Delaware Court Scrutinizes Settlement Process and Replaces Lead Counsel in Shareholder Class Action Suit
A recent opinion of the Delaware Chancery Court ordered the replacement of plaintiffs’ lead counsel in a shareholder class action suit challenging the takeover of a publicly traded Delaware corporation by its controlling shareholder. In his opinion, Vice Chancellor Travis Laster criticized the removed counsel for failing to litigate the case adequately and for exaggerating their role in reaching a proposed settlement.
Vice Chancellor Laster’s opinion can be found online here.
Proposed Merger and Tender Offer
On April 13, 2009, MacAndrews & Forbes Holdings Inc. (“MacAndrews & Forbes”), the controlling shareholder of Revlon, Inc. (“Revlon”), proposed a merger to Revlon that would result in (i) MacAndrews & Forbes acquiring all of Revlon’s outstanding publicly traded Class A common stock and (ii) the minority Class A common stockholders receiving shares of a new Series A preferred stock (entitling its holders to certain liquidation, dividend, redemption and limited voting rights). The Revlon board formed a Special Committee to evaluate the merger and make a recommendation to the board. During the three weeks following the announcement of the proposed merger, four separate but substantively similar representative actions were filed in Delaware by counsel described in Vice Chancellor Laster’s opinion as “frequent filers.” Each complaint generally alleged that Revlon’s directors breached their fiduciary duties because the proposed transaction (which included modification of a $170 million senior subordinated term loan between Revlon’s operating subsidiary, as borrower, and MacAndrews & Forbes, as lender) would enable MacAndrews & Forbes to capture the benefits of an internal Revlon restructuring before such benefits were recognized by the market. As frequently happens in shareholder class action suits of this kind, the nine counsel that filed the four original complaints resolved their dispute regarding, and agreed upon, the status of each counsel in the action, including the selection of lead counsel.
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