Of Pilgrims and Puritans and the Role of Delaware Courts: In re Revlon (New York v. Delaware)

In the end, VC Laster opted to replace plaintiffs' counsel with firms that arrived to the case relatively late.  But even here, he did so in a questionable manner.

Two firms, Harwood Feffer (New York) and Trinko LLP (New York) filed separate suits raising certain claims on behalf of shareholders who tendered in the exchange.  Both of them used the same local firm, Smith Katzenstein (Delaware).

VC Laster apparently wasn't enamored with either firm or their complaint.  With respect to Harwood Heffe, he described their efforts this way:

• The second of the December 21, 2009, cases was styled Corneck v. Perelman, C.A. No. 5160. Smith Katzenstein’s co-counsel was Harwood Feffer LLP of New York, New York. Harwood Feffer’s predecessor firms have appeared in numerous Delaware cases, including another matter involving MacAndrews & Forbes’ affiliates. See In re M&F Worldwide Corp. S’holder Litig., 789 A.2d 1164 (Del. Ch. 2002). The 9-page Corneck complaint was the shortest of the six and resembled a hastily drafted first-day filing.

As for Trinko, LLP, he had this to say:

• The first of the December 21, 2009, cases was styled Gutman v. Perelman, C.A. No. 5158. Smith Katzenstein’s co-counsel was the Law Firm of Curtis V. Trinko, LLP of New York, New York, a frequent filer of representative litigation in this Court. The 20-page complaint asserted that the Exchange Offer was substantively unfair and that the disclosure documents were false and misleading. Unlike the original four actions, which challenged a negotiable proposal, the Gutman complaint challenged an actual transaction. Otherwise it was not significantly different from the initial four efforts.

As for Smith Katzenstein, the Delaware firm that put its name on the two complaints, he had this to say:

• Smith Katzenstein is a Delaware firm that has litigated representative actions successfully. The firm is not, however, one of the usual Delaware conduits for the traditional plaintiffs’ bar.

The descriptions would portend the Vice Chancellor's rulings. 

Other than falling into the frequent filer category, both Trinko and Harwood showed no signs of inattention or indolence. Once their complaints were in and the cases consolidated, they filed a motion to be appointed co-lead counsel for the tendering shareholders with Smith Katzenstein as liaison counsel.  See PLAINTIFFS GUTMAN AND CORNECK’S MEMORANDUM OF LAW CONCERNING LEADERSHIP DESIGNATION, Feb. 12, 2009. 

Moreover, when the matter of new lead counsel came up, these firms raised for the trial judge the possibility of a conflict of interest between tendering and non-tendering shareholders.  The frankness moved VC Laster to "commend New Counsel for making this disclosure and raising the concern" although he did not view the perceived conflict as a problem.  

Yet when it came time to appoint new counsel, VC Laster chose to elevate Liason Counsel as lead counsel.  Why?  Apparently on the basis of their reputation (expressed only by VC Laster) as frequent filers, the two New York firms apparently could not be trusted.

• I therefore find that New Counsel can take over as lead counsel in the case. I will not, however, adopt the leadership structure that New Counsel proposed, in which the Harwood Feffer firm and the Trinko firm would serve as co-lead counsel with Smith Katzenstein as Delaware liaison counsel. The qualifications and modus operandi of the Harwood Feffer and Trinko firms closely resemble those of Old Counsel. As relatively small firms managing a portfolio of representative litigation, the Harwood Feffer and Trinko firms have similar economic incentives to settle early to maximize the net benefit to themselves, rather than expending resources to press litigation further for the benefit of the class. I have no desire to replace Pilgrims with Puritans.

But he could trust the local Delaware firm. 

• The Smith Katzenstein firm, by contrast, is a Delaware law firm that is well known to the Court. The firm frequently represents paying clients and does not appear to litigate plaintiffs’ cases using a portfolio strategy. The members of that firm, including the lead lawyer in this case, have built up reputational capital with the Court and have proven willing to engage in the hard work of actual litigation.

While all three firms were appointed co-lead counsel, it was clear that Smith Katzenstein was left in control.  VC Laster made clear that "In the event the co-lead firms disagree about any aspect of the litigation, including the allocation of any potential fee award, the Smith Katzenstein firm will have
decision-making authority."

So many things could be said about all of this, none of them in agreement.  First, frequently filing cases does not inevitably equal indolence.  Yet that is what VC Laster seems to suggest.  Second, given the circumstances of this case and the obvious willingness of VC Laster to replace counsel, it can't be a serious concern that new counsel wouldn't rigorously litigate the case.  Third, the case reflects a clear preference for local firms.  Local firms will have the best and most repeat opportunities to build up the necessary "reputational capital" with the Vice Chancellor.  Fourth, as noted, other than criticizing their complaints, VC Laster had not disclosed issue with either of the two New York firms. 

Replacing initial counsel was certainly within the Vice Chancellor's discretion.  Giving liaison counsel contol of the case because of its reputational capital with the Vice Chancellor and bypassing two experienced out of state firms because they frequently litigate derivative suits in Delaware, without more, produces nothing positive and only throws up even greater barriers to shareholders seeking to vindicate their rights in Delaware.