Opinion
C.A. No. 16570-NC.
Submitted: February 26, 2001.
Decided: February 28, 2002.
Michael J. Maimone, Esquire and Michael A. Weidinger, Esquire of Morris, James, Hitchens Williams, Wilmington, Delaware, and Kenneth J. Ashman, Esquire, Thomas G. Griffin, Esquire and Sara C. Spitler, Esquire of Ashman Griffin, Chicago, Illinois, attorneys for Plaintiffs.
William O. LaMotte, III, Esquire of Morris, Nichols, Arsht Tunnell, Wilmington, Delaware, and R. Robert Popeo, Esquire and John F. Sylvia, Esquire of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts, attorneys for Defendants Boston University, John R. Silber, Leon C. Hirsch, Turi Josefsen, Gerald S.J. Cassidy, Kenneth G. Condon and Marathon Biopharmaceuticals, LLC.
Donald J. Wolfe, Jr., Esquire and Arthur L. Dent, Esquire of Potter, Anderson Corroon, Wilmington, Delaware, and William F. Sullivan, Esquire and Christopher H. McGrath, Esquire of Brobeck, Phleger Harrison LLP, San Diego, California, attorneys for Defendants Reed R. Prior, Norman A. Jacobs and Jean C. Nichols.
MEMORANDUM OPINION
Plaintiffs, all former owners of Seragen, Inc. ("Seragen") common stock, have moved for class certification of their claims arising from a series of events that culminated in the merger of Seragen with a wholly owned subsidiary of Ligand Pharmaceuticals, Inc. ("Ligand").
Plaintiffs challenge four pre-merger transactions which are alleged to have diluted the minority shareholders' cash value and voting power. They also attack the Seragen-Ligand merger itself which, they assert, resulted in the payment of unfair and disproportionate consideration to them. All of the challenged transactions are said to have been the product of breaches by some of the defendants of their fiduciary duties — conduct, which, plaintiffs contend, was aided and abetted by other defendants.
The defendants are: former directors of Seragen, John R. Silber ("Silber"), Reed R. Prior, Gerald S.J. Cassidy, Kenneth G. Condon, Norman A. Jacobs and Jean C. Nichols; two significant holders of Seragen stock, Leon C. Hirsch ("Hirsch") and Turi Josefsen ("Josefsen"); Boston University ("BU") which held a majority of Seragen's common stock; and Marathon Biopharmaceuticals, LLC ("Marathon"), an entity allegedly created by BU for the purpose of carrying out one of the challenged pre-merger transactions.
Plaintiffs now seek certification of a single class of former Seragen shareholders (except for defendants and their affiliates) who owned Seragen common stock at any time between July 1, 1996 (the date of the first challenged transaction) and August 12, 1998 (the date of the challenged merger). The defendants, on the other hand, dispute the inclusion of those shareholders who transferred their common stock before the merger and suggest that a class composed only of individuals owning Seragen common stock at the time of the August 12, 1998 merger may be certified. For the reasons discussed below, I certify a class that includes all persons (except for defendants and their affiliates) who held Seragen common stock as of the Marathon Transaction or as of the merger.
I. FACTUAL PROCEDURAL BACKGROUND
Through their Second Amended Complaint ("Complaint"), plaintiffs charged the directors and certain major shareholders of Seragen with breaches of their fiduciary duties of care, loyalty and disclosure in connection with their having executed four pre-merger transactions and effectuated the self-dealing merger that was allegedly approved by means of a defective proxy and had the effect of wrongfully allocating a disproportionate amount of the merger proceeds to the shareholder defendants. The Complaint also alleges that certain defendants aided and abetted this self-dealing in order to effect the merger at a favorable price or to obtain other benefits. On August 23, 1999, the defendants moved to dismiss the Complaint.
For a more complete review of the background and the parties' substantive contentions, see Oliver v. Boston University, Del. Ch., C.A. No. 16570, mem. op., Steele, V.C. (July 18, 2000).
In its July 18, 2000 Memorandum Opinion, the Court dismissed several of the counts in the Complaint. Notably, the Court dismissed all causes of action against Ligand, Knight Acquisition Corporation, Seragen and Seragen Technology, Inc. It also dismissed the fiduciary duty claims against Marathon, Hirsch and Josefsen and dismissed the disclosure claims as they related to the fairness opinion rendered by Lehman Brothers, Inc.
