Feb 6 A group of lawsuits by shareholders objecting to the sale of the New York Stock Exchange has put state judges in Delaware and New York on a collision course, highlighting a recent boom in a chaotic and sometimes costly type of litigation.
Almost as soon as mergers are announced, they are met with legal challenges from shareholders, with similar lawsuits often appearing in two different state courts. The lawsuits usually settle quickly, but nevertheless they have become a growing headache for companies that are being bought out.
This proliferation prompted Leo Strine, the chief judge on Delaware's Court of Chancery, to publish a detailed proposal last month for corralling such cases in his court. But as the lawsuits over the New York Stock Exchange sale show, the biggest opposition to his proposal may come not from plaintiffs' attorneys but from other judges.
NYSE Euronext announced on Dec. 20 it had agreed to be bought by IntercontinentalExchange Inc for $8.2 billion. NYSE shareholders immediately sued, saying its directors had breached their duties by selling the company too cheaply.
The first lawsuit was filed by an individual investor in the Court of Chancery in Delaware, where NYSE is incorporated. Soon afterwards, a union pension fund filed a similar lawsuit in state court in New York, where the NYSE does business. Several more cases were soon filed in each court.
The cases, which seek class action status, are proceeding in parallel, in what is known as multiforum litigation, raising the possibility of duplicate discovery, depositions, hearings and legal costs.
PLEASE TELL ME IT'S NOT STRINE
While federal courts have procedures to prevent overlapping litigation, there is no easy way to coordinate state-level cases, and the two judges overseeing the cases have very different views of which case should take precedence.
Last month, Strine, who is hearing the Delaware case, co-authored a 104-page paper arguing that such cases should be in the court that specializes in the law governing the dispute.
For merger class actions, which are internal corporate disputes between directors and shareholders, that would generally be Delaware, which is home to about two-thirds of the largest U.S. corporations.
Strine argued that the "first-filed" system, which in many states gives precedence to the oldest lawsuit, just encourages hastily drafted complaints and a race to the courthouse by plaintiffs' attorneys.
On Jan. 10, the same day that Strine's paper was published by Harvard Law School, Justice Shirley Kornreich was holding a hearing to consolidate five class actions filed in New York over the NYSE sale.
According to a transcript, when she learned of the parallel cases in Delaware, she said: "Who - please tell me it's not Chancellor Strine who has the Delaware cases?"
In a subsequent interview with Reuters, Kornreich said that the court in the state of incorporation may be trumped by the court in the state with the actual operations, which she said has "an economic interest" in the litigation.
"As a matter of policy they are going to hold onto it," she said, referring to states where businesses operate. Kornreich said she was talking about parallel cases in general and not specifically about the NYSE cases.
AVOIDING A FOOD FIGHT
Kornreich acknowledged parallel cases are a problem, but she said it should be possible for two state courts to work side-by-side, issuing identical orders and coordinating discovery.
"What I think is, there shouldn't be a food fight. It demeans the court," she said.
Strine declined to comment. But in his paper, he said that judges in different states are often unable to work together. Some judges might find the class actions "intellectually and reputationally more rewarding than a more standard diet of routine civil or criminal cases," he wrote. He said a judge may also, out of loyalty, want to keep cases in the bar where they had practiced as attorneys.
Kornreich, who said she had not seen Strine's paper, bristled at the suggestion that other judges were to blame. "What is he doing, pointing the finger at another jurisdiction's judges and blaming them for this?" she asked.
Defendants often describe these cases as meritless, but they generally settle them quickly so they can move to close their deals. The settlements typically provide added information for investors and fees for the plaintiffs' attorneys, which average around $1.2 million according to Cornerstone Research.
The U.S. Chamber of Commerce, which has long pushed for limiting class actions, in a recent paper called the cases "extortion through litigation, plain and simple."
Plaintiffs' attorneys, however, say the cases serve as a kind of private regulation ensuring deals are fair, and lawsuits over the sales of Del Monte Foods and El Paso Corp unearthed significant conflicts.
One of the most notorious parallel class actions involved the sale of Topps Co. In that instance, in 2007, the New York cases were filed first, but Strine refused to stay lawsuits in Delaware. The New York judge, Herman Cahn, also refused to back down, leading to actively litigated parallel cases until a settlement was reached.
Cahn has since returned to private practice with the Milberg law firm and he is leading the NYSE cases before Kornreich in New York. At the Jan. 10 hearing, he offered support to Kornreich after she said her views differed from Strine's.
"Chancellor Strine seems to believe he covers the road," Cahn said, in what may be a reference to Strine's frequent admonition that other courts should "stick to their lane."
Cahn did not immediately respond to a request for a comment.
Strine has appointed attorneys from five law firms as co-lead counsel to direct the Delaware litigation, including Jeffrey Golan, of Barrack, Rodos & Bacine, who declined to comment.
The defendants, represented by Wachtell, Lipton, Rosen & Katz, have asked Kornreich to put her cases on hold in favor of the Delaware cases. While this tactic is aimed at reducing litigation, Strine said in his paper it is often useless if another judge is determined to hold onto a case.
Kornreich has not yet ruled on the motion.
At her hearing on Jan. 10, Kornreich said that she was going to hold off trying to coordinate with Strine because she did not want to "walk into the fire."
The Delaware cases are In Re: NYSE Euronext Shareholder Litigation, Delaware Court of Chancery, No. 8136
The New York case is NYSE Euronext Shareholders/ICE Litigation, Supreme Court of New York, County of New York, No. 654496/2012