Scully v. Nighthawk Radiology Holdings, Inc.,
No. 5890-VCL (Mar. 11, 2011)(Report of Special Counsel). This Report
concluded that there was neither forum shopping nor collusive behavior in the
settlement of a class action related to the $170 million merger of Nighthawk
Radiology and Virtual Radiologic Corporation.
Issues Addressed (as quoted from the Special
1. Is forum-shopping for purposes of securing an
advantageous settlement a wrong under existing law, taking into account Prezant
v. De Angelis, 636 A.2d 915 (Del. 1994), and other authorities? What is (or
should be) the standard for determining when a settlement is collusive?
2. What role, if any, should the disfavored forum (here,
the Court of Chancery) have when it receives notice of what appears to be a
3. My principal concern has been that, given the manner
in which representative action settlements typically are presented, the court
in the favored forum (here, the Arizona Superior Court) would not have reason
to learn about (i) forum shopping efforts or (ii) prior adverse rulings or
commentary by the court in the disfavored forum. Is this concern valid and, if
so, how should it be addressed?
4. Lawyers are the repeat players in the
multi-jurisdictional litigation process. What remedy, if any, should there be
if counsel is found to have engaged in a collusive settlement? Should the pro
hac vice status of forwarding counsel be revoked? Should the revocation go
beyond the civil action relating to the collusive settlement? If Delaware
counsel participates in a collusive settlement, what action should be taken?
5. How should the answers to the foregoing questions be
applied to the facts
of this case?
The Delaware Court of Chancery appointed a Special
Counsel to address the above issues "from the point of view of Delaware
and the public interest". If not sui generis, the appointment
of a Special Counsel in this context is unusual for corporate litigation in
Delaware, and may be compared in the world of corporate law, in an
academic sense, with the unfortunate tremors experienced in Japan a few
days ago. The genesis of the Special Counsel's decision was a status
conference in December, held in the Court of Chancery in connection
with the approval of a class action lawsuit in Arizona. The status
conference was memorialized in a transcript ruling here.
The class action involved in this matter related to the merger of Nighthawk
Radiology and Virtual Radiologic Corp. The Court of Chancery raised issues sua
sponte about a possible "reverse auction" and the exploitation of
several cases pending in multiple forums (or fora). The Court of Chancery was
concerned about whether a settlement reached in a related Arizona case was
intended to avoid the scrutiny of the Delaware Court and if there was pressure
for the Delaware counsel to join the Arizona settlement or "lose out on
The Special Counsel's Report (the
The Special Counsel appointed by the Court of Chancery in
this matter was the highly-regarded veteran corporate litigator Gregory P. Williams of
Richards Layton and Finger in Wilmington. The Report was filed with the
Court two days ago in the form of a "Brief of Special Counsel"
authored by the Special Counsel and Richards Layton associate Blake Rohrbacher. Their
42-page magnum opus is available here.
Likely to be as widely read as a major decision from the court, it
includes a reference to many transcript rulings from the Court of Chancery in
recent cases. Transcript rulings are often cited in briefs to the Court of
Chancery in corporate litigation. An index to the voluminous Compendium of
transcript rulings referred to in the brief is available here, and
the actual Compendium of transcript rulings (weighing in a 627-pages) is
Short Overview of the Special Counsel's
The AmLaw Daily
blog has a short post that provides a brief synopsis of the Special
Counsel's brief, which we refer to as the Report, here.
According to The AmLaw Daily, the stakes involved in the outcome
of the Report included at least one lawyer's continuing ability to
"litigate in the country's most important business court" as well as
"the rules and guidelines for plaintiffs' and defense lawyers litigating a
swell of merger-related class actions." This momentous Report could easily
stimulate a long commentary the length of a typical law review article, but the
goal here is much more modest. I will attempt merely to highlight a few of the
key aspects of the Report and encourage readers to make time to read the entire
document linked above. It is truly "must reading" for anyone interested
in the latest developments in Delaware law on this topic.
The Special Counsel describes the three-part background
of the Report, before he addresses the issues listed above, as follows:
First the brief discusses forum-shopping in the context
of multi-jurisdictional class actions, including the "reverse auction"
phenomenon, in which plaintiffs' counsel are said to underbid each other to
settle with defendants and secure higher attorneys' fees. Next, the brief
discusses the effects of the "settlement class" procedure, in which the Court
does not certify a class until the settlement is approved. Then, the brief
addresses the Court's review of settlements, particularly those involving
issues of potential collusion.
