NEW YORK (The Deal) -- J. Travis Laster is a bold judge, and the Delaware vice chancellor was at his most aggressive in a Feb. 21 order where he asked very probing questions of the shareholders and lawyers who brought a fiduciary duty lawsuit challenging the $68 million sale of Theragenics to Juniper Investment. Several lawyers not involved in the matter say they've never seen anything like Laster's order, which may be the latest salvo in the Delaware courts' effort to rein in the shareholder litigation that follows virtually every merger or acquisition of a Delaware public company.
As is common, Theragenics shareholders sued to challenge the deal soon after it was announced Aug. 5 on the grounds that in approving the transaction the company's directors had violated their fiduciary duties. The parties agreed to a settlement, which requires judicial approval because the matter is styled as an action on behalf of the entire class of Theragenics shareholders, who approved the deal. Over 96% of the shares cast - a total of 64% of the total float - were voted in favor of the deal, which closed Oct. 29. Theragenics was a surgical device company.
On Friday, Laster issued an order in which he scheduled a May 5 hearing to approve the settlement and the attorneys' fees that the shareholders' counsel at Rigrodsky & Long PA are seeking. Most of the order was boilerplate, but one portion was not. Laster required Rigrodsky to answer several questions that reflect a deep skepticism about the conduct of the Theragenics litigation and similar cases. His order could indicate he's considering a reduction in how much Rigrodsky is paid.
The judge did ask similar questions in an order consolidating the shareholder litigation arising from the Activision Blizzard's (ATVI) buying back a control stake from Vivendi last year. But the answers there were meant to help Laster appoint lead counsel for the shareholder plaintiffs and that case isn't much help in pointing to how Laster's plans to use the information in the Theragenics proceeding.
Critics of suits like Theragenics' - a group that occasionally includes the Delaware judges who hear such matters - believe that the shareholder plaintiffs are mere figureheads and that their counsel choose to bring the cases and determine when to settle them. Shareholders themselves almost never receive additional payment. Instead, the companies agree to disclose additional facts about the merger negotiations or the way bankers arrived at a valuation for the company and as part of the settlement pay shareholders' counsel a fee that's generally hundreds of thousands of dollars per case.
Laster directed several questions to the Theragenics shareholder plaintiffs Leslie Baker and Julia Davis. He wanted to know their economic interest in the company at the time the complaint was filed and the date of settlement; "a description of the plaintiff's investment portfolio sufficient to determine the materiality of the plaintiff's economic interest in the issuer;" and "a description of the plaintiff's investment strategy."
Laster also asked a series of questions designed to reveal the relationships between shareholders and their counsel. Laster queried how the plaintiff came to hire Rigrodsky, "including whether counsel advertised for potential plaintiffs; how plaintiff came into contact with counsel; whether plaintiff contacted any other law firms; any referral process among counsel; [and] whether the plaintiff has any other relationships with counsel." He requested a table of "representative actions filed by the plaintiff within the last five years" including the counsel retained, venues in which the matters were filed, outcomes, and any "compensation that the plaintiff received."
Finally, Laster directed a pointed question at Rigrodsky. Counsel for shareholders generally work on a contingency basis, but Laster asked the law firm how many times in the last year it's been hired by the hour "together with an estimate of the percentage of total firm revenues represented by such engagements." Corporate lawyers complain that firms such as Rigrodsky do nothing but file form complaints designed to induce a quick settlement and accompanying fee. Laster wants to know how much of Rigrodsky's business is comprised of those cases.
Corporate lawyers and litigators have asked similar questions - and cynically theorized answers - for many years. They view most M&A-related shareholder litigation as an unwarranted tax on dealmaking. Delaware judges have often agreed with that critique but said they were unable to curb strike suits because of the problem of multijurisdictional litigation. Plaintiffs' lawyers bring M&A-related class action suits in multiple state courts, and defendant companies seek global settlements rather than fight dubious suits because of the cost of defending the matters and the risk of an adverse decision. But many Delaware corporations have in recent years adopted forum selection bylaws or charter provisions that require all fiduciary duty litigation to be brought in Delaware.
There hasn't been much litigation about the legality of such provisions, though then-Delaware Chancellor Leo. E. Strine Jr., blessed one last year. The plaintiffs, shareholders of Chevron (CVX), did not appeal the decision to the Delaware Supreme Court. But Strine is to be sworn in as the chief justice of that body on Friday, and it seems likely that he would steer a similar case to the same conclusion should the issue come before him.
Laster presided over another recent case arising from the sale of Edgen Group where last month a Louisiana state court judge honored a Delaware choice of forum provision in Edgen's certificate of incorporation. The Chevron and Edgen matters may have emboldened Laster to issue the Theragenics order.
A few lawyers not involved in the matter noted that Laster seems to have a low opinion of Rigrodsky & Long. It's possible that the judge is singling out that firm for harsh treatment, but Rigrodsky is far from the only plaintiffs' shop to bring a large volume of cases. Laster may hope to subject other shareholder plaintiffs and their counsel to such scrutiny as well.
The Theragenics order came as Delaware governor Jack Markell is considering whom to select as Strine's successor. Laster could apply for the post, though he is a Republican and Markell is a Democrat. Instead, the gossip among Delaware lawyers for the past few months has been that Andre Bouchard of Wilmington law firm Bouchard, Margules & Friedlander PA is the front-runner for the post. Whoever succeeds Strine will have to determine if Laster's approach is the best way to handle the longstanding problem of M&A-related strike suit litigation.