Notwithstanding the Court's decision to dismiss several of the plaintiffs' claims, the Court held that the plaintiffs alleged direct, instead of derivative, claims, that the Complaint adequately stated a claim that the individual defendants (except for Hirsh and Josefson, who were not directors of Seragen) breached their fiduciary duties of loyalty and disclosure, and that the Complaint set forth an actionable aiding and abetting claim against Marathon, Hirsch and Josefsen. Plaintiffs have now moved for class certification pursuant to Court of Chancery Rule 23(a), (b)(1), and (b)(3) to recover damages suffered as a result of the pre-merger transactions and the Seragen-Ligand merger.
The Court also permitted the "plaintiffs to present additional evidence relating to the surviving claims purportedly supporting imposition of a constructive trust." Id. at 28.
A. The Pre-Merger Transactions
The plaintiffs argue in support of their motion for class certification that the defendants "caused, engaged and participated in and voted to approve a number of self-dealing transactions, all of which were unfair to Plaintiffs and members of the [proposed class] in that they resulted in significant cash value and voting power dilution." Specifically, the four pre-merger transactions that the plaintiffs challenge are (1) the Restructuring of the Loan Guarantee Transaction; (2) the BU Private Placement Transaction; (3) the USSC Transaction; and (4) the Marathon Transaction. The plaintiffs posit that each of these transactions was the product of unfair self-dealing and had the effect of unfairly harming Seragen's minority shareholders. Each will be briefly discussed below.
Plaintiffs' Opening Brief in Support of their Mot. for Class Certification ("Plaintiffs' Opening Brief") at 14.
This background narrative is based on the Complaint.
1. The Restructuring of the Loan Guarantee Transaction
The first pre-merger transaction challenged by the plaintiffs involved the July 1996 refinancing of a June 1995 bank financing in which Seragen procured $23.8 million. BU, Hirsch, Josefsen and Cassidy, who guaranteed the original financing in exchange for warrants valued at over $4 million, received newly created Seragen Series B preferred stock valued at $23.8 million and additional warrants worth $8.6 million as a result of their assumption of this outstanding indebtedness. The plaintiffs assert that "[b]y assuming debt that they had already guaranteed, these Defendants received the preferential shares and warrants for virtually no additional consideration, for they were at little more, if any, risk than they were prior to the restructuring." The plaintiffs further assert that, in addition to safeguarding the defendants from any downside risk, the Series B preferred stock that these defendants received as part of the restructuring transaction granted super-voting rights to the defendants who also received additional security for their preferred dividends to the detriment of the minority shareholders.
Plaintiffs' Opening Brief at 16.
2. The BU Private Placement Transaction
The plaintiffs next challenge a private placement sale by Seragen to BU in which the former sold 5000 shares of Series C preferred stock to the latter in exchange for $5 million in September 1996. The plaintiffs claim that "[t]he Series C preferred stock gave BU the right, at BU's option, without the payment of any additional consideration, to convert its Series C preferred shares into common stock at a discounted price equal to 73% of the price of common stock at the conversion date." It is further alleged that BU's March 1998 conversion of 1060 shares of Series C preferred stock netted it 3,360,625 shares of Seragen common stock. Even more troubling to the plaintiffs was BU's claim of entitlement to "another $4,530,461 in cash from Seragen for the repurchase of its remaining shares at [a] repurchase premium of 1.15%." The plaintiffs argue that this assured BU a return of more than 90% of its initial $5 million investment and allowed BU to retain over 3 million shares of Seragen common stock.
Compl. ¶ 70.
Id. ¶ 72.
3. The USSC Transaction
The third transaction challenged by the plaintiffs involved a licensing agreement executed by Seragen and United States Surgical Corporation ("USSC") on July 21, 1997. Under this agreement, Seragen granted USSC certain rights related to Seragen Fusion Proteins in exchange for $5 million. Hirsch and Josefsen, who were directors and officers of USSC, and Silber, who was a director, all held a stake in that company. The agreement between Seragen and USSC granted USSC the right to "`option' back into its original $5 million worth of Seragen common stock — i.e., a free option with no risk." The plaintiffs take issue with the fact that USSC did exactly that: by receiving its entire investment back at the closing of the Seragen-Ligand merger USSC secured for itself "preferential treatment [for] its purported claim" at that time.
