Delaware Supreme Court allows class action opt-outs

Thu Dec 27, 2012 6:10pm EST

Dec 27 (Reuters) - The Delaware Supreme Court ruled on Thursday that a large investor should be allowed to opt out of a shareholder class action settlement, making it potentially more difficult for companies to end litigation.

The court reversed a the lower Court of Chancery and ruled that a large holder of shares of Celera Corp must be allowed to pursue their claims for "substantial" monetary damages relating to the company's sale to Quest Diagnostics Inc.

Delaware's Court of Chancery is a major venue for shareholder class actions challenging mergers and acquisitions. The lawsuits almost always end in settlements and rarely provide for opt-outs by those shareholders who oppose the settlements.

The case stems from the 2011 acquisition of Celera by Quest for $680 million.

The deal was opposed by BVF Partners LP, which argued in letters to Celera's board that the company was undervaluing its drug royalties. BVF had nearly a quarter of Celera's stock by the time the deal closed on May 17, 2011.

At the same time that BVF was fighting the deal, a separate shareholder with a smaller investment, the New Orleans Employees' Retirement System, sued the board for breaching their fiduciary duties by selling too cheaply.

Weeks after filing its lawsuit, the pension fund settled its lawsuit in return for Celera reducing the deal's termination fee and several non-monetary changes. Shareholders did not receive additional money from the settlement, which would release all shareholder legal claims, including those of BVF.

BVF objected to the settlement and attacked the pension fund as an inadequate class representative, but Delaware Court of Chancery Judge Donald Parsons overruled the fund's objections. BVF then appealed to the state's highest court.

In its 34-page opinion, the Delaware Supreme Court said BVF must be given an opt-out because the lower court found the class representative was "barely" adequate and BVF was a significant shareholder ready to pursue a clearly identified claim.

"I think it would be fair to say that the decision today in Celera may make it easier for objectors to class action settlements, especially those with a substantial holding, to argue for an opt out option, which in turn may make it more difficult to bring closure to such claims and more difficult to 'buy global peace'," said Francis Pileggi, an attorney with Eckert Seamans Cherin & Mellott in Wilmington.

Big investors have occasionally opted out of federal class action securities and antitrust cases as they hope to do better on their own, adding to the legal costs for defendants.

For example, the state of Alaska said in 2007 that its $60 million securities fraud settlement with Time Warner Inc was 50 times what it would have recovered as part of a class action against the company. The case involved allegations that the media company misled investors about AOL, with which it merged in 2001.

Pileggi said the Supreme Court decision could be compounded by a September decision by the Court of Chancery involving Hecla Mining Corp.

Judge Travis Laster found in that case that dismissing a shareholder lawsuit because the plaintiff was not qualified to represent a class did not prevent a more diligent plaintiff from bringing essentially the same case.

The Delaware Supreme Court case is In Re Celera Corporation Shareholder Litigation No. 212, 2012.

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