Opinion ID: 692029
Heading Depth: 2
Heading Rank: 1

Heading: The Delaware Settlement

Text: The Delaware class action was filed on September 26, 1990, the day the financial press reported that Matsushita was negotiating to buy MCA. The suit named as defendants MCA and its directors, including Wasserman and Sheinberg. The essence of the complaint was that MCA's directors had breached their fiduciary duties by failing to implement a market check mechanism to maximize shareholder value upon a change of corporate control, as required by Revlon, Inc. v. MacAndrews & Forbes Holdings Inc., 506 A.2d 173, 182 (Del.1986). On December 2, 1990, three days after public disclosure of the terms of the tender offer, the Epstein class action was filed in the Central District of California. Unlike the state action, the Epstein complaint named Matsushita as a defendant and claimed that the tender offer violated SEC Rules 14d-10 and 10b-3. On December 4, 1990, the day after the Epstein action was filed in the Central District, lead counsel for the Delaware plaintiffs transmitted a letter to MCA's counsel that was to serve as the basis of an amended complaint. In that letter, the Delaware plaintiffs stated their intention to add additional claims against all directors. In particular, the complaint was amended to allege that MCA was wasting corporate assets by increasing its exposure to liability for violations of Rules 10b-13 and 14d-10, that directors Wasserman and Sheinberg had breached their fiduciary duties by negotiating preferential deals with Matsushita, and that MCA failed to make full disclosure of the benefits MCA insiders would receive from the takeover. Finally, Matsushita was added as a defendant and charged with conspiring with and aiding and abetting MCA directors in violating Delaware law. On December 11, 1990, a week after Delaware class counsel's letter proposing to amend the complaint and add Matsushita as a defendant, the defendants reported to the Central District that they had reached a settlement of the Delaware class action in principle. On December 14, the amended complaint was filed in the Court of Chancery, and on December 17, the parties agreed on the terms of a settlement to be submitted to the Vice Chancellor for approval. The settlement provided for the payment of $1,000,000 in fees to class counsel, but no monetary benefit for class members. The only arguable benefit to class members was a proposed change in the poison pill of the new corporation that was to be formed to own MCA's radio station if the tender offer succeeded. The Vice Chancellor found the value of this poison pill provision to class members to be illusionary. See In re MCA Shareholders Litig., Inc., 598 A.2d 687, 696 (1991). Finally, the settlement provided for the release of all claims arising out of the tender offer, both state and federal. In defending the settlement before the Vice Chancellor on January 30, 1991, class counsel argued that the state claims, while not frivolous, had little merit. Counsel also argued that the federal claims were frivolous and should not be pursued. On April 22, 1991, the Vice Chancellor disapproved the proposed settlement. He agreed with class counsel that the state law claims being compromised were at best, extremely weak and, therefore, have little or no value. In re MCA, Inc. Shareholders Litig., 598 A.2d at 694. In particular, he found the state claim of preferential treatment for Wasserman and other directors to be weak because no such state cause of action existed. Id. Under Delaware law, the Vice Chancellor noted, [a] shareholder is not prohibited, by his status as a director, from dealing in shares of the corporation, and that a director breaches his duty of loyalty only if he uses inside information for his personal benefit. Id. Finding that the value of the settlement to the class lacked any real monetary benefit, the Vice Chancellor rejected the settlement because of the significant value of the federal claims that would have been released along with the valueless state claims. Id. at 696, 690. Despite the Vice Chancellor's opinion that the state claims had no merit and no value, Matsushita and its co-defendants took no action to dismiss the Delaware action. In fact, the docket of the Court of Chancery reflects no action of any kind--no discovery, no motions, no settlement or status conferences--until after the Central District awarded summary judgment to the defendants in the federal actions in February, 1992, more than a year after the Vice Chancellor disapproved the original Delaware settlement. On October 22, 1992, after the federal plaintiffs filed their notices of appeal of the summary judgment to the Ninth Circuit, the parties to the Delaware action entered into a new settlement agreement. It provided for the creation of a $2 million settlement fund, enough to pay shareholders two to three cents per share before payment of fees and costs. 23 Like the first settlement agreement, the second agreement provided for the release of all claims arising out of Matsushita's acquisition of MCA, both state and federal. Unlike the first agreement, the second settlement agreement permitted class members to opt out. 24 The Vice Chancellor approved the second settlement agreement, concluding that it is in the best interests of the class to settle this litigation and the terms of the settlement are fair and reasonable--although the value of the benefit to the class is meager. In re MCA, Inc. Shareholders Litig., 1993 WL 43024, at  1 (Del.Ch. Feb. 16, 1993). He approved the second settlement for the sole reason that the federal claims which he originally thought had significant value, had been reduced to minimal economic value by the summary judgment entered in the Central District. The Vice Chancellor uncritically accepted the summary judgment as having destroyed the value of the federal claims without considering the fact that the Ninth Circuit reviews summary judgments de novo. See T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 629 (9th Cir.1987). The Vice Chancellor downgraded the value of the federal claims even as he expressed reluctance to assess the merits of those claims because they were outside the jurisdiction of this Court. Id., 1993 WL 43024 at  4. Objectors argued that the settlement was collusive because the defendants cut a deal with the named plaintiffs in the Delaware action and their attorneys in order to extinguish the claims pending in the federal litigation. In re MCA, Inc. Shareholders Litig., WL 43024, at  5. The Vice Chancellor acknowledged that the potential for this type of abuse clearly exists in representative litigation, and that suspicions abound when the settling parties have previously proposed a patently inadequate settlement in which the class would have received no monetary benefit but the attorneys would have received $1 million in fees. Id.at  4. Nonetheless, he refused to make a finding of collusion on the record before him because objectors offered no evidence of any collusion. Id. at  5. The judgment incorporating the terms of the settlement was summarily affirmed by the Delaware Supreme Court. In re MCA, Inc. Shareholders Litig., 633 A.2d 370 (Del.1993).