May 12 Powerpoint

1. KURT M. HEYMAN
kheyman@proctorheyman.com
MELISSA N. DONIMIRSKI
mdonimirski@proctorheyman.com
PROCTOR HEYMAN LLP
WILMINGTON, DELAWARE

2.  A controlling shareholder (the “Controller”) of a company proposes a going private
transacOon by way of fully negoOated merger. On announcement of the proposed
merger, numerous stockholder lawsuits are filed challenging the fairness of the yet‐
to‐be negoOated merger.
 The board appoints an independent Special CommiUee to consider and negoOate the
merger with the Controller. Once the lawsuits are filed, plainOffs cease liOgaOon
acOvity and wait for the outcome of the Controller‐Special CommiUee negoOaOons.
 The Controller and Special CommiUee proceed to negoOate directly. They reach a
deal on price and agree to make the deal subject to seUlement of the outstanding
lawsuits. The Controller then presents this deal to the plainOffs as a “best and final
offer” for seUlement of the stockholder lawsuits. PlainOffs counter for majority of
the minority approval to which the Controller agrees. PlainOffs claim credit for the
pendency of the lawsuits leading to an improvement in the terms of the deal and are
rewarded with aUorneys’ fees, which are paid by the Controller.
* In re Cox Commc’ns, Inc. S’holder Litig., 879 A.2d 604 (Del. Ch. 2005) 1

3.  Why do defendants engage plainOffs in this Kabuki dance? Because
Kahn v. Lynch Commc’n, Inc. 638 A.2d 1110 (Del. 1994), sets forth a
standard requiring that all mergers with a controlling stockholder be
subject to enOre fairness review, which will not be dismissible on a Rule
12(b)(6) moOon, making it economically more logical to seUle rather
than liOgate a Kahn lawsuit.
 The seUlement obtained by the Kabuki dance also provides the
Controller with broad releases from any future liOgaOon relaOng to the
underlying transacOon, which is also “the most effecOve
discouragement of appraisal claims.” (879 A.2d at 631.)
 “The incenOves on both sides maximize the likelihood of seUlements
that result not from any case‐specific efforts by the plainOffs' lawyers,
but from the mutually livable outcomes generated when seUlements
are Oed to the financial results achieved by special commiUees.
Everyone gets happy…” (Cox, 879 A.2d at 633.)
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4.  Vice Chancellor Strine proposed to integrate the review standards of Kahn and the In
re Siliconix Inc. S’holders Li9g., 2001 WL 716787 (Del.Ch.) line of cases. The Siliconix
line of authority regulates a Controller’s aUempt to take a corporaOon private through
a tender offer and subsequent back end merger, but permits avoidance of enOre
fairness review if the tender offer is subject to approval by the minority shareholders
and the board is not involved in the tender.
 The proposed integrated standard would permit both Kahn and Siliconix going‐private
transacOons to avoid enOre fairness review if the transacOon is (i) negoOated by an
independent Special CommiUee and (ii) approved by the majority of the minority.
 Strine noted that the economics of the Kabuki dance make it irraOonal for defendants
to challenge Lynch through an appeal to the Delaware Supreme Court.
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5. Brinckerhoff v. Texas E. Prods. Pipeline Co., LLC, 986 A.2d 370 (Del. Ch. 2010)
 The Court applied a high level of scruOny when considering whether to approve a seUlement
that would resolve a Cox Communica9ons/Kahn going private transacOon in addiOon to
previous derivaOve liOgaOon that challenged certain insider transacOons.
 Concern over whether the seUlement consideraOon adequately valued the derivaOve claims
caused the Court to review the seUlement with “significant scruOny.” (986 A.2d at 386.)
AddiOonally, the Court requested a supplementaOon of the record to include the Special
CommiUee’s valuaOon materials in order to review how the Special CommiUee valued the
derivaOve claims (Brinckerhoff v. TEPPCO, C.A. No. 4548 (Del. Ch. Oct. 12, 2010) (Transcript at
39‐43)).