Id. ¶ 73.
Id.
4. The Marathon Transaction
The final pre-merger transaction attacked by the plaintiffs was Seragen's sale of its operating division to Marathon, which was created by BU to effect the transaction, for $5 million. The plaintiffs contend that, but for the disclosure deficiencies in the November 1997 proxy that was distributed to shareholders to secure approval for the transaction, the minority shareholders would have voted to reject the proposal. Specifically, the plaintiffs assert that the proxy failed to disclose the ongoing merger negotiations with Ligand which resulted in a tentative agreement only two months after Seragen's shareholders voted to ratify the sale of the company's operating division to BU/Marathon. After the merger, BU sold Marathon, which consisted entirely of Seragen's former operating division, to Ligand for $8 million, thereby realizing a $3 million windfall to the detriment of Seragen's minority shareholders.
Id.
The November 1997 proxy statement also stated that Seragen retained a four-year right to repurchase its operating division if, over time, the company realized that it had sold the division to BU/Marathon for less than it was worth. The Complaint alleges that had the Seragen-Ligand merger negotiations been disclosed, "Seragen's minority shareholders would have known that there existed a significant possibility (ultimately realized) that Seragen's operating division would be soon resold at a significant increase over the purported amount for which shareholder ratification was sought, and that Seragen's trumpeted repurchase rights, touted so valuably in the November 1997 proxy, may soon be rendered worthless."
Id. ¶ 78.
B. The Merger
Merger negotiations between Seragen and Ligand began in mid-1997 and an agreement in principle was reached in early 1998. That agreement provided for Ligand's acquisition of Seragen and its operating assets (including acquisition from BU of Marathon, which by then owned Seragen's former operating division) for approximately $75 million. As stated above, the defendants held a controlling interest in the Seragen stock that was authorized to vote on the merger. The plaintiffs argue that the defendants received the "lion's share" of the merger proceeds and challenge the defendants' attempt to justify the disproportionately large allocation in their favor on the basis that they settled their substantial claims against Seragen. The plaintiffs challenge these settled claims, arguing that the defendants "had caused Seragen to issue these obligations to themselves with no valid justification, in an unlawful manner, and in self-dealing transactions that failed to take any steps necessary to insure the validity or enforcement of those transactions . . . ." The plaintiffs also challenge the accuracy of the July 1998 proxy statement disseminated to Seragen shareholders that purportedly explained the settlements and justified the premiums that the defendants received. The plaintiffs further argue that the proxy statement contained a host of material omissions including the failure to disclose the defendants' self-dealing and conflicts of interest and the failure to make full financial disclosures.
Specifically, the plaintiffs allege that despite holding an approximately 43% interest in Seragen, the minority shareholders received less than 15% of the proceeds from the Seragen-Ligand merger. See id. ¶ 95.
Id. ¶ 85.
II. ANALYSIS
A. The Contentions of the Parties
The plaintiffs seek certification of a class consisting of all former shareholders of Seragen, including the plaintiffs, but excluding defendants and their affiliates, who owned Seragen common stock at any time from July 1, 1996 through and including August 12, 1998, the date of the merger. This proposed class would include all former minority shareholders who held Seragen common stock during any and all of the four pre-merger transactions and would also include those individuals who owned Seragen common stock at the time of the August 12, 1998 merger. Defendants oppose certification of the class as proposed. They focus on what they perceive to be the absence of a common question of law or fact that is shared by both the shareholders at the time of the merger and those persons who owned shares only during the pre-merger transactions.
B. Is Certification Appropriate Under Rule 23(a)?
The plaintiffs must carry the burden of satisfying the Court that they meet the requirements for maintaining a class action under Rule 23. With that in mind, I turn to Rule 23(a) which sets forth the first step in the certification of a class action. A class action must satisfy all four of the prerequisites enumerated in subsection (a) of Rule 23 which are: "(1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class."
Dieter v. Prime Computer, Inc., Del. Ch., 681 A.2d 1068, 1071 (1996).
Nottingham Partners v. Dana, Del. Supr., 564 A.2d 1089, 1094 (1989).
Ct. Ch. R. 23(a).
