After Settlement By Director Defendants Of Merger-Related Fiduciary Duty Breach Claims, Delaware Chancery Court Rejects Financial Advisor’s Bid To Invoke Settlement Consent Provision To Stay Trial On Aiding-And-Abetting Claims
On May 26, 2017, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery granted plaintiffs’ request to sever and stay fiduciary duty breach claims settled with directors of Good Technology Corporation (“Good”) and other defendants, notwithstanding the opposition of the sole remaining defendant, a financial advisor to Good, in connection with the acquisition of Good by BlackBerry Ltd. (“BlackBerry”), alleged to have aided and abetted those breaches. In re Good Tech. Corp. Stockholder Litig., C.A. No. 11580-VCL (Del. Ch. May 26, 2017) (Transcript). Stockholder plaintiffs reached agreement on preliminary settlement terms with defendants other than the financial advisor weeks before a scheduled trial and sought to sever and stay those settled claims. The financial advisor opposed the severance and sought a continuance of the trial, arguing that the settlement contravened the settlement consent and indemnification provisions in its engagement letter with Good—drafted in the wake of In re Rural Metro Corp., 88 A.3d 54 (Del. Ch. 2014)—intended to protect against just such an eventuality. Noting that neither plaintiffs nor the settling defendants were parties to the engagement letter, and concluding that the advisor could recover money damages were it subsequently determined that the provisions were breached, Vice Chancellor Laster granted the severance request, denied the continuance request, and ordered the claims against the financial advisor to proceed to trial as previously scheduled. Shortly thereafter, according to a transcript of a June 1, 2017 settlement conference, the advisor settled the claims against it for $35 million, to be funded pursuant to the indemnification agreement.
Plaintiffs, a purported class of former Good stockholders, brought breach of fiduciary duty and related claims against certain Good directors affiliated with venture capital firms invested in Good, the venture capital firms, company executives, and two directors who sat on the special committee, challenging the fairness of BlackBerry’s $425 million acquisition of Good, which closed on October 30, 2015. Plaintiffs alleged that defendants, motivated by their own economic self-interests, disloyally delayed an initial public offering (“IPO”) and ignored strategic acquisition proposals, ultimately forcing the company into a transaction that yielded little value to common stockholders. Plaintiffs also asserted aiding-and-abetting claims against Good’s financial advisor, claiming that the advisor steered Good to an underpriced merger with BlackBerry to cultivate a future relationship with BlackBerry and profit from the higher fees associated with advising on a merger, as opposed to an IPO.
Approximately two weeks before trial was scheduled to commence, plaintiffs reached a preliminary settlement agreement for $17 million with defendants other than the financial advisor. Plaintiffs requested that the Court sever and stay the settled claims, so that the settlement could be finalized while the remaining claims against the financial advisor proceed to trial. The financial advisor opposed the severance request and also sought a continuance of the trial in order to pursue its claims for indemnification and settlement consent rights under its engagement letter with Good in a New York court pursuant to the forum selection provision. Specifically, the financial advisor asserted that, in addition to indemnification for specified claims in connection with its engagement, the agreement prohibited Good from settling various related claims in the absence of an unconditional release, or the consent, of the financial advisor. The financial advisor emphasized that the purpose of the settlement consent provision was to protect the advisor from facing the untenable position of being excluded from settlement negotiations that resolve all of the primary liability claims and leave the advisor as the proverbial “last defendant standing” in a stockholder suit.
In a ruling from the bench, the Court granted plaintiffs’ request to sever and stay the settled claims “pending consideration of a full settlement” and declined to grant the continuance, instead ordering the trial to proceed on the aiding-and-abetting claims against the financial advisor as previously scheduled. The Court explained that the consent provision “runs versus Good and its successor BlackBerry,” and neither plaintiffs nor the settling defendants are parties to that agreement. The Court noted that it was difficult to view the consent right as so broad that it forecloses the right of nonparties to the agreement to settle and places a “hard stop” on a scheduled trial. The Court added that it was unnecessary to delay the scheduled trial in favor of litigation over indemnification and settlement consent rights because those breach-of-contract claims are remediable with monetary damages.
Companies and financial advisors should continue to consider the relevant provisions of their engagement letters in light of this decision in Good Tech as this area continues to evolve. Clear and enforceable settlement consent provisions can benefit both by limiting plaintiffs’ ability to create greater settlement leverage through competing settlement negotiations and potentially reducing the overall payout by the company (and its insurers) to resolve stockholder suits.