In the recent decision of Ehlen v. Conceptus, Inc., C.A. No. 8560-VCG (Del. Ch. May 24, 2013), the Court of Chancery ruled on a motion to expedite filed by Plaintiff Ehlen, in connection with his request to preliminarily enjoin a merger. Through the Complaint, Plaintiff alleged that the Conceptus directors breached their fiduciary duties of care, loyalty, and candor in approving a merger and in filing the accompanying 14D-9 with the SEC. The Complaint alleges three types of claims: a Revlon claim, a challenge to the merger agreement’s package of deal protections, and numerous disclosure claims.

Analysis

The Court recited the standard of review for a motion to expedite, stating that the plaintiff has the burden of demonstrating that good cause exists to “justify imposing on the defendants and the public the extra (and sometimes substantial) costs of an expedited preliminary injunction proceeding.” The Court further explained that a plaintiff meets this burden if he is able to demonstrate “a sufficient possibility of threatened irreparable injury” and a “colorable claim.”

In denying Ehlen’s motion to expedite, the Court found that Ehlen failed to state a colorable claim and improperly delayed in filing his motion.  While Ehlen initially asserted numerous causes of action through the Complaint, between the filing of the Complaint and the motion to expedite (8 days), Plaintiff determined that only the disclosure counts were colorable, and therefore only advocated those counts before the Court at the hearing on the motion to expedite. 

The Court was not persuaded by Ehlen’s disclosure claims in connection with the merger.  In analyzing the claims, the Court reiterated that Delaware directors have a duty of candor, under which they must fully and adequately disclose all material information to stockholders when seeking stockholder action.  Under Delaware law, an omitted fact is material “if a reasonable stockholder would consider it important in a decision pertaining to his or her stock.”  The Court determined that each of Ehlen’s disclosure claims were not colorable, and therefore denied the motion to expedite.

Of significance, the Court also found that Plaintiff’s 8 day delay in filing his motion to expedite after filing the Complaint added to Plaintiff’s burden in demonstrating the necessity in expediting the proceedings.  The Court found that with only three weeks before the filing of the Complaint and the closing of the merger, an eight day delay is significant.  The Court went on to state that while it did not deny the motion based on this delay, it added to the burden of expedition, an added burden created by the Plaintiff which he must overcome through the strength of his allegations of wrongdoing.

Conclusion

This decision demonstrates the importance of immediately seeking a motion to expedite a proceeding.  Here, the Court found that Plaintiff’s 8 day delay was significant given the timing of the closing of the merger, and that such delay added to Plaintiff’s burden in seeking expedited consideration of the lawsuit.  Accordingly, a plaintiff should take all steps necessary to file a motion to expedite contemporaneously with its complaint.

In the case of In re: Paetec Holding Corp. Shareholders Litigation, C.A. No. 6771-VCG (Del. Ch. Mar. 19, 2013), the Court of Chancery awarded attorneys’ fees in the amount of $500,000 in connection with a settlement of a challenge to a merger resulting in additional disclosures prior to the closing of such deal.

Of note, the Court made clear that despite the fact that the fee request was unopposed, the Court still must engage in close judicial scrutiny of the requested fees.  The Court reviewed the fee request under the “common benefit” doctrine, and determined that fees were warranted in this situation.  Specifically, the Court indicated that the standard by which it examines the appropriate amount of attorneys’ fees was set forth by the Delaware Supreme Court in Sugarland Industries, Inc. v. Thomas, 420 A.2d 142 (Del. 1980). The relevant factors are:

(i) the amount of time and effort applied to the case by counsel for the plaintiffs; (ii) the relative complexities of the litigation; (iii) the standing and ability of petitioning counsel; (iv) the contingent nature of the litigation; (v) the stage at which the litigation ended; (vi) whether the plaintiff can rightly receive all the credit for the benefit conferred or only a portion thereof; and (vii) the size of the benefit conferred.

The Court found that the Sugarland factors weighed in favor of the request for attorneys’ fees.  The settlement produced a single supplemental material disclosure, and was obtained by competent counsel.  Accordingly, the request for fees was approved.

