In re Celera: Court of Chancery Criticizes Representative Plaintiff’s Sale of Shares During Lawsuit and Comments on “Don’t-Ask-Don’t-Waive” Standstills
June 5, 2012
In In re Celera Corporation Shareholder Litigation, C.A. No. 6304-VCP (Del. Ch. Mar. 23, 2012), the Court of Chancery approved the settlement of a putative class action despite the representative plaintiff having sold all of its shares after entering into an MOU and before the closing of the challenged transaction. While the Court held that the plaintiff narrowly satisfied the requirements for an appropriate class representative, the Court criticized the sale of shares and warned of summary dismissal of similarly situated representative plaintiffs in future cases.
New Orleans Employees’ Retirement System (“NOERS”) filed suit on March 22, 2011, alleging breaches of fiduciary duty in connection with the $680 million acquisition of Celera Corp. (“Celera”) by Quest Diagnostics, Inc. (“Quest”). The acquisition was structured in two tiers—a front-end tender offer for all Celera shares at a price of $8.00 per share, followed by a back-end top-up option and short-form merger at the same price.
The merger agreement contained several protective measures, including a $23.45 million termination fee and a provision preventing the Celera board from soliciting competing offers from bidders other than Quest. NOERS argued that the no-solicitation provision was especially onerous coupled with confidentiality agreements that Celera previously entered into with five potential bidders. These confidentiality agreements contained “Don’t-Ask-Don’t-Waive” standstill provisions that (i) prohibited the potential bidders from making an offer for Celera’s shares without an express invitation from the Celera board and (ii) prevented the signing parties from asking the Celera board to waive this provision. Accordingly, Celera could not reach out to these potential bidders (as a result of the no-solicitation provision) and these potential bidders could not reach out to Celera (as a result of the Don’t-Ask-Don’t-Waive standstills), although the no-solicitation provision contained a “fiduciary out” permitting Celera’s board to waive the Don’t-Ask-Don’t-Waive standstills.
Approximately one month after NOERS filed its complaint, the parties entered into an MOU settling the case on a provisional basis for a reduction in the termination fee, a waiver of the Don’t-Ask-Don’t-Waive standstills, an extension of the offer period, and supplemental disclosures, but no monetary consideration. Quest acquired 60 percent of Celera’s shares, sufficient to exercise the top-up option. On May 11, Quest announced its intent to complete promptly the short-form merger. Two days later, NOERS sold all of its Celera stock on the secondary market at a price of $8.05 per share. The acquisition closed on May 17, with Celera’s remaining shareholders being cashed out receiving the $8 per share merger consideration. On August 9, the parties entered into a final settlement agreement.
In approving the settlement, the Court held that NOERS was an adequate representative plaintiff, notwithstanding NOERS’s sales of Celera stock, because NOERS sold its shares after all material information regarding the lawsuit, settlement, and acquisition had been disclosed to the market and after the closing of the transaction had become inevitable. Nevertheless, the Court found troubling the frequency with which Delaware courts have had to address the conduct of lead plaintiffs in recent months, emphasized that NOERS’s conduct failed to reflect an appropriate level of regard and respect for its position as fiduciary for the class, and indicated that the Court may not reach the same result in the future.
Regarding the merits of the settlement, the Court found valuable the waiver of the Don’t-Ask-Don’t-Waive standstills. The Court suggested that the Don’t-Ask-Don’t-Waive standstills and the merger agreement’s no-solicitation provision, when taken together, could be problematic. Specifically, the provisions together increase the risk that a board would lack adequate information regarding the interest of potential bidders, which in turn weakens the protections of a fiduciary out. The Court therefore concluded that NOERS had a colorable argument that “[c]ontracting into such a state conceivably could constitute a breach of fiduciary duty.” The Court nevertheless recognized that such provisions may be relatively common and explained that given the absence of a fully developed record, the Court was not ruling that Don’t-Ask-Don’t-Waive standstills are unenforceable.