As stated earlier, the defendants do not challenge certification of a class consisting of owners of Seragen common stock at the time of the August 12, 1998 merger. They do, however, argue that the plaintiffs' proposed class of shareholders, which includes the pre-merger shareholders, fails to meet three of the four prerequisites prescribed in subsection (a) of Rule 23. Specifically, they contend that inclusion of the proposed class of shareholders who no longer held Seragen stock by the time of the merger means that: (1) there is no question of fact or law common to the class; (2) the claims are not typical of the claims of the proposed class; and (3) the plaintiffs can not fairly and adequately represent the interests of the proposed class.
It is undisputed that the numerosity requirement of Rule 23(a)(1) has been met. Prior to the August 12, 1998 merger, Seragen had over 28 million outstanding shares of common stock held by "hundreds and perhaps thousands" of individuals, making joinder impracticable. Compl. ¶¶ 43, 46.
For the reasons set forth below, I find that the plaintiffs have failed to identify any question of law or fact that is common to all members of their proposed class. As such, the plaintiffs have not satisfied the second prong of Rule 23(a), and I decline to certify their proposed class of all persons who held Seragen common stock at any time between July 1, 1996 and August 12, 1998. I do find, however, that certification of a class consisting of all persons holding Seragen common stock as of the Marathon Transaction or the merger is appropriate.
1. Are There Questions of Law or Fact Common to the Class?
Rule 23(a)(2) requires that there be at least one question of law or fact common to all members of the class in order to certify the class. This requirement is satisfied, for example, "where the question of law linking the class members is substantially related to the resolution of the litigation even though the individuals are not identically situated."
Emerald Partners v. Berlin, Del. Ch., C.A. No. 9700, mem. op. at 7, Hartnett, V.C. (Nov. 15, 1991).
Leon N. Weiner Assocs., Inc. v. Krapf, Del. Supr., 584 A.2d 1220, 1225 (1991).
The plaintiffs maintain that the proposed class, which includes the pre-merger shareholders, satisfies this requirement. They contend that all minority shareholders during this period of more than two years were similarly injured by the various breaches of fiduciary duties and the aiding and abetting of those breaches in connection with the merger and the four pre-merger transactions. These alleged claims, the plaintiffs argue, represent a common set of legal and factual issues, all arising out of the same conduct and all substantially related to the resolution of this litigation.
Defendants disagree, arguing that the allegations concerning the pre-merger transactions are distinct from the allegations challenging the August 12, 1998 merger. More fundamentally, defendants argue that there is no single question linking those individuals owning Seragen common stock during any of the pre-merger transactions to individuals owning Seragen common stock solely on the date of merger. As a result, they view the proposed class as at least two distinct groups of shareholders instead of as one integrated class of similarly situated shareholders. These pre-merger claims, defendants argue, do not present questions common to those who held their shares only at the time of the merger and, thus, are not common to the class proposed by the plaintiffs for certification.
The Complaint presents challenges to four pre-merger transactions (the first of which occurred on July 1, 1996) and the merger itself (which occurred on August 12, 1998). With respect to the plaintiffs' challenge to the merger itself, the Complaint specifically asserts that the merger was the product of self-dealing and alleges that the shareholder approval of the merger was obtained by means of a misleading proxy. As recited above, the plaintiffs also contend that the majority shareholders improperly received a "lion's share" of the merger proceeds to the detriment of the plaintiffs.
The holders of Seragen stock on the date of merger clearly constitute a group of individuals who share common questions of fact and law relating to the alleged wrongful conduct on the part of the defendants in carrying out and benefiting from the merger. However, by attempting to obtain certification of a class of persons owning Seragen common stock at any time throughout this more than two-year period, the plaintiffs propose to include persons who did not own stock at the time of the merger. I acknowledge the initial temptation to group all four of the challenged pre-merger transactions with the merger; certainly the fundamental goal of Rule 23 is to allow "large groups of individuals, united in interest, [to] enforc[e] their rights." The commonality requirement of subsection (a)(2), however, serves as a threshold check on this type of reflexive reaction. That the plaintiffs alleged that the various defendants breached their fiduciary duties to the minority shareholders without more does not justify a finding that the otherwise separate and independent transactions share a common question. Nor does the plaintiffs' conclusory averment of a "scheme" on the part of the defendants to dilute the voting power of minority shareholders in order to facilitate the now challenged merger satisfy the commonality requirement of Rule 23(a)(2). Absent a connection between the merger and one, some, or all of the pre-merger transactions, an individual holding Seragen common stock on the date of the merger would not share common questions with another Seragen common shareholder who sold before the merger date. The problem with the proposed class is plaintiffs' inability to link all of the four pre-merger transactions with each other and the merger through a common question. Consequently, shareholders holding Seragen common stock at differing times throughout the two-year period may find themselves with varying and exclusive legal and factual questions depending on the periods of time in which they held their stock. There are, however, certain common questions linking the fourth pre-merger transaction to the merger.
