In the Matter of the Philadelphia Stock Exchange, Inc. Nos. 613/615, 2007 (Del. Mar. 27, 2008) (Jacobs, J)

In this Delaware Supreme Court Opinion affirming approval of a class action settlement, the Court approved a bifurcated review of the settlement and a broad release that included factual allegations that were not the subject of any specific claim for relief. The class action complaint at issue in the case challenged a series of transactions in which almost 90% of the equity of the Philadelphia Stock Exchange (“PHLX”) was sold to six “strategic investors.” The class action plaintiff alleged that the members of the PHLX board breached their fiduciary duties by approving the strategic transactions and that the strategic investors aided and abetted those fiduciary breaches. On the eve of trial, the parties agreed to a settlement. The settlement proceeds consisted of: (1) return of 14% of the equity acquired by the strategic investors in the transactions; (2) payment of $17.1 million in cash; (3) cancellation of 14% of the restricted stock units granted to the PHLX chairman; and (4) certain guaranteed protections against future stock dilution.

The parties submitted the settlement to the Court of Chancery under a bifurcated process, in which the fairness of the settlement was reviewed separately from the allocation of the settlement proceeds. The Court of Chancery found the settlement fair and reasonable and held that the plan of allocation could be established and submitted for approval on a separate track. On appeal, the objectors raised numerous arguments, all of which were rejected by the Delaware Supreme Court.  The two primary legal issues on appeal involved the bifurcated approval process and the scope of the release.

First, the Supreme Court held that the adoption of the bifurcated settlement approval process did not violate the class members’ due process rights because the lower court could determine the fairness of the settlement without knowing how the proceeds would be allocated among the class members. The bifurcated process also was not an abuse of discretion because it was designed to allow the PHLX to proceed with a merger with the Nasdaq, while giving class counsel sufficient time to consider all of the issues and potential conflicts arising from the allocation of the settlement. Second, the Supreme Court approved the release negotiated by the parties, which included all claims relating to the demutualization of the PHLX in 2004. Although the complaint did not raise any specific claims relating to the demutualization, it was the subject of several allegations of wrongdoing and the plaintiff sought “intensive” discovery on the issue. Moreover, during the demutualization the PHLX approved an amended charter which was allegedly violated when the strategic transactions were approved. The Supreme Court noted that the scope of a release cannot be limitless, and in Delaware a settlement can release claims not specifically asserted in the settled action only if those claims are based on the “same identical factual predicate” or the “same set of operative facts” as the underlying action, but held that the release satisfied that standard because the demutualization was a fact upon which the class action claims were predicated.

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