How Settling Stockholders Can Tilt the Playing Field Before Dissenting Investors Can Appear

When class-action or derivative plaintiffs decide to settle stockholder litigation with corporate defendants, both sides seek to secure court approval of their deal with a minimum of interference. [1]  Neither party has much reason to look out for dissenting stockholders who might oppose the settlement or plaintiff’s request for attorneys’ fees. By way of example, settling parties recently secured approval from the Delaware Court of Chancery of a scheduling order that—by design or scrivener’s error—gives any objector only three days to respond to arguments in favor of settlement.

The Stericycle Case

On March 12, 2019, the Court of Chancery rejected a proposed scheduling order in Siu v. Miller, C.A. No. 2018-0273-JTL, holding that a sixty-day notice period did not allow sufficient time for stockholders to object to the settlement. The next day, the plaintiff submitted a revised scheduling order that included a ninety-day notice period. The Court approved the order a few days later.

At first blush, the new order presents a tight but workable schedule:  the plaintiff files an opening brief 35 calendar days before the hearing, giving any objector 14 calendar days to file an objection. Plaintiff’s reply brief must be filed fourteen days later. (See paragraphs six and twelve of the scheduling order.)

However, look closely at paragraph six:  an objector must file papers with the Court 21 calendar days before the hearing, but he must also serve the papers 21 business days before the hearing. The relevant period falls over the July 4 holiday. As a result, any objector would need to finalize and serve papers no more than three days after the plaintiff’s brief is due. [2]

Is this a typo? Probably.  Chancery schedules usually require parties to file and serve on the same day. Yet the parties included the same 21 business day service requirement four times in their submissions to the court:  twice in proposed orders, and twice in proposed notices

Whether intentionally or by accident, the parties’ schedule is now embodied in a binding order and presents a procedural challenge to objectors.  At a minimum, an objector would need to seek agreement from the parties to amend the schedule and, if the parties did not agree, seek relief from the court. [3] Either option would impose additional expense on objector’s counsel and eat up time that could be spent litigating against the settlement.

Avoiding Errors That Harm Absent Class Members

There are several ways that class action litigants or courts can avoid creating this kind of unnecessary procedural hurdle. First, plaintiffs could make their briefs available earlier, either at the same time that they file a proposed scheduling order or when notice is provided to the class. This would give objectors more time to address potential problems.

Second, the parties could request the appointment of an attorney ad litem assigned to review any procedural motions or orders for fairness to absent stockholders. An independent attorney ad litem might notice problems—like a punishing briefing schedule—overlooked by the attorneys whose clients favor the settlement.

Finally, courts could respond more harshly when they discover that representative stockholders have acted to disadvantage their absent peers, whether or not the error is intentional. Plaintiffs, not busy courts, should be responsible for scrutinizing the details of scheduling orders, settlement stipulations, and notices. (Class counsel’s expected compensation is sufficient to cover proofreading costs. The plaintiff in Siu v. Miller is seeking a $2.9 million attorneys’ fee, and the defendants have agreed not to oppose it.) If class plaintiffs, and their counsel, knew that an error prejudicial to potential objectors could result in their fees being cut in half, they might take a far closer look at their routine filings.

Whether through the appointment of attorneys ad litem or more vigorous judicial scrutiny, action should be taken to prevent the mistakes that emerge in a nonadversarial process from disadvantaging absent stockholders. Since founding Margrave Law, I’ve reviewed dozens, if not hundreds, of scheduling orders such as the one in Siu v. Miller.  I’ve seen a few “typos,” but I’ve yet to see a single mistake that worked out in an objector’s favor.

[1] As one article memorably describes it: “[S]ettlement hearings are typically pep rallies jointly orchestrated by plaintiffs’ counsel and defense counsel.  Because both parties desire that the settlement be approved, they have every incentive to present it as entirely fair.” Jonathan R. Macey & Geoffrey P. Miller, The Plaintiffs’ Attorney’s Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. Chi. L. Rev. 1, 46 (1991).

[2] Unless the plaintiff files a confidential brief under seal, in which case an objector might have to serve his papers before he has access to a public version of the plaintiff’s opening brief. See Ct. Ch. R. 5.1(d)(1) (giving party five business days to file public version of sealed brief).

[3] Helpfully, the Court of Chancery’s guidelines permit parties to amend schedules without an order from the court, so long as it does not affect the date of the last brief or the hearing date.