Court of Chancery Dumps Class Counsel
Vice Chancellor Laster took the unusual step of removing and replacing co-lead counsel and Delaware liaison counsel in a proposed settlement of a class action challenging a proposed merger by a controlling stockholder and a subsequent exchange offer by the target company. Despite the refusal of the Special Committee's financial advisor to render a fairness opinion on the proposed merger and the refusal of the Special Committee to recommend the original transaction, plaintiffs' counsel engaged in minimal litigation efforts and quickly reached a settlement with the defendants. Vice Chancellor Laster was highly critical of the actions of the New York and Delaware firms representing the class and proposing the settlement. Among other things, Vice Chancellor Laster noted the New York and Delaware law firms' extensive history of filing and settling representative cases in the Court of Chancery, the existence of significant discrepancies between the plaintiff counsel's actions as set forth in the memorandum of understanding and the exchange offer, the strong possibility of the entire fairness standard applying to the exchange offer, the failure of the exchange offer to receive a majority of the minority shares and the lack of litigation by the plaintiffs' counsel. Although the new counsel had only sought to represent stockholders who exchanged their shares in the exchange offer, Vice Chancellor Laster appointed that counsel to represent the entire class and take over the litigation. Interestingly, Vice Chancellor Laster rejected the leadership structure proposed by new counsel, which would have consisted of two non-Delaware firms known for performing the same type of work as former counsel as lead counsel and a Delaware firm less known for performing similar work as Delaware liaison counsel. Instead, Vice Chancellor Laster appointed the Delaware firm to act as lead counsel along with the non-Delaware firms and gave the Delaware firm decision-making authority in the event of disagreements.
Plaintiffs' counsel and defense counsel should pay close attention to this decision in negotiating settlements, drafting disclosures related to such settlements and defending such settlements in the Court of Chancery. This decision could also encourage law firms not traditionally associated with frequent representative litigation in the Court of Chancery to bring such actions and seek appointment as lead counsel.