In re PLX Technology Inc. Stockholder Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE PLX TECHNOLOGY INC. ) Consolidated C.A. No. 9880-VCL
STOCKHOLDERS LITIGATION )
MEMORANDUM OPINION
Date Submitted: March 31, 2022
Date Decided: April 18, 2022
R. Bruce McNew, COOCH AND TAYLOR, P.A., Wilmington, Delaware; Randall J.
Baron, David A. Knotts, ROBBINS GELLER RUDMAN & DOWD LLP, San Diego,
California; Kent Bronson, MILBERG TADLER PHILLIPS GROSSMAN LLP, New
York, New York; Attorneys for Plaintiffs.
Kevin G. Abrams, J. Peter Shindel, Jr., Matthew L. Miller, ABRAMS & BAYLISS LLP,
Wilmington, Delaware; Richard D. Heins, ASHBY & GEDDES, Wilmington, Delaware;
Patricia L. Enerio, Melissa N. Donimirski, Jamie L. Brown, HEYMAN ENERIO
GATTUSO & HIRZEL LLP, Wilmington, Delaware; Michael A. Weidinger, Elizabeth
Wilburn Joyce, PINCKNEY, WEIDINGER, URBAN & JOYCE, Greenville, Delaware;
Lori Marks-Esterman, Renee M. Zaytsev, OLSHAN FROME WOLOSKY LLP, New
York, New York; Attorneys for Defendants.
LASTER, V.C.
In 2016, the court approved a settlement between a class of stockholders of PLX
Technology, Inc. (“PLX”) and all but one of the defendants. The settlement resolved
challenges to the acquisition of PLX by merger in 2014 (the “Merger”). The settlement
called for a settlement administrator (the “Administrator”) to distribute the settlement
proceeds on a pro rata basis to all holders of record of shares of PLX common stock at the
effective time of the Merger, except for the defendants and their affiliates (the “Excluded
Holders”).
In an attempt to reduce administrative costs and avoid a complex notice-and-claim
process, plaintiffs’ counsel (“Class Counsel”) and the Administrator sought to distribute
the settlement proceeds through the Depository Trust Company (“DTC”). It turns out that
DTC has adopted a policy against distributing settlement proceeds to a DTC participant
that held shares on behalf of an Excluded Holder unless it has received a “Payment
Suppression Letter” from the DTC participant. In the Payment Suppression Letter, the DTC
participant instructs DTC to exclude the settlement consideration associated with the
Excluded Holder and undertakes to indemnify DTC against any claims arising from the
distribution.
An impasse has arisen because almost all of the DTC participants who held shares
for Excluded Holders have failed to provide Payment Suppression Letters. Some DTC
participants have simply refused. Others have studiously ignored persistent inquiries from
the Administrator and Class Counsel.
Currently, the Administrator is in the untenable position of being required to
distribute the settlement proceeds to record holders and not to Excluded Holders, yet the
Administrator cannot accomplish this task because of its inability to obtain Payment
Suppression Letters and DTC’s refusal to proceed without the letters. The process of
settlement administration has ground to a halt.
To break the impasse, Class Counsel has moved for an order modifying the plan of
distribution (the “Motion”). The order approving the modified plan will authorize and
direct the Administrator to obtain information from DTC about PLX’s record holders and
Excluded Holders on the date of the Merger. The Administrator then will distribute the
settlement proceeds directly to the DTC participants, bypassing DTC and obviating the
need for the Payment Suppression Letters.
The request is unopposed, and this decision approves it. The court has issued this
decision largely as a public service announcement. Corporate litigators need to be familiar
with the bug in this particular settlement technology and understand the fix. Even with the
workaround, the method of distributing settlement proceeds to record holders remains more
efficient than the traditional notice-and-claim process.
In addition, Class Counsel deserves credit for their assiduousness in working
through these challenges. Class Counsel received an award of fees and expenses based on
the benefits they conferred in the litigation. That award did not take into account the
subsequent burdens associated with a lengthy period of settlement administration. Class
Counsel also did not have a client pushing them to figure out the answers. As a judge who
has bluntly criticized class action lawyers when they have succumbed to agency costs or
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otherwise fallen short,1 I think it important to acknowledge when members of the class
action bar have made a special effort to fulfill their obligations.
I. FACTUAL BACKGROUND
The facts are drawn from the Motion and its supporting documents. Other facts are
drawn from earlier docket items in the case or are matters suitable for judicial notice.
