Friday, May 11, 2012
In the recently decided Forsythe v ESC Fund Management, Vice Chancellor Laster approved an innovative settlement. The innovation entails the way in which he managed the 57 objectors to the settlement. By his own reckoning the settlement offered was fair, though low. Rather than approve the settlement straight up, VC Laster gave the objectors the option to post a bond, buy the settlement, and try their own hand at improving it:
Passing on the current settlement to seek more at trial carries substantial risk. The defendants have offered real money to settle the claims, and any future recovery could be substantially less favorable to the Fund, even nonexistent. Because the consideration falls within the range of fairness, I will approve the settlement unless the objectors make the equivalent of a topping bid. If they post a secured bond or letter of credit for the benefit of the Fund for the full settlement consideration of $13.25 million, then they may take over the case. If they later lose or obtain less than the full settlement amount, the Fund will be able to draw on the security and be made whole. If the objectors achieve a greater recovery, then both they and the Fund will benefit.
In approving this topping bid approach, VC Laster took some inspiration from a version of claim buying previously proposed by Jonathan Macey and Geoff Miller's. As VC Laster noted:
This approach draws on proposals to address agency cost problems in representative actions by auctioning claims. In one such proposal, the class or derivative claims would be sold at the outset of the case to the highest bidder (including potentially the defendants), and the net proceeds of the auction would be distributed to the class. The winning bidder would take over the rights of the plaintiffs, could pursue the action, and would keep any recovery for itself. If the defendants were to win the auction, they would simply dismiss the claims. ...
By settling, the defendants effectively are purchasing the claims for $13.25 million. If the objectors believe the claims are worth more, they can act on their belief, put real money on the table, and outbid the defendants. Compared to an auction conducted at the outset of a case, the objectors are well-positioned to make an informed decision. At the start of a case, participants have only limited additional information. Here, the parties have access to a thoroughly developed discovery record and multiple decisions from the Court.
For observers of the court who are interested in shareholder litigation and other kinds of representative litigation, this kind of approach to settlements is an innovative way to beat agency costs out of the system. It will be worth following whether the objectors in this case ultimately post a bond and take over this case and what result they get in the end.