Corporate Governance

Delaware Courts and the Validation of Misleading Disclosure: In re Transkaryotic (In Delaware, It's Tough to be a Plaintiff)(Part 6)

By J. Robert Brown

We are discussing In re Transkaryotic, a relatively recent Delaware case that contains bad law and reflects the anti-plaintiff bias of the Delaware courts.  

The case opened with a condescending slap at the role of plaintiffs and presumably their lawyers, likening them to  scavengers who concoct theories of misbehavior out of rubble.

• All corporate combinations leave in their wake certain artifacts-documents, e-mails, conversations, and notes.  If one digs through enough of the rubble of a consummated merger, one will almost invariably find something questionable.  A clever corporate archeologist can extrapolate from these suspicious artifacts and concoct a theory of malfeasance, disloyalty, and bad faith.  Yet theories alone cannot lead to liability. 

Now mind you, the Court found in this case that the  "rubble" revealed that the merger may not have been approved by shareholders, hardly requiring plaintiff to "concoct a theory."  It was not accurate about this plaintiff and an unattractive thing to say about plaintiffs in general.     

These aspersions more or less continued throughout the opinion.  When plaintiffs alleged a possible conflict of interest with respect to one of the directors, the Court accused plaintiffs of "misrepresent[ing] and mischaracteriz[ing] the record in their opposition brief."  As if not blunt enough, the Court further noted that "Plaintiffs' sloppy and disingenuous description of the record cannot create a genuine issue of material fact where none exists."  Put aside that some of the evidence used by the plaintiffs was characterized as hearsay.  In other words, it wasn't that the plaintiffs misrepresented the evidence, it was that the Court chose to exclude it on evidentiary grounds.

The sharpness of the approach was particularly apparent given the Court's treatment of the defendants.  Plaintiffs alleged that the vote tally for the merger was incorrect, that in fact shareholders voted down rather than approved the merger.  As part of that argument, plaintiffs asserted that some votes favoring the merger had been double counted, producing as evidence two proxy cards with the same totals.  The Company responded by contending that the same proxy card had "apparently [been] produced twice."  The Court, however, noted that "[e]ven a cursory examination of each card makes clear that the cards are not identical reproductions or photocopies of each other . . . Thus it is obvious that they are not the same card . . . " 

Imagine if the plaintiffs had made an argument that could be dispelled with a "cursory" examination of the evidence. But where the defendants make the argument, there was no reference to sloppy or disingenuous practices, no reference to mischaracterizing the record.  In this opinion, pejorative language and hostile reactions are reserved for the plaintiffs. 

This disparity is not all.  When Plaintiffs succeeded on an argument, the Court made absolutely clear that the decision was grudging.  Examples?

• I conclude that plaintiffs have sufficiently, albeit scarcely, rebutted this presumption to survive the Company;'s motion for summary judgment on the unlawful merger claim . . . 
• I therefore conclude that plaintiffs have adequately, if barely, demonstrated Shire's knowing participation in Langer's assumptive breach of his duty of loyalty to the Company.
• Without such evidence, however, I am forced to conclude that, with respect to the 776,395 votes at issue on the July 25 proxy card, plaintiffs have raised a genuine issue of material fact . . .
• I hasten to add, however, that this conclusion should not in any way imply that I am optimistic that plaintiffs will succeed in carrying their ultimate burden of proof at trial (emphasis added)

There is more.  Take a look at footnote 137, with plaintiffs criticized for failing to attend the meeting while the court hardly has anything to say about the failure of the defendants to preserve documents.  There is a reference to the 110 page brief opposing summary judgment, clearly intended to suggest a wordy (dare we say prolix) written product, coming from a Court that itself took 63 pages to set out its views. 

Few could read this opinion without detecting a noticeable hostility or dislike towards plaintiffs.  The disparate treatment of the two sides makes this impression even more pronounced.  Could this opinion have been written in a manner that avoided the harsh remarks and grudging references while still conveying the same legal principals?  Of course.  But in the Delaware, such neutrality is apparently not required, at least when it comes to the plaintiffs. 

We have posted a copy of the opinion and many of the primary documents involved in the case  on the DU Corporate Governance web site. 

Full post as published by The Race to the Bottom on July 25, 2008 (boomark / email).