A. The Settlement
In 2014, Class Counsel filed a complaint alleging that the directors of PLX breached
their fiduciary duties in connection with the Merger, a transaction in which Avago
Technologies Wireless (U.S.A.) Manufacturing Inc. (“Avago”) used an acquisition
subsidiary to acquire PLX. The complaint asserted that Avago, its acquisition subsidiary,
and Potomac Capital Partners II (“Potomac”) aided and abetted the directors in breaching
their fiduciary duties. Class Counsel subsequently amended the complaint to assert that
Deutsche Bank, PLX’s financial advisor in connection with the Merger, aided and abetted
the directors in breaching their fiduciary duties.
The defendants moved to dismiss the amended complaint under Rule 12(b)(6). The
court granted the motion in part, dismissing the claims against Avago, its acquisition
subsidiary, and two of the director defendants.
On August 17, 2016, Class Counsel settled with all of the defendants except for
Potomac. Dkt. 159 (the “Settlement”). The litigation proceeded through trial against
1
See, e.g., In re Revlon, Inc. S’holders Litig., 990 A.2d 940 (Del. Ch. 2010).
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Potomac. See In re PLX Tech. Inc. S’holders Litig., 2018 WL 5018535 (Del. Ch. Oct. 16,
2018), aff’d, 211 A.3d 137 (Del. 2019) (TABLE). In its post-trial decision, the court found
that Potomac had aided and abetted a breach of fiduciary duty by the PLX directors, but
that the Class Counsel had failed to prove damages.
The Settlement defined the “Class” as a
non-opt-out class consisting of all record and beneficial holders of PLX
common stock who held such stock at any time between and including June
23, 2014 and August 12, 2014, including any and all of their respective
successors-in-interest, successors, predecessors-in-interest, predecessors,
representatives, trustees, executors, administrators, estates, heirs, assigns and
transferees, immediate and remote, and any Person acting for or on behalf of,
or claiming under, any of them, and each of them, together with their
predecessors-in-interest, predecessors, successors-in-interest, successors,
and assigns, but excluding the Settling Defendants, Non-Settling Defendants,
Avago, and [Avago’s acquisition vehicle], their respective affiliates as to
their own accounts (i.e., accounts in which they hold a proprietary interest),
and any person, firm, trust, corporation, or other entity affiliated with Avago,
[Avago’s acquisition vehicle], or any Settling or Non-Settling Defendant.
Settlement ¶ 1(b) (the “Class Definition”). The Class Definition thus excluded the
Excluded Holders, which is a standard approach.
The Settlement consideration consisted of $14,125,000 in cash. Id. ¶ 1(s) (the
“Common Fund”). The Settlement provided for Class Counsel to retain a settlement
administrator to administer and distribute the Common Fund. Id. ¶ 2(d). Galardi & Co.
LLC has served as the Administrator.
After deducting the award of attorneys’ fees and expenses to Class Counsel, and
after paying the Administrator’s costs and expenses, the Settlement called for the
Administrator to distribute the amounts remaining in the Common Fund
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on a pro rata basis to all holders of record of shares of PLX common stock
as of the date the Merger closed, except no such payment shall be made to
any Person excluded from the Class, except as permitted in Paragraph 1(b).
Id. (the “Plan of Distribution”); see id. ¶ 21 (providing that any awarded attorneys’ fees
and expenses would come “solely from the Common Fund,” and that the amount paid to
create the Common Fund “shall be wholly inclusive of all fees, expenses, cost
disbursements, and expert and consulting fees associated with the creation of the Common
Fund”).
To facilitate the Plan of Distribution, the Settlement required PLX to provide the
Administrator with the following information, to the extent available:
(i) a list of the holders of record of PLX common stock as of the closing of
the Merger containing each holder’s name, address, and the number of shares
owned and (ii) similar lists or reports available from PLX’s Transfer Agent
or the [DTC] identifying the beneficial owners of PLX common stock as of
the Merger Date, as appropriate for providing notice of the Partial Settlement
to the Class.
Id. ¶ 2(f).
On December 20, 2016, the court approved the Settlement. Dkt. 204.