See Emerald Partners v. Berlin, mem. op. at 7-8.
DONALD J. WOLFE, JR. MICHAEL A. PITTENGER, CORPORATE AND COMMERCIAL PRACTICE IN THE DELAWARE COURT OF CHANCERY § 9-3[a], at 9-107 (2001).
See Emerald Partners v. Berlin, mem. op. at 7.
To the extent that the plaintiffs have alleged that the merger negotiations between Seragen and Ligand were ongoing at the time of the Marathon Transaction, and, more specifically, at the time that the allegedly defective November 1997 proxy was disseminated, the plaintiffs have sufficiently alleged the necessary linkage between the fourth challenged pre-merger transaction and the merger. The Complaint alleges, at least tangentially, that the defendants caused Seragen to go forward with the sale of its operating division to Marathon/BU with the knowledge that the merged entity would buy back those operations after the Seragen-Ligand merger. As such, the plaintiffs' allegations concerning the misleading November 1997 proxy and the $3 million windfall realized by BU are linked to the merger through the defendants' failure to disclose the anticipated merger when approval of the Marathon Transaction was sought. The alleged failure to disclose the potential post-merger sale of Marathon taints both the Marathon Transaction and the merger. Accordingly, I find that at least one common question exists among those persons holding Seragen common stock as of the fourth pre-merger transaction and as of the date of the merger.
See Compl. ¶ 78; see also supra text accompanying note 13.
Unlike the fourth pre-merger transaction, however, I note the plaintiffs' failure to identify a common question linking the alleged wrongdoing in the first, second, or third pre-merger transactions with either the merger or the Marathon Transaction. At no time have the plaintiffs characterized the alleged misconduct in connection with the first three pre-merger transactions as being part of the development, structuring or execution of the merger. Nor, for example, do the plaintiffs allege that pre-merger transactions were effectuated as a means of facilitating the Seragen-Ligand merger, except that the dilutive effects of the transaction empowered the defendants to complete the merger without concern for opposition from the minority shareholders. Instead, the plaintiffs consistently separate the alleged wrongs associated with the pre-merger transactions from those assertions challenging the fairness of the merger. I am convinced, therefore, that the plaintiffs have failed to satisfy the commonality requirement of Rule 23(a)(2) with respect to the fill range of individuals in their proposed class.
The plaintiffs do argue that "[in the absence of the super-voting shares [obtained by virtue of the now challenged Restructuring Transaction], the Insider Defendants controlled only 48% in Seragen by voting power, and could not have delivered the number of proxies required by Ligand to go forward with the Merger." Plaintiffs' Opening Brief at 25. While an argument can be made that this assertion identifies a common question linking the first pre-merger transaction to the merger, I disagree. It may be true that the defendants would not have obtained the necessary voting power but for the supposedly wrongful Restructuring Transaction (as arguably enhanced by the BU Private Placement Transaction). The plaintiffs do not, however, allege that the Restructuring Transaction was motivated, designed, or carried out with goal of attaining the necessary voting power to effectuate the now challenged merger. Consequently, I do not find that the plaintiffs' conclusory argument here sufficiently raises a common question as required by Rule 23(a)(2). It is because of this reasoning that I similarly find the plaintiffs' factual averments as to "preferential liquidation rights" in connection with the Restructuring Transaction and the BU Private Placement Transaction to be unavailing. Because the Complaint fails to tie these two transactions with the merger ( i.e., that they were effectuated with the merger in mind) or the other two pre-merger transactions, the requisite commonality demanded by Rule 23 is absent.
