Scully v. Nighthawk: Reverse Auctions and A Vice Chancellor's Unlikely Efforts at Reform (Part 1)

We are in the middle of a series on the independence of the director nomination process, focusing on the recent events connected to the board of Hewlett-Packard.  But in the name of topicality, we will pick the subject up tomorrow and instead briefly touch on a different matter. 

VC Laster has made quite a splash since joining the Delaware Chancery Court.  His longstanding experience in the courts likely adds to his sometimes untraditional approach in decision making.  Nowhere has this untraditional approach been clearer than with respect to his efforts to stop what he views as inappropriate legal behavior.

In Revlon, VC Laster raised concerns about the behavior of plaintiff's counsel and replaced them.  We criticized the case not because he was wrong but because he chose to selectively criticize plaintiffs counsel for a practice that, to the extent accurately portrayed, required the complicity, if not the involvement, of defense counsel. 

In Scully v. Nighthawk, the Vice Chancellor again raised concerns about counsel's behavior and this time defense counsel was included in the analysis.  The case involved multiple suits filed over the same transaction (a merger), with at least some actions filed in Arizona and one in Delaware.  In the Delaware action, plaintiffs filed a motion for expedited proceedings apparently in an attempt to obtain injunctive relief before the merger closed.  The effort was vigorously resisted. 

 At the hearing on the motion, VC Laster apparently reviewed the merits and suggested that the disclosure claims brought by plaintiffs likely lacked merit but that other claims were more viable.  See Transcript, Dec. 17, 2010 ("Now, you also will recall that reviewing the proxy myself, I regarded the disclosure claims as not colorable. That's page 23 of the transcript. I also made clear that I thought that there were meaningful, litigable process laws in this deal."). 

Thereafter, silence ensured until the Vice Chancellor received an unexpected bit of information.

• So imagine my surprise when last Friday I got a letter informing me that the parties had agreed to a disclosure-based settlement. So, in other words, the settlement consideration was the claims that I already said weren't colorable. There was no apparent effort to address the claims that I thought were colorable. And rather than coming back to me on this, the parties had decided to go to the Arizona state courts.

Transcript, Dec. 17, 2010.  Rather than express umbrage and otherwise ignore the conern, he required additional information from the parties and appointed Special Counsel to look into the matter.  In making the appointment, he asked a number of specific questions.  The Report has now been filed and we will have some comments on it as well as some thoughts as to where it leaves VC Laster.

The primary materials in the case, including the report of the Special Counsel, can be found at the DU Corporate Governance web site.