Chancery Court Honors Shareholder Representative Provision Holding Selling Stockholders Are Not Real Parties-In-Interest
In Fortis Advisors LLC, v. Allergan W.C. Holding Inc., C.A. No. 2019-0159-NTZ (Del. Ch. May 14, 2020), a shareholder representative appointed pursuant to a merger agreement asserted a claim on behalf of selling stockholders for certain contingent payments. The defendant surviving corporation brought a motion in the Delaware Court of Chancery (the “Court”) to (i) compel the selling stockholders to participate in discovery as parties-in-interest to the action and to be subject to trial subpoenas as parties or (ii) compel the shareholder representative to procure and produce discovery from the selling stockholders. The Court denied the motion in full.
Defendant Allergan W.C. Holding Inc. (“Allergan”) and Oculeve, Inc. (“Oculeve”) executed a merger agreement in July 2015 (the “Merger Agreement”), which included appointment and authorization of plaintiff Fortis Advisors LLC (“Shareholder Representative”) as the shareholder representative. In such capacity, Shareholder Representative was designated as the “sole, exclusive, true and lawful agent, representative and attorney-in-fact” of the former Oculeve stockholders (“Selling Stockholders”) with respect to “any and all matters relating to, arising out of, or in connection with” the Merger Agreement, including contingent payments.
The Merger Agreement contemplated that Allergan would make certain post-closing milestone payments to Selling Stockholders should pending regulatory authorization be granted. However, after receiving an authorization, Allergan declined to make the corresponding milestone payment, arguing that the authorization did not meet the conditions set forth in the Merger Agreement. In October 2019, the Court declined to dismiss a claim by Shareholder Representative alleging that Allergan materially breached the Merger Agreement with respect to such payments. In December 2019, Allergan served its initial discovery requests to Shareholder Representative. The requests sought documents from over fifty non-party individual Selling Stockholders, to which Shareholder Representative objected.
In reviewing Allergan’s motion to compel discovery from Selling Stockholders, the Court noted that Delaware law presumes that sophisticated parties engaging in arms-length negotiations will be bound by the language of the agreements they negotiate. Here, the Merger Agreement appointed Shareholder Representative to litigate on behalf of Selling Stockholders as the real party-in-interest to such actions. The Court recognized that this structure creates transactional efficiencies that benefit both buyers and sellers post-closing. As Allergan had bargained for this structure, the Court said that Allergan could not displace the structure now with the argument that it created “tangential inefficiency” to the litigation. Accordingly, the Court declined to compel Selling Stockholders to participate in discovery as parties-in-interest to the action or to be subject to trial subpoenas as parties.
Next, the Court noted that the Merger Agreement did not give Shareholder Representative any ability to compel discovery from Selling Stockholders. Court of Chancery Rule 34 requires a party to produce all documents within its possession, custody or control in discovery. A party has possession and control over documents held by third parties if it can force production of documents without relying on a court, such as pursuant to a contractual obligation. The Court found the Merger Agreement did not grant such possession and control of Selling Stockholders’ documents to Shareholder Representative; Allergan had not bargained for such terms. The Court distinguished cases from outside of Delaware in which the appointment of administrative agents under credit agreements did not prevent discovery from the lenders, noting that the applicable agreements did not contemplate litigation arrangements as provided in the Merger Agreement. As such, the Court declined to compel Shareholder Representative to procure and produce discovery from Selling Stockholders.
Finally, the Court noted that (i) Shareholder Representative had limited substantive relationships or communications with Selling Stockholders, (ii) Shareholder Representative had engaged counsel on its own behalf, not on behalf of Selling Stockholders and (iii) as a practical matter, dismissing the motion would not significantly prejudice Allergan in the litigation because it already had access to the majority of Oculeve’s books and records. The Court stated that these facts bolstered its conclusions.