 “Due regard for the protecOve nature of the stockholders’ class acOon [and to which I would
add derivaOve acOons as well], requires the court, in these cases, to be suspicious, to exercise
such powers as it may possess to look imaginaOvely beneath the surface of events, which, in
most instances, will itself be well‐craned and unobjecOonable.” (986 A.2d at 374.) (quoOng
In re Fort Howard Corp. S’holders Li9g., 1988 WL 83147 (Del. Ch.))
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6. Brinckerhoff v. Texas E. Prods. Pipeline Co., LLC, 986 A.2d 370 (Del. Ch. 2010)
(continued)
 On the expanded record, the Court found that the Special CommiUee had used
the derivaOve claims “as an effecOve negoOaOon tool to increase the Merger
consideraOon and obtain a fair result.” (Id. at 395.)
 The Court reduced the aUorneys’ fees from $19.5 million to $10 million, finding
that:“In pursuing the DerivaOve AcOon, plainOffs’ counsel undertook real
conOngency risk. PlainOffs’ counsel did not take the case through trial, but did
engage in significant liOgaOon efforts, including extensive document discovery
and four deposiOons. Once the parOes shined into Cox Communica9ons mode,
the plainOffs’ risk was substanOally miOgated.” (Id. at 396.)
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7. In re Revlon, Inc. S’holders Li>g., 990 A.2d 940 (Del. Ch. 2010)
 The Court quesOoned the adequacy of class counsel where counsel agreed to seUle strong
claims for minimal consideraOon. The Court ulOmately replaced lead counsel.
 The case started out as a tradiOonal Cox Communica9ons case challenging a yet‐to‐be‐
negoOated merger with a controlling stockholder. The merger entailed an exchange of
unlisted preferred stock for publicly traded common stock. Following negoOaOons with the
Controller, however, the Special CommiUee determined that it could not recommend the
merger when its investment advisor refused to issue a fairness opinion.
 With no Special CommiUee recommendaOon, the controlling shareholder opted to launch a
tender offer on the same terms as the merger and with a majority of the minority condiOon.
The board authorized the tender offer but declined to recommend that shareholders tender.
In seUlement negoOaOons, the plainOffs obtained several addiOonal concessions respecOng
the form of consideraOon stockholders would receive.
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8. In re Revlon, Inc. S’holders Li>g., 990 A.2d 940 (Del. Ch. 2010) (con9nued)
 Less than a majority of the minority shareholders tendered and the controlling shareholder
renegoOated the tender to waive the majority of the minority tender condiOon and to eliminate
most of the concessions obtained by plainOffs. PlainOffs agreed to the terms of the revised
tender offer and endorsed the seUlement as reasonable and in the best interests of the
stockholders.
 AddiOonal shareholder lawsuits were filed, challenging the fairness of the final terms of the
revised tender offer and moving to consolidate all shareholder liOgaOon.
 The Court expressed skepOcism of the value to shareholders of seUlements that do not
significantly revise deal terms. “The resulOng system involves liUle real liOgaOon acOvity,
generates quesOonable benefits for class members, provides transacOon‐wide releases for
defendants, and offers a good living for the tradiOonal plainOffs’ bar.” (Id. at 959‐60.)
 In parOcular, the Court quesOoned plainOffs’ willingness to endorse as reasonable and in the best
interests of the shareholders a tender offer that the board had refused to recommend and
subsequently agree to waive most of the concessions they had obtained, apparently simply to
permit the seUlement to go forward. “If there were ever a test case for applying enOre fairness
review to a tender offer, this one would fit the bill.” (990 A.2d at 956.)
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9. In re Revlon, Inc. S’holders Li>g., 990 A.2d 940 (Del. Ch. 2010) (con9nued)
 The Court replaced lead counsel, ciOng concerns that “Old Counsel has acted only when
there was a dispute over control of the case and Old Counsel’s path to a fee.” (990 A.2d at
957.) The Court pointed to the lack of evidence that the old lead counsel had conducted
any meaningful assessment of the claims or invesOgaOon into the facts. Minimal discovery
was served but responses were never sought and old counsel acknowledged that, at the
Ome the seUlement was negoOated, they had only publicly available informaOon.
