Can Strine and Castel resolve forum fight in BofA derivative deal?
According to Bank of America’s board, if three Delaware plaintiffs’ firms wanted to settle their shareholder derivative suit accusing the board of breaching its duty when it acquired Merrill Lynch, they should have asked. Instead, the Delaware firms bickered amongst themselves and refused to participate meaningfully in settlement talks, board members’ counsel at Davis Polk & Wardwell and Richards, Layton & Finger wrote in a brief filed in Delaware Chancery Court on Wednesday.
The BofA brief, which offers a rare behind-the-scenes account of the shuttle diplomacy the bank’s lawyers engaged in as they tried to get rid of parallel derivative suits in Delaware and New York, said that the board would have been perfectly willing to reach a deal with either set of plaintiffs’ firms, and actually reached out first to Delaware counsel from Chimicles & Tikellis; Horwitz, Horwitz & Paradis; and Wolf Haldenstein Adler Freeman & Herz. BofA said it was “rebuffed” by those firms, so when shareholders’ counsel in the New York federal court case, Kahn Swick & Foti and Saxena White, approached the board with a settlement offer, the bank began the talks that resulted in a $20 million proposed settlement earlier this month.
Even in the midst of those negotiations, the bank brief said, Davis Polk partner Lawrence Portnoy took a call from a Wolf Haldenstein partner who said the Delaware firms were finally ready to talk about a deal within the limits of BofA’s directors and officers insurance coverage. But before Portnoy could bring his clients into the loop, the other two Delaware shareholder firms informed him that Wolf Haldenstein had spoken out of turn and Delaware wouldn’t settle within the D&O policy limits. (That figure hasn’t been publicly disclosed in either derivative case, but my Reuters colleague Jon Stempel calculated it to be $500 million, based on Delaware plaintiffs’ filings.)
In other words, according to Bank of America, the Delaware firms have only themselves to blame for the mess that the BofA derivative litigation has become.
That’s quite a different story from the one the Delaware firms told in an Apr. 13 preliminary injunction motion in Chancery Court and a simultaneous petition for an order to show cause in Manhattan federal court. (The petition and accompanying affidavits are, unfortunately, under seal.) The Delaware firms, as Gretchen Morgenson reported in the New York Times, accused BofA of settling on the cheap with the firms in the New York case, which hadn’t put anywhere near as much work into the litigation as they had. The bank deliberately excluded them from talks, the Delaware firms said, so it could collude with firms that had ridden sidecar in discovery in the consolidated federal-court securities litigation in New York.
Putting aside the ugliness of the accusations (though I’m always loath to put such things aside), what’s remarkable about the Bank of America derivative turf war is that the New York and Delaware cases proceeded in tandem for as long as they did. And as much as the bank and all of the plaintiffs’ firms blame one another, some responsibility for this state of affairs lies with the two judges overseeing the litigation, U.S. District Judge Kevin Castel in Manhattan federal court and Chancellor Leo Strine in Delaware. Neither has been willing to give an inch on jurisdiction, which is why the cases both got as far as they did.
Strine is well-known for promoting Delaware’s primacy even as plaintiffs’ firms have taken to filing M&A and derivative suits outside of Chancery Court. In a hearing last September in the Delaware case, the chancellor told BofA’s lawyers that he regarded the fiduciary duties of the bank’s board members as a matter of Delaware law, and he wasn’t going to let the Delaware case sit around and wait for developments in federal court. “I want coordination to the extent possible,” Strine said. “But frankly, the predominant interest here is the protection – the application of Delaware law.”
Castel, meanwhile, long ago denied Bank of America’s motion to stay the federal-court derivative case in favor of the Delaware suit. The New York action makes derivative claims not only under Delaware fiduciary law but also under a section of the Exchange Act of 1934 that regulates proxy materials. In a motion to dismiss filed way back in December 2008, Bank of America argued that Castel should toss the Exchange Act claim because shareholders hadn’t served a demand on the board – and should stay whatever Delaware state-law claims remained in the case in deference to the Chancery Court. Castel kept the Exchange Act count in the derivative suit and refused to stay the case.
Castel is concerned enough about the Delaware plaintiffs’ allegations that he ordered a May 4 hearing on their motion to enjoin the deal. We haven’t yet heard from Strine on the simultaneous motion they filed in Delaware, but BofA’s Apr. 25 brief contends the chancellor simply has no power to enjoin a federal-court settlement. Strine isn’t the type who likes to be reminded of the limits of his jurisdiction.
One way or another, these two judges are going to have to agree on what happens next in this litigation. Good luck with that.
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