Class Action Settlements in Deal Litigation - Propriety of Court’s Consideration of Fairness of Sett
Class actions present an agency problem between class representatives/attorneys and the class members. The representatives’ interests might compete with those of the absent class members, and so the former may bind the latter to a litigation process or outcome which favors the representatives and jeopardizes the interests of the class. Vice Chancellor Glasscock of the Court of Chancery of Delaware explained the agency problem that bedevils class action settlements in a deal litigation as follows: “settlements in class actions present a well-known agency problem: A plaintiff's attorney may favor a quick settlement where the additional effort required to fully develop valuable claims on behalf of the class may not generate an additional fee as lucrative to the plaintiff's attorney as accepting a quick and moderate fee, then pursuing other interests”. In re Riverbed Tech. Inc. Shareholders Litig., No. 10484-VCG, 2015 Lexis 241, at *9-10 (Del. Ch. Sept. 17, 2015).
The law puts up three structural safeguards to mitigate the problem and ensure the protection of the class. First, Rule 23(2)(A) of the Rules of the Court of Chancery of the State of Delaware, which is mutatis mutandis with the Federal Rules of Civil Procedure, mandates the court to direct notice of a class action to all class members so that a class member who does not want to be part of the suit can opt-out. Second, Rule 23(a)(4) stipulates that the representatives of the class must undertake to fairly and adequately protect the interests of the class. Third, Rule 23(e) provides that the court must direct notice of a proposed settlement to the class so that any member who has an objection thereto may be heard in respect thereof. For example, in a class action seeking an injunction against a merger deal, Rule 23(e) may allow a class member to object to a proposed disclosure settlement on the ground that the additional disclosure is not material as to justify the settlement.
The recent opinions of Vice Chancellor Glasscock and Chancellor Bouchard in the cases of In re Riverbed and In re Trulia, Inc. Stockholder Litig., 129 A.3d 884 (Del. Ch. 2016) project the stance that a court can, in the absence of an objection from a class member, take it upon itself to consider the reasonableness or fairness of a proposed settlement and reject the same if it finds otherwise. I, respectfully disagree with the posture. The letters and intent of Rule 23 (e) is abundantly clear. The Rule empowers the court to adjudicate over objections lodged against a proposed settlement. It does not, by any stretch of the imagination, empower the court to assume the role of a disgruntled class member and lodge its own objection regarding the value of a settlement and then adjudicate over the same. In the absence of an objection, the court can only, at best, satisfy itself that the settlement was not obtained by fraud or fraught with any other vitiating elements of an agreement.
The responsibility of the class representative to represent the class fairly and adequately should not become actionable until and unless a class member lodges a complaint of breach of the undertaking in the form of an objection to a proposed settlement. Indeed, this underlies the purpose of Rule 23(e): allowing a class member who thinks the class representatives have agreed to a settlement which does not fairly represent their interest to come forward to complain and have the court examine the settlement. Only upon such a complaint should the court undertake an evaluation of fairness. Undoubtedly, the class representatives and plaintiff’s lawyer have a fiduciary duty to the absent class members. However, no questions or claims can arise regarding the duty as to justify the court’s determination of the fairness of the “give” and the “get” of a settlement unless and until the person to whom the duty is owed expresses a reservation and requests the court to make such a determination.
Vice Chancellor Glasscock explains that “members of the class, who are the potential losers if the settlement is improvidently approved, may, like the class representative, have but a small stake in the outcome; they may not have sufficient incentive to make appearance and objection worthwhile.” Respectfully, I do not find this convincing as to justify the court’s undue interference with a settlement process. The small stake of a shareholder cannot be a legitimate handicap. The class action itself is a product of aggregated claims. In the same manner, all the class members who consider that a proposed settlement is unfair to their interest can collaborate to prosecute an objection. In negotiating an improved settlement, they can then request that their attorney’s fees be settled by the defendant alongside those of the plaintiff’s attorney. Gone are the days when a claim or an objection to a proposed settlement should suffered a handicap because of a fractional share of the litigation outcome.
Chancellor Bouchard further expressed the concern that once a settlement is reached, the litigation process becomes non-adversarial as between the representing class members and the defendant. He said that, consequently, the court must play the devil’s advocate in the interest of the absent class members. Again, I respectfully disagree. The traditional and statutory role of the court is to act as an unbiased umpire between disputing parties but never to adjudicate where a dispute does not exist. The three safeguards discussed above, and particularly the third, afford an absent class member ample opportunity to object to the terms of a proposed settlement and he suffers no handicap in doing so. I am unable to reconcile to the thinking that the court must, in the name of protecting an absent class member, constitute itself an unsolicited advocate of the absent class members who has no objection whatsoever to a proposed settlement. Interestingly, 99.15% of the votes cast by Trulia stockholders were in favor of the transaction. The overwhelming stockholders’ approval for the transaction leaves one to wonder whether “playing the devil’s advocate” as espoused by Chancellor Bouchard serves the interest of the stockholders which it purportedly sought to advance. The voting outcome compels the thought that the court acting as “devil’s advocate” may be doing harm rather than good to the class. The clear indication in the Trulia case is that the stockholders were happy to consummate the transaction, having regard to their overwhelming votes; it is unfair for the court to scuttle their investment objectives under the guise of protecting them. It must be reiterated that the court should not be presumed to have insight into the minds of absent class members, and cannot, therefore, assert itself in their defense without an express request to do so.
Richard Somade received his Bachelor of Laws from Olabisi Onabanjo University and is admitted to the Nigerian Bar. He is currently enrolled in NYU’s Traditional LL.M. Program where he is focusing his studies on Corporate Law, Governance, Compliance & Risk Management. Prior to commencing his post-graduate studies at NYU, he had brief stints in three commercial-focused law firms in Nigeria and also headed the Legal & Compliance Department of a leading financial institution.