A recent decision from the Delaware Supreme Court is a reminder that the members of a mandatory class—one in which the class isn’t guaranteed opt-out rights—sometimes may be given the right to opt out in order to pursue their own individual actions.
The decision, In re Celera Corp. Shareholder Litigation (pdf), addressed a class settlement of claims that the directors of Celera Corp. had breached their fiduciary duties in agreeing to a merger with Quest Diagnostics. The settlement promised “therapeutic benefits” to the class of Celera shareholders, such as additional disclosures and changes to the merger agreement that made it easier for Celera to entertain other offers. But the settlement gave class members no damages, it released all shareholder claims related to the merger, and it barred class members from opting out to pursue individual actions. The chancery court certified the class under its Rule 23(b)(1) (because of the potential for inconsistent adjudications) and Rule 23(b)(2) (because the class sought injunctive relief). The chancery court also overruled the objection to the settlement lodged by Celera’s largest shareholder, BVF Partners, which believed that the transaction undervalued Celera and wanted to pursue an individual claim for damages.
On appeal, the Delaware Supreme Court rejected BVF’s challenge to the standing of the named plaintiff. The court ruled that even though the named plaintiff sold its shares before the consummation of the merger, the plaintiff still was an adequate class representative, albeit “barely,” because it owned the shares when the merger was announced and did not “acquiesce” to the merger. The Delaware Supreme Court also saw no merit in BVF’s argument that the class’s potential damages claims should have precluded any class certification except under Delaware’s Rule 23(b)(3), which guarantees opt-out rights to class members. The court explained that Delaware precedent allows shareholders to bring mandatory class actions under Rules 23(b)(1) and (b)(2) in order to challenge director conduct in carrying out corporate transactions.
BVF had better success with its request to opt out of the certified class. The Delaware Supreme Court concluded that the chancery court should have allowed BVF to opt out. Worried that absent class members “could have their claims released without an opportunity to be heard,” the court explained that the chancery court has discretion to permit class members to opt out of (b)(2) classes. The court noted that such discretionary opt-out rights have been allowed when an objector has a distinct claim or when allowing opt outs would facilitate fair and efficient litigation. The court then explained that the “objective of global peace” shared by the parties to the settlement was “outweighed by due process concerns” arising from BVF’s circumstances. In particular, the named plaintiff was “barely” adequate, the “therapeutic relief” afforded by the class settlement was quickly mooted by consummation of the merger, and BVF was a substantial shareholder with a supportable damages claim. The court therefore concluded that barring BVF from opting out was an abuse of discretion.
The Celera decision promises to become an important consideration in negotiating class settlements of challenges to corporate transactions in Delaware and elsewhere. Defendants can no longer count on obtaining global peace from a non-monetary class settlement. And both sides must now be ready to account for the possibility that objecting shareholders may try to obtain opt-out rights.