 The Court quesOoned the accuracy of statements in the MOU “which appear designed to
lead the Court to believe that Old Counsel played a ‘substanOal’ role in changes that seem
to have had very liUle to do with Old Counsel.” (Id. at 950.) The Court noted that it was
not apparent how plainOffs had determined the fairness of the transacOon, given that the
Special CommiUee’s advisors refused to issue a fairness opinion. The Court also
quesOoned the MOU’s asserOon that Old Counsel had “conducted substanOal factual and
legal research” noOng that, at a minimum, plainOffs had not used tradiOonal discovery
tools to obtain informaOon and that plainOffs had only publicly available informaOon at the
Ome the MOU was negoOated.
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10. In re Revlon, Inc. S’holders Li>g., 990 A.2d 940 (Del. Ch. 2010) (con9nued)
 The Court ordered the New Counsel to conduct confirmatory discovery and
evaluate the seUlement in preparing to present the seUlement to the Court.
Furthermore, the Court ordered invesOgaOon into Old Counsel, including what
acOons had been taken in negoOaOng the seUlement, the degree of factual
and legal invesOgaOon, the number of hours expended, the idenOty and
qualificaOons of the unnamed financial advisor and the basis for the
determinaOon that the seUlement was fair.
 Perhaps not surprisingly, the seUlement was ulOmately abandoned aner New
Counsel was appointed.
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11. Scully v. Nighthawk Radiology Holdings, Inc.,
C.A. No. 5890‐VCL (Del. Ch. Dec. 17, 2010) (Transcript)
 The Court ordered briefing for the purpose of invesOgaOng whether acOons taken
by the parOes to seUle in Arizona were intended to circumvent the oversight of the
Court, and if “collusive forum shopping” was the cause, what remedies are available
to the Court.
 Shareholder class claims were filed in both Delaware and Arizona challenging a
merger between Nighthawk and Virtual Radiologic Corp.
 During a preliminary injuncOon hearing, the Court refused to enter the PI but
indicated that it regarded the process claims as strong and the disclosure claims as
weak. No proceedings had yet occurred in Arizona.
 Following the hearing, the parOes negoOated a disclosure‐based seUlement of the
claims and informed the Court that the seUlement would be submiUed to the
Arizona court for approval.
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12.  Out of concern that the parOes were seeking to submit the seUlement to the Arizona
court based on the weak disclosure claims (as opposed to the strong process claims) in an
aUempt to avoid scruOny of a seUlement with no monetary value to the shareholders,
the Court ordered addiOonal briefing respecOng the sudden move to Arizona. The Court
also ordered briefing on what remedies are available to the Court if “collusive forum
shopping” had occurred.
 Finally, the Court appointed special counsel to represent the interests of the State of
Delaware in the briefing, and to evaluate harm caused to the State if “collusive forum
shopping” had taken place.
 Special Counsel Report
 The Special Counsel Report found that, while some acOons taken by the parOes gave rise
to suspicion, review of the negoOaOons revealed fairly typical arm’s‐length negoOaOons.
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13.  Special Counsel recommended a “best pracOce” of substanOvely involving Delaware
plainOffs’ counsel in negoOaOons to avoid the appearance of impropriety, given the
Court’s focus on representaOve seUlements. Special Counsel also recommended that
mulOjurisdicOonal parOes keep all Courts informed of proceedings in the others. Special
Counsel also noted that “much self‐policing among the bar has already occurred and will
conOnue to occur, supplemented by the conOnued careful consideraOon of seUlements
by this Court…”
 Following submission of the Special Counsel Report, the Court issued a leUer ruling that
the Court was saOsfied with the analysis of Special Counsel, that the Court had no
concerns about the conduct of any aUorney in the maUer, and that some of the Court’s
earlier statements unfairly cast defense counsel in a negaOve light. The Court stayed the
case pending compleOon of the Arizona liOgaOon.