See, e.g., Emerald Partners v. Berlin, mem. op. at 9-10. The Complaint alleges that the USSC Transaction enabled USSC to receive preferential treatment for its claim at the time of the now challenged merger. This, alone, however, does not raise a common question linking that transaction to the merger. The facts in the Complaint do not support any inference that the preferential treatment received by USSC was obtained or negotiated with an eye towards the now challenged Seragen-Ligand Merger. A finding of commonality based on this type of "but for" allegation would undermine the commonality requirement of Rule 23(a). For the same reasons, the allegations that the Series B and C preferred shareholders each received preferential liquidation rights in connection with the first and second pre-merger transactions with Seragen fail. See supra note 24. I note that unlike the USSC Transaction, the Complaint does not allege that the Series B and C preferred shareholders realized any special benefits as a result of the liquidation rights at the time of the merger.
See, e.g., Plaintiffs' Reply Brief at 4 (stating that "from the initial structure of the Complaint, Plaintiffs have asserted two parallel but different types of claims, those based upon breaches of fiduciary duty arising from four pre-Merger transactions and those based upon breaches of such duty arising from the Merger").
Because I find that those persons holding Seragen common stock as of the Marathon Transaction or the Seragen-Ligand merger constitute a group of persons sharing a common question of fact or law for these purposes, I now turn to the other requirements of Rule 23(a) to discern whether certification of this group of shareholders is appropriate.
2. Are Plaintiffs' Claims Typical of the Class?
Before a class may be certified, Rule 23(a)(3) instructs that the claims of the representative parties must be typical of the claims of the class. "The test of typicality is that `the legal and factual position of the class representative must not be markedly different from that of the members of the class.'" I conclude that the claims asserted by the class of plaintiffs holding Seragen common stock as of the Marathon Transaction or the merger are sufficiently typical to satisfy this requirement. The claims of individuals holding stock as of the Marathon Transaction or the merger are typical of those of the defined class of shareholders because these shareholders have all experienced a common harm that is related to the allegedly wrongful merger and the inadequate disclosures associated with it, including those regarding the effects of the Marathon Transaction. As the result of narrowing the plaintiffs' proposed class to include only owners of Seragen common stock during the Marathon Transaction or the merger, the claims of the representatives of this purported class are also typical of the other members of the purported class. That certain shareholders in this group likely held stock at different times is not dispositive. If additional proceedings reveal that some of plaintiffs' claims are atypical of the claims of other shareholders in this group, it would be a "problem . . . better addressed by a possible subdivision of the class with a separate representative rather than a blanket denial of certification." This, however, is not a question that I need to address at this time.
Leon N. Weiner Assocs., Inc. v. Krapf, 584 A.2d at 1225 (quoting Singer v. The Magnavox Co., Del. Ch., C.A. No. 4929, mem. op. at 2, Brown, V.C. (Dec. 14, 1979)); see also In re Best Lock Corp. S'holder Litig., Del. Ch., C.A. No. 16281, mem. op. at 68-69, Chandler, C. (Oct. 29, 2001).
Emerald Partners v. Berlin, mem. op. at 10.
3. Are the Plaintiffs Adequate Class Representatives?
In order to be deemed an appropriate class representative under Rule 23 (a)(4), the plaintiffs must be able fairly and adequately to protect the interests of the class.
In order to meet the adequacy requirements of Rule 23 . . ., representative plaintiff must not hold interests antagonistic to the class, retain competent and experienced counsel to act on behalf of the class and, finally, possess a basic familiarity with the facts and issues involved in the lawsuit.
In re Fuqua Indus., Inc. S'holder Litig., Del. Ch., 752 A.2d 126, 127 (1999); In re Best Lock Corp. S'holder Litig., mem. op. at 69-70.
I have held above that all individuals holding Seragen common stock as of the Marathon Transaction or the Seragen-Ligand merger share a common question of law and fact and that their claims are typical of one another. Specifically, because all members of the modified group of Seragen shareholders seek redress for wrongs stemming from an allegedly wrongful merger and a transaction linked directly to that merger, I do not identify any potential class representatives with "interests antagonistic to th[is] class." Whenever a class action challenges multiple discrete events on behalf of a class that includes persons who were not affected by all of the events, the potential for conflict within the class exists when and if damages arising out of the various events are allocated among the various class members. The answer again is not to deny certification but, instead, to retain the option to establish subclasses should a problem arise.
See supra text accompanying note 28.
