As Matthew Tuccillo reports in the May/June issue of the Pomerantz Monitor, corporate transactions are typically challenged by shareholders in multiple jurisdictions. Courts will sometimes stay duplicative cases, so that defendants do not have to fight the same claims in different places at the same time, and subject themselves to duplicative proceedings and possibly inconsistent rulings. When a stay is not entered, it can lead to problems, particularly when defendants try to settle one case without involving counsel from the other(s). That is because any settlement will include a release dismissing all pending cases raising the same claims, whether the other plaintiffs like it or not.
That is exactly what happened recently in two cases involving claims that the directors of Bank of America (“B of A”) breached their fiduciary duties in 2008 in connection with the $50 billion acquisition of Merrill Lynch (“Merrill”). This notorious transaction led to many lawsuits, because B of A’s board proceeded with the deal even after allegedly learning before the merger closed that Merrill had suffered catastrophic losses and that Merrill was paying huge bonuses to management. Not only did B of A’s board fail to abort the deal, they also allegedly misled B of A shareholders about those facts before they voted to approve the merger.
Two derivative actions pursued those claims, one in New York federal court and the other in Delaware state court. Although the Delaware case had been far more heavily litigated, with more discovery, more motion practice, and an October 2012 trial date set, defendants chose to settle the claims with New York counsel. This decision prompted Delaware counsel to challenge the settlement, claiming that defendants had engaged in an improper “reverse auction” to settle far more cheaply than they could have in Delaware.
The proposed settlement of the New York action, reached on April 12, 2011, provided for a payment of $20 million in damages, all of which was to come from B of A’s insurance coverage. Delaware counsel had demanded far more, including that the defendant directors pay some of the damages out of their own pockets, given that potential damages were alleged to be $5 billion and that the Securities and Exchange Commission had previously imposed a $150 million penalty (after the court rejected a $33 million settlement) regarding the adequacy of disclosures concerning the Merrill deal.
In order to recover anything from directors, however, plaintiffs would have had to overcome their “raincoat” legal protections, which bar the recovery of damages from them unless they are guilty of intentional wrongdoing. Moreover, counsel’s submissions to the New York court have been redacted to remove discussion of applicable insurance coverage. So, it is not self-evident to non-parties exactly how much this case is really worth, given the likelihood of recovery from available sources.
Both courts refused to enjoin the settlement. On May 4, 2012, Chancellor Strine denied the preliminary injunction motion filed in Delaware, stating that he found no irreparable harm where arguments against the settlement can be pursued in the federal courts (trial and appellate) in New York. However, he did make clear that if the settlement is not approved in New York, his October 2012 trial date will stand firm. On May 14, 2012, Judge Castel in New York denied Delaware counsel’s motion as well, stating that their arguments can best be presented during the upcoming settlement fairness hearing.
The settlement approval process will undoubtedly be contentious and may give rise to an important decision on the adequacy of settlements reached under these circumstances.
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