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14. In re Del Monte Foods Company S’holders Li>g., 2010 WL 5550677 (Del. Ch.)
 The Court applied the so‐called Hirt factors in appoinOng lead counsel and lead plainOff of
class acOon shareholder liOgaOon.
 In considering lead counsel’s ability to provide effecOve representaOon, the Court considered
at length the quality of pleadings filed, counsel’s experience with class acOon shareholder
liOgaOon and associated track record.
 The Court was parOcularly interested in successes achieved by counsel’s efforts and the
reliability of counsel’s submissions to the Court. The Court was criOcal of law firms that
claimed credit for outcomes achieved in a Cox Communica9ons sesng and indicated that
such statements created doubt about other asserOons of success.
 In considering lead plainOff’s ability to represent the class, the Court considered the size of
the plainOff’s holding, the ability of the plainOff to provide oversight of counsel and whether
the plainOff could create unnecessary vulnerabiliOes in the class (one of the proposed lead
plainOffs did not clearly have standing).
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15.  Implica9ons for the Future
 The Court is taking seriously its fiduciary responsibility for the class.
 In lead counsel disputes, the Court will select the counsel it believes will best represent
the interests of the class. It will even remove and replace lead counsel for the class in
extreme cases.
 SeUlements will be closely scruOnized to determine whether the consideraOon is fair
and reasonable in exchange for the release of the claims involved. Such scruOny
involves valuaOon of the claims being released.
 The Court will consider carefully whether class counsel’s representaOon is vigorous and
the extent to which the outcome was a direct result of counsel’s efforts. AUorneys’ fees
will be cut where counsel did not create value for the class.
 If acOons taken by the parOes seem strange or unusual, the Court may invesOgate to
determine whether collusive or improper acOons may be the cause.
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16.  The role of Delaware Courts as fiduciary when managing class acOon liOgaOon has been long
established. There is really very liUle that is new about the recent decisions summarized herein.
The recent cases are best understood as a conOnuaOon of a tradiOonal role that exists for the
benefit of absent class members.
SeNlement
 “Because of the fiduciary character of a class acOon, the court must parOcipate in the
consummaOon of a seUlement to the extent of determining its intrinsic fairness.” Rome v. Archer,
197 A.2d 49, 53 (Del. 1964) [Patsy Cline era]
 “The court's funcOon is to consider the nature of the claim, the possible defenses thereto, the
legal and factual circumstances of the case, and then to apply its own business judgment in
deciding whether the seUlement is reasonable in light of these factors.” Polk v. Good, 507 A.2d
531, 535 (Del. 1986) [Heart was s9ll rocking]
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17.  “If, in the light of these maUers, the Court of Chancery approves the seUlement as reasonable
through the exercise of sound business judgment, its funcOon as the so‐called third party to the
seUlement has been discharged.” NoLngham Partners v. Dana, 564 A.2d 1089, 1102 (Del. 1989)
[Prince era]
Representa9on
 A plainOff who becomes a class representaOve assumes a fiduciary role with respect to the absent
class members. Tuckman v. Aerosonic Corp., 1980 WL 272833, *2 (Del. Ch.) [Ozzy Osbourne era]
 “The requirement of adequate representaOon also includes an element of adequate counsel for
the plainOffs.” In re Best Lock Corp. S’holder Li9g., 845 A.2d 1057, 1093 (Del. Ch. 2001) [The Ar9st
Formerly Known as Prince era]
Fees
 “Heightened judicial scruOny applies to the approval of fee applicaOons in class acOon seUlements
because once a fee peOOon is filed and the aUorney becomes a claimant against the fund created
for the benefit of the class, fiduciary responsibility for the class shins from the aUorney to the
trial court and the trial court has the duty to award fees with moderaOon and a jealous regard for
the rights of class members.” PaineWebber R & D Partners II, L.P. v. Centocor, Inc., 2000 WL
130632 (Del. Ch.) [Garth Brooks era]
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