Delaware Court of Chancery Approves Modifying Merger-Related Class Action Settlement to Distribute Proceeds to Record Stockholders through DTC
The Court of Chancery granted a motion for leave to modify a settlement agreement in a merger-related class action suit to distribute settlement proceeds through DTC to Dole Food Company, Inc. (“Dole”) common stockholders of record. The Court held that the original stipulation providing for settlement proceeds to be distributed to both record holders and beneficial holders through a traditional notices and claims forms process proved to be too costly and burdensome in practice, which justified modifying the allocation procedure.
In re Dole Food Company, Inc. arose out of a going-private transaction Dole completed through a single-step merger on November 1, 2013. The merger proceeds were distributed to the stockholders of record, including Cede & Co., the nominee of the Depository Trust Company (“DTC”). Shortly following the merger, a class of Dole common stockholders sued Dole fiduciaries in a case that settled for consideration of $2.74 per share plus interest.
The parties to the class action entered into a Stipulation and Agreement of Settlement, under which all record holders and beneficial owners of common stock of Dole between June 11, 2013 and November 1, 2013, the day of the closing of the merger, were to receive a payment of $2.74 per share plus interest. After excluding the defendants, the class of stockholders entitled to this consideration held in the aggregate a total of 36,793,758 outstanding shares of Dole common stock. This settlement was approved by the court and the aggregate settlement proceeds amount was paid by defendants to the Settlement Administrator.
A.B. Data served as Settlement Administrator and mailed notices and claims forms to potential class members, brokers and other nominees. Through this process, A.B. Data received facially eligible claims from holders whose completed claims forms indicated record and beneficial ownership of a total of 49,164,415 shares. This exceeded the total number of shares entitled to receive settlement proceeds by 12,370,654 shares. A.B. Data and class counsel’s efforts to solve the discrepancy with DTC revealed that due to short-selling and a high volume of trade in the three days before the merger closed, it would be nearly impossible to determine who owned the shares as of closing in a practical or cost-effective manner. Class counsel therefore moved for leave to modify the allocation procedure of settlement proceeds so that instead of the claims process, the proceeds would be distributed through DTC, using the same payment mechanism that was used to distribute the merger consideration.
The Court of Chancery reviewed the motion for leave to modify the settlement as a request to modify the plan of allocation for good cause shown. The Court of Chancery explained that a plan of allocation must be reasonable but, according to Delaware law, a plan does not have to compensate all potential claimants equally in order to be reasonable. The Court pointed out that although the original plan sought to allocate consideration among all holders of Dole common stock, this allocation would not have achieved pro rata distribution among all class members but rather, only those class members that made claims. The Court thus determined that allocating the settlement proceeds among only the record holders in the same way the merger proceeds were allocated would be the better solution because it was fair, cost-efficient and consistent with Delaware law.
In its reasoning the Court indicated that distributing settlement proceeds only to record holders would be consistent with Delaware law in that Delaware corporations generally are required only to recognize record stockholders and are not required to determine beneficial stockholders, even in settlements. The Court also referred to the property rights in Dole shares held by the record holders at the time of the merger as a basis for the claims underlying the class action settlement agreement. The Court concluded that consideration paid in settlement of such class action claims could be viewed as additional merger consideration that the class should have received pursuant to the merger.
In support of its determination that distributing and allocating the settlement proceeds in the same way as the merger proceeds would be the most efficient, the Court noted that Cede & Co and DTC already had put in place and had successfully used for the merger DTC’s system for distributing to its participant members cash proceeds allocated to record holders. The Court also referred to DTC’s confirmation that DTC would charge $2,500 to distribute and allocate the Dole class action settlement proceeds using this procedure, with an additional budget of $10,000 for consultations. Any disputes that arose from effecting this through DTC, the Court further concluded, could be resolved pursuant to the contractual mechanisms in the governing agreements to which DTC’s participants are parties or a separate judicial proceeding, if necessary.
The Court of Chancery noted that it was possible that this process would result in incremental costs for beneficial owners but that there was nothing inequitable in having a beneficial owner bear the cost of its voluntary choice to hold shares through an intermediary institution holding record ownership. The Court similarly dismissed the idea that the consideration would be distributed to stockholders who were otherwise excluded under the settlement because DTC, A.B. Data and class counsel had undertaken to make sure this did not happen.
The Court of Chancery determined that class counsel had established good cause to modify the plan of allocation. It concluded by noting that in future merger-related class action settlements, distributing the settlement consideration to record holders at the outset would be beneficial to the class because it would reduce overall administrative expenses and mitigate the effects of short selling and trades.