Navigating Securities Class Action Payouts in Delaware’s Court of Chancery
Delaware’s dominance as the state of incorporation for U.S. companies has long made it a critical venue for enforcing shareholder rights – particularly those involving mergers and acquisitions.
For investors, understanding the Delaware Court of Chancery’s approach to class action distribution is key given the large settlement funds we’ve seen in cases over the past few years. Recent examples include:
- Dell Technologies. In 2022, the Court approved a $1 billion cash settlement in a case surrounding the company’s 2018 stock swap, with minority investors alleging they received substantially less than fair market value for their Class V common shares.
- Paramount Global. Last year, breach of fiduciary duty claims stemming from the 2019 CBS-Viacom merger resulted in a $122.5 million award to Viacom shareholders.
- Pattern Energy Group. Earlier this year, the company agreed to pay $100 million to resolve class action litigation tied to a take-private buyout deal, making it the largest settlement to date in a “Revlon Rule” case.
FRT recently spoke with Mark Richardson, a partner in the Delaware office of Labaton Keller Sucharow (co-lead counsel in the Dell and Pattern cases), about how the recovery payout process works and what forces are driving this recent activity. Below we spotlight a few key takeaways from that discussion.
No Claim Forms Necessary
In class actions tied to M&A activity, Delaware does not require investors to submit proof of claims forms as they do in U.S. federal court securities class action settlements. Other than excluded parties (e.g., defendants), any investors who held eligible securities on the closing dates of challenged transactions are automatically class members entitled to share in the recoveries on a pro rata basis, according to the number of shares held at closing.
The Court of Chancery takes a direct approach to settlement distributions. Instead of claim forms, the settlement administrator distributes per share amounts to the shareholders of record as listed on the company’s shareholder ledger, or with the Depositary Trust & Clearing Corporation (DTCC). Often, shares are not held in the names of beneficial owners but in the names of their custodians. As a result, the custodians receive the per share amounts and must then identify and credit the accounts of their beneficial customers in accordance with their eligible holdings.
While this streamlined approach removes much of the time and administrative costs associated with federal court securities class action settlements, the lack of advance notice around distributions can create operational challenges for claimants, particularly wealth managers and other entities that must in turn allocate funds received to their underlying customer accounts. Particularly with large settlements, the deposited funds can come as a surprise to internal operations teams who are not diligently monitoring these cases.
In Richardson’s experience, custodians usually receive funds within two or three weeks of the court entering an administrative order authoring the settlement administrator to distribute funds. However, custodians vary in the time they take to credit the accounts of their beneficial owner clients. As a result, we recommend that impacted investors closely monitor these proceedings to anticipate and prepare for receipt of funds.
What’s Next in Delaware?
Over the past decade, a few key decisions have significantly raised the bar for successfully bringing M&A class actions in Delaware.
Those include In re Trulia, where the court took a clear stance against “disclosure only” settlements that do not include monetary recoveries for class members, as well as Corwin v. KKR Financial Holdings and Kahn v. M&F Worldwide Corp., which established that utilizing certain structural protections will trigger the “business judgment rule” and essentially cleanse a transaction from litigation claims.
Yet Richardson still expects large M&A-related breach of fiduciary duty cases to be filed in Delaware following those in the Dell, Paramount, and Pattern Energy matters. He reasons that plaintiffs’ lawyers have become more sophisticated and are conducting more through pre-suit investigations, which can effectively identify claims based upon process failures and price unfairness.
The other thing to watch is whether more controlling stockholders threaten or attempt to reincorporate companies in other states, as Tesla CEO Elon Musk has done after a Delaware judge voided his compensation package in January 2024.
States with more restrictions on (or disincentives for bringing) shareholder suits, such as Texas and Nevada, have predictably caught the attention of majority investors looking to leave Delaware to deepen control and evade accountability to minority stockholders.
As Richardson argues, Delaware’s legal framework is a strength, not a weakness, and he believes judicial scrutiny of conflicted controller transactions has immense value for shareholders and is one of the reasons for Delaware’s success as a domicile for companies.
Access FRT’s On-Demand Webinar for More Insights
FRT’s Legal team hosted a live session for investors on July 17, where we discussed Delaware’s distribution process in more depth, as well as class action filing and settlement data for 2024 so far. Other topics covered include:
- Why SEC Fair Funds activity is rising in the U.S.
- Which global recovery opportunities have the strongest risk/reward profiles
- How almost $8B in undisbursed antitrust settlements could shake out