On January 10, 2012, in the case of In Re Appraisal of the Aristotle Corporation, the Delaware Court of Chancery addressed an issue of first impression with respect to the standing of stockholders, who dissented to a short form merger under Section 253 of the Delaware General Corporation Law (“DGCL”) and perfected their appraisal rights, to bring an additional claim alleging that the directors breached their fiduciary duty to disclose the material facts necessary for the stockholders to determine whether to seek appraisal.

In connection with a short form merger, the petitioners filed an appraisal action under Section 262 of the DGCL seeking the fair value of their shares. Despite the fact that the appraisal action was pending, on the eve of trial and eighteen months into their appraisal case, the petitioners filed a separate complaint for breach of fiduciary duty of disclosure in connection with the merger seeking the difference between the fair value of their shares and the price of the merger.  The defendants moved to dismiss the fiduciary complaint for lack of standing.

Because there were no prior cases that squarely addressed this issue, the Court relied on its prior decision of Andra v. Blount, 772 A.2d 183 (Del. Ch. 2000) by analogy.  There, the Court was faced with an action for breach of the duty of disclosure in connection with a tender offer, which culminated in a cash out of remaining shareholders through a short form merger.  The plaintiff initially moved for expedited proceedings to enjoin the consummation of the tender offer until corrective disclosures were issued.  Thereafter, the plaintiff withdrew her request to enjoin the tender offer and instead waited to bring a post-closing action for money damages in the form of an appraisal proceeding.  After the short form merger was consummated, in which plaintiff refused to accept the merger consideration and preserved her appraisal rights, plaintiff renewed her fiduciary duty challenge to the disclosures.  The Court ruled that plaintiff did not have standing to pursue her disclosure claim because she did not tender her shares and thus, could not have been injured by the allegedly misleading disclosures.

Importantly, the Andra Court noted that a different result might have been obtained if the plaintiff had timely sought to enjoin her disclosure claim before her decision to tender.  This would have given the Court an opportunity to order corrective disclosures, a remedy that would inure to the benefit of all the stockholders contemplating the decision to tender.  The Court refused to look at the potential injury to the other shareholders because the plaintiff withdrew her injunction motion through which she could have sought to demonstrate collective injury to other investors. Instead, plaintiff chose to press her disclosure claim only after the merger closed. As a result, the Court held plaintiff to the traditional standing requirement that she show individual injury as a result of the misleading disclosures—a burden plaintiff could not satisfy, because she chose not to tender.

“When a litigant files a new claim that, if proven, would not entitle it to any relief that it does not already have a right to receive, that litigant in my view has no proper standing.”

Relying on the reasoning in Andra, the Chancellor in the instant case ruled that the petitioners did not have standing to pursue their disclosure claim because the petitioners never sought to represent other investors, did not promptly seek to enjoin the merger and thus, did not suffer any cognizable individual injury that could be redressed by the Court of Chancery. The Court further found this to be particularly true because the relief sought in the fiduciary duty action is the same as the exclusive remedy afforded in a Section 262 appraisal action—a fair value determination.

The Chancellor reasoned that “when a litigant files a new claim that, if proven, would not entitle it to any relief that it does not already have a right to receive, that litigant in my view has no proper standing.”  In other words, the alleged disclosure inadequacies did not in any way impair the petitioners’ ability to seek appraisal, and addressing the fiduciary duty claim could at best result in the petitioners’ “right to a ‘quasi’ version of something they already possess in its actual form.”  Such a moot court determination, according the Chancellor, would result in an advisory opinion, against which the Delaware Supreme Court has warned.

The Court further found that there was no need to evaluate the possibility of nominal damages in connection with the fiduciary duty action, because the petitioners’ voting interests were not harmed, and they will receive a fair value determination in connection with the appraisal action.

This case is important to shareholders who seek appraisal in connection with a short form merger but also choose to bring a subsequent action for breach of the duty of disclosure in connection with merger.  If the stockholder refuses to tender in connection with the short form merger, thereby preserving their appraisal rights, but fails to seek an injunction of the merger, he will not be able to demonstrate cognizable injury to bring a fiduciary action for breach of the directors’ duty of disclosure after the closing of the short form merger transaction.