In addition, I do not understand the defendants to challenge the competence of the plaintiffs' counsel in connection with their carrying out the prosecution of this action on behalf of the modified class. I similarly note the absence of any argument in the defendants' papers bearing on the plaintiffs' familiarity with the legal or factual issues relevant to this action or the plaintiffs' ability to facilitate this litigation. I am satisfied that the plaintiffs can fairly and adequately protect and promote the interests of the other class members and that the standards of Rule 23(a)(4) have been met.
Having found that all of the requirements of Rule 23(a) have been satisfied with respect to those individuals holding shares of Seragen common stock as of the Marathon Transaction or as of the Sergan-Ligand merger, I now turn my attention to the second step required of me by Rule 23 before a given group may be certified as a class.
C. Is Certification Appropriate Under Rule 23(b)?
Once the Rule 23(a) requirements for certification are satisfied, an action may be maintained as a class action only if a prospective class fits into one of the three categories under Rule 23(b). Again, it is the plaintiffs' burden to demonstrate that a proposed class fits into one of these categories.
Court of Chancery Rule 23(b) provides in part:
To maintain a class action, the proposed class must comply with one of the following subsections:
(1) The prosecution of separate actions by or against individual members of the class would create a risk of:
(A) Inconsistent or varying adjudications with respect to individual members of the class which would establish incompatible standards of conduct for the party opposing the class, or
(B) Adjudications with respect to individual members of the class which would as a practical matter be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests; or
* * *
(3) The Court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. The matter pertinent to the findings include:
(A) The interest of members of the class in individually controlling the prosecution or defense of separate actions;
(B) The extent and nature of any litigation concerning the controversy already commenced by or against members of the class;
(C) The desirability or undesirability of concentrating the litigation of the claims in the particular forum;
(D) The difficulties likely to be encountered in the management of a class action.
Dieter v. Prime Computer, Inc., 681 A.2d at 1071.
The plaintiffs have maintained that certification of their proposed class of Seragen shareholders is appropriate under both Rule 23(b)(1) and Rule 23(b)(3). For the following reasons, I find that certification of the group of individuals holding Seragen common stock as of the Marathon Transaction or the merger is appropriate under Rule 23 (b)(1).
Defendants contend that because there is no common question under Rule 23(a)(2) which is shared by any of the pre-merger transactions and the merger itself, an argument that I have previously addressed, it follows that common questions cannot "predominate over any [other] questions" and, thus, Rule 23(b)(3) cannot be satisfied. They also suggest that an action solely for monetary damages, such as this one, should be certified, if at all, under Rule 23(b)(3) and not under Rule 23(b)(1). Answering Brief of All Defendants in Opposition to Plaintiffs' Motion for Class Certification at 14-16.
To maintain a class action under Rule 23(b)(1), the proponent of certification must show that:
(1) The prosecution of separate actions by or against individual members of the class would create a risk of:
(A) Inconsistent or varying adjudications with respect to individual members of the class which would establish incompatible standards of conduct for the party opposing the class, or
(B) Adjudications with respect to individual members of the class which would as a practical matter be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests[.]
While subsection (A) of Rule 23(b)(1) necessitates a consideration of the potential for harm to defendants arising out of multiple actions, subsection (B) focuses on the corollary risks to the individual members of the proposed class. My starting point is Turner v. Bernstein, which addressed a motion for class certification in an action brought by former shareholders of GenDerm Corporation ("GenDerm") against its former directors. After GenDerm merged with a wholly owned subsidiary of Medicis Pharmaceutical Corporation, the plaintiffs proposed a class which consisted of all former shareholders of GenDerm common stock on the date of the merger (excluding the defendants and their affiliates). The complaint alleged that the former directors of GenDerm had breached their fiduciary duties by having failed to disclose to the common shareholders all material facts relevant to their decision to accept the consideration offered them in connection with the merger or to seek an appraisal. After the plaintiffs moved for class certification under Rule 23(b)(1), the defendants argued that certification was inappropriate because permitting certification under that section where only monetary damages were sought "would swallow Rule 23(b)(3) and leave no room for that separate category of class action."
O'Malley v. Boris, Del. Ch., C.A. No. 15735, mem. op. at 16, Chandler, C. (Jan. 11, 2001).
Del. Ch., 768 A.2d 24 (2000).
Id. at 30.
