Opinion ID: 1560325
Heading Depth: 2
Heading Rank: 2

Heading: The Chancery Class Action

Text: On June 6, 2006, a Class A shareholder brought this class action against the Exchange, its Board, and the Strategic Investors, seeking rescission of the Strategic Investor Transactions or, in the alternative, rescissory damages, attorneys' fees and costs. The initial class complaint asserted claims for breach of fiduciary duty by the individual Board members in approving the Strategic Investments, and claims that the Strategic Investors aided and abetted those alleged breaches of fiduciary duty. On June 9, 2006, the plaintiff moved to expedite the proceedings and enjoin preliminarily the Strategic Investor defendants from further exercising the warrants and diluting the class A shareholders. The Chancellor denied the plaintiff's motion to expedite on June 14, 2006. In July 2006, after all six Strategic Investors had exercised their respective warrants, the plaintiff amended the initial class complaint to add allegations relating to the Strategic Investors' ability to control PHLX by aggregating their equity interest, in violation of Article IV of the PHLX Certificate. Thereafter, the defendants moved to dismiss the amended complaint for failure to state a claim. The Chancellor denied those motions in December 2006, finding that the amended complaint stated a direct (and not derivative) claim for relief under Article IV. [5] In March 2007, the class plaintiff moved for class action determination. On May 11, 2007, after full briefing, the Chancellor determined that the action was eligible to proceed as a class action on behalf of all injured parties. The Court provisionally certified a class of all Class A common stockholders of the [PHLX] on April 20, 2005, [6] and their transferees or successors in interest. On May 30, 2007, a notice of the pendency of the class action was circulated to class members, disclosing that holders and transferees were included in the class. After merits and expert discovery was concluded, the defendants moved for partial summary judgment challenging the availability of rescissory damages. The motion was denied on May 31, 2007. Urging that the Strategic Investor Transactions had been consummated independently to save the Exchange, which at that point was on the verge of bankruptcy, the Strategic Investors and the PHLX again moved for summary judgment. The Chancellor denied the motion of Strategic Investor UBS on June 11, 2007. Briefing on the remaining motions was deferred until after trial, which was scheduled to begin on June 18, 2007. After the denial of UBS's motion for summary judgment, the parties held a mediation before Vice Chancellor Stephen P. Lamb pursuant to Court of Chancery Rule 174. The parties submitted their pre-trial briefs and key trial exhibits to the mediator, and after several days of intense mediation, an agreement in principle was reached. On June 20, 2007, the parties and Vice Chancellor Lamb signed a Memorandum of Understanding (MOU), under which all claims asserted in the action would be fully settled. The settlement would include a release to the broadest extent possible under law. In exchange, the Strategic Investors agreed to return 14% of the shares acquired by them in the Strategic Investor Transactions; the CEO of the Exchange agreed to the cancellation of 14% of the restricted stock units awarded him under the PHLX management compensation plan; the Exchange agreed to pay $17.1 million cash into a settlement fund, primarily for payment of attorneys' fees; and the plaintiff class was guaranteed certain protections against future stock dilution.