The Delaware bench and corporate bar have a conflicted attitude toward the shareholder litigation that now follows the announcement of almost every merger. Despite skepticism of the lawyers who bring the suits, many in the Delaware establishment want to retain a high market share of litigation involving Delaware companies. Plaintiffs' lawyers have their own motivations. Some practice primarily in Delaware, while others believe they receive a better reception -- and higher fees -- from judges in other jurisdictions.
The variety of actors and incentives means that shareholder litigation, once a stronghold of the Delaware Court of Chancery, occurs in state courts all over the country.
That becomes a serious problem when different law firms bring cases arising from the same deal in different state courts, since there's no standard procedure for the judges hearing the cases to consolidate them in one jurisdiction, as is done in federal courts.
Vice Chancellor J. Travis Laster has focused on the issue in several cases over the past year. In shareholder litigation arising from Compellent Inc.'s $960 million agreement to sell to Dell Inc., Laster said that Delaware courts have a "comparative advantage" in resolving disputes involving corporate law because of their expertise in the area. Compellent was incorporated in Delaware but based in Minnesota, yet there was litigation over the Dell deal in both jurisdictions.
In a case involving the $170 million sale of NightHawk Radiology Holdings Inc. to Virtual Radiologic Corp., Laster asked Gregory Williams, a partner at Richards, Layton & Finger PA in Wilmington who wasn't otherwise involved, to file a special report with the court on multijurisdictional shareholder litigation. Williams noted that the problem is inherent in a federal system and judges can't do much to police it.
Chancellor William B. Chandler III proposed his own, ad hoc solution on March 29 in a footnote to his 23-page opinion in a suit brought by Allion Healthcare Inc. shareholders who challenged the company's sale to H.I.G. Capital LLC. The case required Chandler to divide $1 million in fees between plaintiffs' firms that pursued a case in Delaware and those that sued in New York. The judge gave $875,000 to the Delaware firms and only $125,000 to the New Yorkers, who opposed the Delaware settlement on its merits and then requested a fee for it.
But Chandler didn't just lampoon the absurdity of a fee fight. Instead, he outlined his "personal preferred approach, for what it's worth." In Chandler's world, defense counsel would "file motions in both (or however many) jurisdictions where plaintiffs have filed suit, explicitly asking the judges in each jurisdiction to confer with one another and agree upon where the case should go forward." As he recognized, "[j]udges in different jurisdictions might not always find common ground on how to move the litigation forward. Nevertheless, this would be, I think, one (if not the most) efficient and pragmatic method to deal with this increasing problem. It is a method that has worked for me in every instance when it was tried."
Chandler's stance is less assertive than Laster's argument for Delaware's primacy in corporate cases involving an entity incorporated in the state, and thus may be more apt to allow state court judges to avoid duplicative litigation. Three lawyers not involved in the Allion case say the chancellor's method usually works. Defense lawyers are often indifferent to the venue chosen; they just want a single venue, which allows them to reach a global settlement with all plaintiffs in a case more easily.
Nevertheless, Chandler's proposal isn't a cure-all. As Laster has noted, plaintiffs' lawyers have a strong desire to control a case, which allows them to extract more fees -- and which leads them to sue in different forums. Defense lawyers may on occasion have an equally strong desire to avoid certain jurisdictions or individual judges. And judges themselves are not immune from the desire to control a case because it involves an important point of law or a key local company.
Despite those limitations, Chandler's proposal may be the most practical solution yet offered in the debate over multiforum shareholder litigation.
David Marcus is senior writer at Corporate Control Alert.