The Court in Turner concluded that certification under Rule 23(b)(1) for actions brought by shareholders challenging the actions of directors in the context of a merger could not be ruled out solely because of the fact that the relief sought took the form of monetary damages. The Court observed:
"Typically an action challenging the propriety of director action in connection with a merger transaction is certified as a (b)(1) or (b)(2) class because [1] plaintiff seeks equitable relief (injunction); [2] because all members of the stockholder class are situated precisely similarly with respect to every issue of liability and damages; and [3] because to litigate the matters separately would subject the defendant to the risk of different standards of conduct with respect to the same action.
The argument has been made that once a preliminary injunction is denied a (b)(2) action should be treated as a (b)(3) action because, practically speaking, damages are the likely remedy if plaintiff prevails. This argument has been rejected, in part, I suggest, because of concerns reflected in the second and third of the reasons stated above.
* * * * *
Neither the state nor federal claims are class actions of the type that meld somewhat dissimilar individual claims together for efficient common adjudication, as contemplated by subsection (b)(3). Rather both sets of theories involve one set of actions by defendants creating a uniform type of impact upon the class of stockholders. The Constitution does not require, nor do prudential considerations, in my opinion, commend the granting of an opt-out right in stockholder actions attacking the propriety of director conduct in connection with a corporate merger. The propriety of director action should be adjudicated, if it is to be adjudicated, once with respect to all similarly situated shareholders."
Id. at 30-31 (quoting In re Mobile Communications, Del. Ch., C.A. No. 10627, mem. op. at 36-37, Allen, C. (Jan. 7, 1991)) (citations omitted) (emphasis added).
The Court further observed that:
(1) the defendant-directors either did or did not breach their fiduciary duty of disclosure to all or none of the GenDerm stockholders in the Proposed Class; (2) if the defendant-directors did commit such a breach . . ., there is no requirement that any member of the Proposed Class have actually relied upon such breach in order to benefit from a remedy; and (3) thus any monetary remedy due to the Proposed Class will be calculated on a per share, rather than per shareholder basis. As in Mobile Communications, this case therefore involve[s] "one set of actions by defendants creating a uniform type of impact upon the class of stockholders."
Id. at 31.
The parallels between the facts of Turner and the ones here are plentiful. As in Turner, the class of persons holding Seragen common stock as of the Marathon Transaction or the Seragen-Ligand merger can attack the legitimacy of the actions taken by the defendants without regard to the specific circumstances of any particular class member. The only question that varies from class member to class member is when each owned Seragen common stock. As was the case in both Turner and Mobile Communications, the defendants either did or did not breach their fiduciary duties in connection with the Seragen-Ligand merger and the Marathon Transaction. Moreover, if the defendants did breach their duties, there are no other unique circumstances or questions that would require individualized considerations in determining either liability or damages. Finally, this would also be a case where any monetary remedy would be calculated on a per share basis. Accordingly, the class that I am considering involves two transactions orchestrated by the defendants having a uniform impact on the minority's shares at the time of each transaction, with each transaction sharing at least one common question with the other.
That certain class members may have owned or sold their Seragen common stock at differing times does not preclude compliance with Rule 23 (b)(1). That Rule does not limit its reach to cases not involving subclasses (assuming for present purposes the possibility that they may be needed to address these variations). Instead, the Rule is clear on its face in providing for those situations where "[t]he prosecution of separate actions by . . . individual members of the class would create a risk of . . . [i]nconsistent or varying adjudications with respect to individual members of the class which would establish incompatible standards of conduct for the party opposing the class[.]" "For a class to be certified under 23(b)(1)(A), there must be a realistic likelihood of multiple litigation and a total absence of individual issues among the class." As noted above, there are no issues or questions relating to the actions of the defendants that bear on factors unique to certain individual members of the class of Seragen common shareholders owning stock as of the dates of the Marathon Transaction or the Seragen-Ligand merger ( e.g., reliance). Simply stated, either the defendants breached their fiduciary duties in connection with their involvement in these transactions (or otherwise acted culpably) or they did not. Thus, the absence of individual issues for those Seragen common shareholders who held stock at the appropriate time and the possibility that, from among the hundreds of former Seragen shareholders, further litigation may result suffice for purposes of Court of Chancery Rule 23 (b)(1). Accordingly, I find that certification under Rule 23(b)(1) is appropriate.
Ct. Ch. R. 23(b)(1)(A).
O'Malley v. Boris, mem. op. at 16.
I also note that this action could be action under Court of Chancery Rule 23(b)(3) as well. See id. at 19.