Regarding the topic of forum-shopping in the context of
multi-jurisdictional class actions, the Report quotes from a recent Chancery
transcript ruling as follows:
"Plaintiffs gain some leverage by filing deal
litigation in multiple courts. As this Court has recognized, plaintiffs'
lawyers may choose multiple forums to gain advantage in the contest for lead
counsel status; they also do so to force defendants to engage with their
individual suits.See, e.g., In re Compellent Techs., Inc. S'holder Litig.,
C.A. No. 6084-VCL, at 20 (Del. Ch. Jan. 13, 2011) (TRANSCRIPT) ("[W]hen
everybody is filing in the same forum, you're not guaranteed to get control of
a case. But if you then go and file in another forum, you do have control of
that case and then the defendants have to deal with you. You may get control of
the entire action but, at a minimum, you get control of a piece of the
litigation for purposes of the fee negotiations.")." Report at 2.
The Report also cites to the duty of an attorney to
zealously represent her client as required by the Rules of Professional
Conduct, as a consideration in determining the best forum in which to file
suit. See also Delaware Principles of Professionalism at A(4).
Related to the discussion of forum-shopping in corporate
litigation, is the increased attention given by scholars and practitioners
to non-Delaware courts deciding issues of Delaware law--perhaps due to the
aversion that some plaintiffs may have to the greater scrutiny they might find
in Delaware. See, e.g., Professor Larry Ribstein's discussion of
this topic and the related issue of jurisdictional competition,
available here. See
also the discussion available here,
of a related article by Professors John Armour, Bernard Black and Brian
Cheffins. Also notable is the analysis by Professor Joseph Grundfest here
and Professor Stephen Bainbridge's discussion here
of a somewhat related issue of "choice of forum provisions" in
bylaws and corporate charters. See also the draft article by Professor
Brian Quinn here about
plaintiffs bringing Delaware-law based claims in non-Delaware courts.
The Special Counsel concludes that: "...
forum-shopping for purposes of securing an advantageous settlement is not an
independent wrong under existing Delaware law. That is, such forum-shopping
should not be equated with a collusive settlement".
After a review of the leading commentary by scholars as
well as court decisions from around the country, the Special Counsel formulated
the following definition:
a collusive settlement in the context of stockholder deal litigation appears to
involve, at its core, an explicit or implicit agreement between counsel for
plaintiffs and counsel for defendants to require less consideration for the
settling class in exchange for (1) exclusive dealings with particular
plaintiffs' counsel and/or (2) more consideration for plaintiffs'
counsel. Factors that should give rise to heightened scrutiny for collusiveness
include the following: settlement consideration disproportionately weak in
comparison to the strength of the claims asserted; settlement with a
plaintiff's firm that typically does not litigate aggressively when other, more
formidable, firms are involved in the litigation; and an agreement to pay
attorneys' fees significantly higher than are typical given the settlement
consideration. Report at 26-27.
The Report explains with detailed reasoning why there was
no collusion based on the facts of this case. Advice on best practices is
also provided for those involved in multi-jurisdictional deal litigation that
is pending in the Delaware Court of Chancery and is courts of another state:
... all counsel should be aware that this Court will play
some role, either in reviewing a potential settlement or in dismissing a case
following a settlement approved by another court. Therefore, best
practice for counsel negotiating a settlement of such litigation in a
jurisdiction outside of Delaware-recognizing this Court's focus on
representative settlements-would be to substantively involve Delaware counsel
in the negotiations.
The Report also discussed the public policy aspects of
the role that state courts play in multi-jurisdiction settlements within our
system of federalism. See, e.g., footnote 12 (citing several transcript
rulings within the last few months in which the Court of Chancery addresses the
public policy issues.)
The Role of the Non-Settlement Forum
At the request of the Court, the Special Counsel made the
following suggestions for the role of the non-settlement forum in
multi-jurisdiction deal litigation:
1). The non-settlement forum should ensure that all
courts involved in the multi-jurisdictional case are operating on the same
information. The Special Counsel is also the Chair of the Court of
Chancery Rules Committee and will follow-up to determine if the Court of
Chancery is amenable to a new rule that would require disclosure to the
settlement forum where the Court of Chancery is the non-settlement forum.
2). The non-settlement forum could maintain an open line
of communication with the settlement forum.
3). The non-settlement forum could require the common
parties to provide it with copies of the settlement documents filed in the
Remedies for Collusive Behavior and Basis for
Revocation of Pro Hac Vice Admissions
Because the Special Counsel did not find the need for any
remedies or revocations in this case, I will merely commend the last section of
the Report for future reference on the following topics, the second one being
of wide applicability beyond the world of class action settlements:
1). What penalties, if any, can or should courts
impose upon a finding of collusive behavior; and
2). What is the standard for the Court revoking the
grant of a motion for admission pro hac vice.
Read more Delaware business
litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Fox Rothschild LLP.
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