As class-action litigation has become a more prominent part of the Delaware Court of Chancery's docket, judges have put more effort into monitoring the lawyers who bring such suits. In both the class action and its cousin, the derivative suit, the interests of the lawyers who represent the plaintiffs may diverge from those of the plaintiffs themselves. Lawyers can settle a case quickly for modest compensation but still recoup a fee that compensates them amply for the time they've spent on a case.
Delaware law allows judges to mitigate this tension in two ways. At the start of a case, they pick a lead plaintiff -- in practice, a lead lawyer -- who will pursue the matter vigorously, and they must approve the settlements with which virtually all M&A-related shareholder litigation concludes.
No member of the Court of Chancery has been more aggressive in overseeing the plaintiffs' bar than Vice Chancellor J. Travis Laster. A 17-page decision he issued in May suggests how deeply and creatively he has thought about the issue. In Forsythe v. ESC Fund Management Co., he employed a version of a method that was much discussed in the 1990s to resolve a case in which a large group of plaintiffs objected to a settlement to which two of them had initially agreed. The lawyers who represented the two original plaintiffs continued to support the $13.25 million settlement, which included $3 million in attorneys' fees.
In a 1991 law review article, Jonathan Macey of Yale Law School and Geoffrey Miller of New York University School of Law proposed that courts resolve the tension between plaintiffs and their lawyers in representative actions by auctioning the claims to the highest bidder and distributing the proceeds to the class. If the highest bid came from the defendant, the case would be dismissed; otherwise, the winning bidder would assume the rights of the plaintiff, pursue the litigation and keep whatever it recovered.
A few federal judges experimented with the model, and the approach occasioned a fair amount of debate. But it proved to be unworkable, since it raised the possibility of corrupt bidding and did not eliminate incentives for plaintiffs' lawyers to pursue baseless claims.
Laster cited the Macey-Miller article in his decision, but he gave his own twist to their proposal. In the case before the judge, two investors in a fund formed by the Canadian Imperial Bank of Commerce in 1999 to allow employees to invest with the bank in private equity deals filed a derivative suit against the fund for alleged violations of fiduciary duty. (A derivative suit is one brought by a shareholder on behalf of the corporate entity.) The case was originally before then-Vice Chancellor Stephen Lamb, who handed it off to Laster when he stepped down from the bench in 2009 but mediated a settlement in March 2011. CIBC and the other defendants agreed to pay the fund $10.25 million and to forgo $3 million in claims for indemnification.
The two named plaintiffs in the case agreed to the settlement but had second thoughts, Laster wrote, and one of them tried to meet with a group of objectors to the settlement who had hired counsel. "Purportedly to protect the attorney-client privilege, plaintiffs' counsel blocked the meeting," Laster wrote. The judge allowed the meeting to occur, and the named plaintiffs joined the objectors, who stood between the original plaintiffs' lawyers and their fee.
The settlement fell at the low end of "a range of reasonableness," Laster wrote in the opinion, but he said he would approve it unless the objectors post a secured bond or letter of credit for the benefit of the fund for $13.25 million within 60 days. In that event, the objectors may take over the case. If they lose or obtain less than $13.25 million, the fund will be able to draw on the security.
"Laster is essentially telling the plaintiffs to put their money where their mouth is," says Jill Fisch, a professor at the University of Pennsylvania School of Law. "This is a much narrower use of auctions than proposed by Macey and Miller, and it largely resolves the problem of how you value the settlement because the existing proposed settlement provides a benchmark and the court has already done a preliminary assessment of its fairness."
Lawyers not involved in the case say that it's unlikely Laster or another judge would rely on the gambit often, since it would be hard to use in cases with nonmonetary damages. But the Forsythe decision shows how attuned Laster is to economic motives and how deeply he has immersed himself in corporate law scholarship.
David Marcus covers legal matters for The Deal magazine.