In re Celera Corporation Shareholder Litigation: Supreme Court Finds Abuse of Discretion in Trial Court’s Decision Not to Allow Discretionary Opt-Out Right
December 27, 2012
In In re Celera Corporation Shareholder Litigation, No. 212, 2012 (Del. Dec. 27, 2012), the Delaware Supreme Court upheld the Court of Chancery’s decision to certify as class representative a plaintiff that had sold its stock prior to the challenged merger, but held that, under the facts and circumstances of the case, the Court of Chancery had abused its discretion by failing to provide a significant stockholder with the right to opt out of the class. BVF Partners, L.P., Celera Corporation’s largest stockholder, objected to the proposed settlement Celera had entered into with New Orleans Employees’ Retirement System (NOERS) to resolve litigation challenging Quest Diagnostic Incorporated’s acquisition of Celera for $8.00 per share. BVF argued on appeal that NOERS was not an adequate class representative because, among other things, it had sold its stock after execution of the merger agreement but before the transaction closed. BVF also asserted that it should have been permitted to opt out of the class to pursue its individual claims for monetary damages.
In March 2011, Celera’s board approved a merger agreement under which Quest would launch a tender offer followed by a back-end merger. Under the terms of the agreement, Celera was required to pay a termination fee of $23.45 million if it accepted a competing bid; Celera’s board was subject to a “no shop” provision; and several initial bidders were bound by a “don’t-ask-don’t-waive” standstill agreement. Shortly after the transaction’s announcement, NOERS filed a class action complaint alleging breach of fiduciary duty claims. After expedited discovery, NOERS and the defendants entered into a non-binding memorandum of understanding providing for certain therapeutic benefits, including a reduction in the termination fee from $23.45 million to $15.6 million, the elimination of the “don’t-ask-don’t-waive” standstill agreements, an extension of the tender offer, and supplemental disclosures. The MOU was conditioned on NOERS’ general release of all claims (including monetary damages) by any member of the class, including BVF.
BVF objected to the settlement, claiming that the therapeutic benefits were of no value to it and stating that it sought monetary damages to reflect the real value of its stock. On March 23, 2012, over BVF’s objection, the Court of Chancery certified the class as a non-opt-out class under Court of Chancery Rules 23(b)(1) and (b)(2) and approved the settlement. On appeal, the Supreme Court held that NOERS was an adequate class representative because, although it sold its stock four days before the transaction closed and ten months before the settlement was approved, it had owned its stock at the time Celera’s board approved and executed the merger agreement and at the time the parties executed the MOU.
While the Supreme Court held that the Court of Chancery did not abuse its discretion by certifying the class under Rules 23(b)(1) and (b)(2), it held that the trial court did abuse its discretion by denying BVF a discretionary right to opt out of the class. Recognizing that Rule 23, similar to its federal counterpart, does not contain a provision that authorizes the court to grant opt-out rights to class members of any class not certified under Rule 23(b)(3), the Supreme Court held that Rule 23(d)(2), providing for notice to class members, permits a discretionary opt-out right. The Supreme Court also recognized that the litigation as originally filed presented claims that were primarily for equitable relief, which typically supports certification of a non-opt-out class. Nonetheless, the Supreme Court observed that “in somewhat unique circumstances, the parties agreed to a de facto settlement of those equitable claims without formal court approval, leaving only monetary damage claims as the subject of a later formal, de jure application for a court-approved settlement.” The Supreme Court held that the Court of Chancery, in considering whether to certify a class, “should not—and indeed cannot—blind itself to that reality and treat the settlement as one in which the equitable claims were still viable and predominant.” Because the Court of Chancery, in determining whether to certify a class, must consider the posture of the case “as it realistically exists,” the Supreme Court held that the Court of Chancery erred by denying a discretionary opt-out right where the policy favoring a global settlement was outweighed by due process concerns. Accordingly, the Supreme Court held that the Court of Chancery had to provide an opt-out right under these particular facts and circumstances.