Corporate Governance

Delaware's Top Five Worst Shareholder Decisions for 2010 (#5: In re Revlon)

By J Robert Brown Jr.

VC Laster is the newest member of the Chancery Court.  He has made a number of bold decisions and will be an interesting figure to watch.  It remains to be seen whether his decision making flair will gradually dim as he incurs reversals by the less colorful approach of the Delaware Supreme Court.

But one of his opinions makes the list this year, In re Revlon, 990 A.2d 940 (Del. Ch. 2010).  We blogged on this case back in April. 

In many ways, Revlonreflects the bold nature of VC Laster's decision making.   He dealt with what he saw as lawyers not adequately representing the interests of shareholders.  Rather than ignore the situation, he weighed in and took action.  

• I find that Old Counsel has not provided adequate representation in this case. After the initial skirmish over consolidation and lead counsel status, Old Counsel fell blithely into Cox Communications mode. They literally did nothing.  To put the best spin on it, Old Counsel seemingly recognized that they filed their complaints prematurely and that the consolidated case was subject to a motion to dismiss. I infer that the defendants did not challenge the premature litigation because they wanted the case to stay alive to support a settlement. Everyone knew their parts.

More than criticize, he took action, replacing Old Counsel with New. 

Had that been the extent of the opinion, VC Laster would have sent a firm message to counsel that in his court this type of representation would not be tolerated. 

But the message was obscured by two actions that betrayed hostility towards counsel for plaintiffs in general.  The first was his decision to describe counsel for shareholders in pejorative terms.  As he described:  "Firms who are early filers are frequently early settlers, leading some wags in the defense bar to label them 'Pilgrims.'"  Later in the opinion, he would note that he had "no desire to replace Pilgrims with Puritans."

The term had, until its exposure in the opinion, represented an example of inside baseball.  VC Laster was apparently repeating an adage commonly spoken among the defense bar.  The term (as a pejorative label) appears in no other Delaware case nor in any federal case.  One can find a mention of the term in an article by Professor Coffee.  He provides no citation for the origin of the term but notes that it is derisive.  See ACCOUNTABILITY AND COMPETITION IN SECURITIES CLASS ACTIONS: WHY "EXIT" WORKS BETTER THAN "VOICE", 30 Cardozo L. Rev. 407, 413 n. 15 (2008). 

Future articles and opinions need not use the term in an unattributed manner.  Revlon provides the requisite citation.  The derisive term should have remained a part of the sotto voce conversations of defense lawyers, without bleeding into the judicial lexicon. 

Moreover, the unfortunate terminology could be juxtaposed against his characterization of independent directors.  They were described as "courageous."  This was the case even though, as we noted, their behavior seemed anything but. 

The second unfortunate step was, that in replacing Old Counsel, he faced three firms seeking to intervene, two from New York and one from Delaware.  The three firms had already cobbled together an arrangement.  The two New York firms would act as lead counsel, the Delaware firm was liaison counsel.  Although these firms had no role in the concerns expressed about Old Counsel, VC Laster largely treated them with equal disdain.  As he reasoned:  

• I therefore find that New Counsel can take over as lead counsel in the case. I will not, however, adopt the leadership structure that New Counsel proposed, in which the Harwood Feffer firm and the Trinko firm would serve as co-lead counsel with Smith Katzenstein as Delaware liaison counsel. The qualifications and modus operandiof the Harwood Feffer and Trinko firms closely resemble those of Old Counsel. As relatively small firms managing a portfolio of representative litigation, the Harwood Feffer and Trinko firms have similar economic incentives to settle early to maximize the net benefit to themselves, rather than expending resources to press litigation further for the benefit of the class. I have no desire to replace Pilgrims with Puritans.

Instead, he appointed liaison counsel as lead counsel.  The basis for the decision?  The reputational capital that liaison counsel had built up with the new Vice Chancellor.

• The Smith Katzenstein firm, by contrast, is a Delaware law firm that is well-known to the Court. The firm frequently represents paying clients and does not appear to litigate plaintiffs' cases using a portfolio strategy. The members of that firm, including the lead lawyer in this case, have built up reputational capital with the Court and have proven willing to engage in the hard work of actual litigation.

Given the local nature of liaison counsel, VC Laster was in effect announcing that Delaware firms would have greater credibility in his courtroom.  Moreover, his attitudes about Old Counsel was allowed to bleed over into New Counsel, despite any significant evidence of similar concerns.  Whatever reasons VC Laster had in replacing Old Counsel, he lacked similar evidence to disrupt the arrangement worked out by New Counsel. 

We hope that this case does not reflect VC Laster's general views on counsel for shareholders.  We also hope that VC Laster will continue to decide cases in a bold fashion but will avoid the type of actions and language in Revlon that otherwise obscure important and necessary analysis. 

Full post as published by The Race to the Bottom on January 03, 2011 (boomark / email).