entire plan of allocation. In doing so, the Chancellor created the controlling law on how to divide a settlement among shareholders of a publicly traded company. The amounts involved were significant as buyers like SIG will gain $50 million in settlement proceeds after holding the PHLX stock for a short period.

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