It’s virtually inevitable: Within hours (or less) of a press release announcing a merger or acquisition involving a public company, a group of shareholders will file a class action lawsuit against the public company target’s directors and officers. The suit will customarily allege, among other things, that the target company’s board of directors breached their fiduciary duties by failing to get a fair price for their company and that the process used to approve the deal was deficient. Shortly thereafter, the target public company typically settles with the plaintiffs for relief that almost always includes increased disclosures to the public company’s shareholders in revised filings with the Securities and Exchange Commission (SEC). Such settlements rarely include any monetary relief for the shareholders, but almost always will include provisions for reimbursement of the plaintiffs’ attorney’s fees and expenses.
The recent acquisition of Theragenics by Juniper Investment Company and the subsequent shareholder litigation that followed in the Delaware Court of Chancery is no exception. Following the acquisition, a shareholder class action lawsuit against the board and officers followed. On February 21, 2014 though, Vice Chancellor Laster issued an unusual order in In re Theragenics, Corp. Stockholders Litigation in connection with the plaintiffs’ attorney’s fee application. The order indicates that the Delaware courts may start applying heightened scrutiny to fee applications made by shareholder plaintiffs’ counsel. In Theragenics, more than 96 percent of the stockholders who voted on the transaction voted in favor of approving it, suggesting that the vast majority of the target company’s shareholders viewed the price and process of the transaction as fair. Vice Chancellor Laster’s order—which may be the first of its kind in connection with a fee application—requires the class representatives to disclose the following:
- the class representatives’ economic interests in Theragenics and a description of their investment portfolio generally to determine the materiality of their interest in Theragenics
- a general description of the class representatives’ investment strategy, including with respect to Theragenics
- how the class representatives came to retain their counsel, including whether counsel advertised for potential plaintiffs, how the class representatives came into contact with counsel, whether the class representatives contacted any other law firms, any referral process among counsel and whether the class representatives have any other relationships with counsel
- details of all other class actions filed by the class representatives in the last five years, including their counsel and whether the court awarded any fees
- the number of times in the past year that the plaintiffs’ counsel have been retained—and compensated—at the hourly rates used in their fee application and the percentage of total law firm revenue represented by such engagements.
Vice Chancellor Laster’s order suggests that his court will not be a rubber-stamp for the fees and expenses of shareholder plaintiffs’ counsel and that such fee applications may receive a heightened level of scrutiny in his court. Going forward, both shareholder plaintiffs and their counsel who file shareholder litigation almost reflexively following the announcement of a transaction will have to consider the prospect of having to disclose the information Vice Chancellor Laster is requiring in Theragenics. It remains to be seen what effect, if any, such disclosure will have on the frequency of such shareholder suits. Additionally, Vice Chancellor Laster’s approach—especially if adopted by his colleagues on the Court of Chancery—could provide further incentive for publicly traded Delaware corporations to adopt forum selection bylaws designating Delaware as the exclusive venue for stockholder derivative suits and certain other stockholder suits. As we have previously discussed here, here and here, the purpose of these provisions is to reduce the high cost of duplicative, multi-forum suits challenging corporate actions and help ensure that the matters in dispute will be heard relatively swiftly by a knowledgeable and highly regarded judiciary.