B. Problems With Implementation
To implement the settlement, Class Counsel and the Administrator attempted to
follow the method approved by this court in In re Dole Food Company, Inc. Stockholder
Litigation, 2017 WL 624843 (Del. Ch. Feb. 15, 2017). In Dole, the court initially approved
a settlement that called for settlement proceeds to be distributed to class members through
a traditional notice-and-claims process. The class consisted of holders of 36,793,758
shares. But due to various factors relating to the time allowed for clearing trades, as well
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as the existence of a significant short interest when the merger closed, claimants submitted
facially eligible claims covering 49,164,415 shares. See id. at *3–4. The court found that it
was “functionally impossible to resolve the share discrepancy in a practical or cost-
effective manner. The resulting process would be lengthy, arduous, cumbersome,
expensive, and fundamentally uncertain.” Id. at *4.
As a workaround, class counsel proposed modifying the settlement “to replace the
claims process with a pro rata distribution through DTC.” Id. Under that model, members
of the class who held their shares in street name as beneficial owners would receive the
settlement proceeds in the same manner that they received the merger consideration. The
administrator would pay the consideration to Cede & Co., the nominee for DTC and the
record holder appearing on PLX’s stock ledger. Cede would then distribute the
consideration to DTC and the custodial banks and brokers who are DTC participants. From
there, the proceeds would flow on, moving through the network of Article 8 entitlement
holders until eventually reaching the ultimate beneficial owners.
Using this method meant that “it will be up to the DTC participants and their client
institutions to resolve in the first instances any issues over who should receive the
settlement consideration.” Id. at *6. The court explained that
[s]hifting the burden to them is efficient because they already had to address
these issues for purposes of allocating the merger consideration. If new issues
arise, the DTC participants and their client institutions have access to their
own records, and they have visibility into the terms of their contractual
relationships, such as the terms on which shares are borrowed. Any ensuing
disputes are between the beneficial owners and their custodial banks and
brokers. Those disputes should be resolved pursuant to the contractual
mechanisms in the governing agreements or, if necessary, through a judicial
proceeding limited to the parties. Addressing those disputes is not part of the
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settlement process and therefore not a task for [the settlement administrator]
or this court.
Id. (citation omitted).
The court observed that distributing the consideration through DTC created
potential problems of its own. For example, “under this method, consideration could flow
to holders of shares that are excluded from the class under the terms of the settlement, such
as shares for which appraisal was sought or those held by certain defendants.” Id. at *7.
Class counsel reported, however, that DTC could “tailor the distribution to bypass the
excluded holders if provided with the names of the account holders, the account numbers,
the custodial banks or brokers, and the number of shares held in each account.” Id. To
enable DTC to tailor the distribution, the court directed the parties in Dole to “provide this
information to DTC to the extent the information is within their possession, custody, or
control.” Id.
The Dole court observed that there was nothing unique about the problems that
infected the settlement. “The only difference was the magnitude of the discrepancy, which
made the issues visible.” Id. at *7. The court concluded that “[d]istributing the settlement
consideration in merger cases to record holders from the outset would mitigate both
pathologies and reduce overall administrative expenses, which in turn will benefit the
class.” Id.
The parties in this case heeded the guidance from the Dole decision and sought to
proceed from the outset by distributing the settlement proceeds to record holders through
DTC. But since the Dole settlement, DTC has imposed additional requirements. Now, DTC
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also requires a Payment Suppression Letter from each DTC participant that held shares on
behalf of an Excluded Holder. In the Payment Suppression Letter, the DTC participant
confirms that DTC can withhold payment for the excluded shares, and the DTC participant
agrees to indemnify DTC against any claims arising from the withholding of that payment.
Presumably, a well-meaning lawyer for DTC dreamed up the Payment Suppression
Letter as a way to build in additional protections for DTC in the event that DTC’s reliance
on a court order was deemed insufficient to insulate DTC from liability in some form of
litigation brought against DTC as a result of the settlement distribution. Unfortunately,
introducing the Payment Suppression Letter not only adds another step to the process, but
the additional step requires a deliverable from a party outside the court’s control, who can
readily ignore the request. Moreover, the Payment Suppression Letter requires that the
DTC participant undertake an obligation to indemnify DTC, which the DTC participant
understandably might resist.2
In this case, the defendants and PLX have already provided DTC with the Dole
information, viz. the names of the account holders associated with Excluded Holders, the
2
I make this observation without any meaningful insight into whether or the degree
to which the request for indemnification actually alters the existing internal governance
relationship between DTC and its participants and their respective obligations. It would not
be surprising to find out that there are already detailed internal governance agreements
between the parties that contemplate indemnification, exculpation, waivers of rights and
obligations, and numerous other features. The fact that DTC asked for indemnification in
the Payment Suppression Letter nevertheless implies that DTC thought it was getting
something additional, and a DTC participant might well reject the request on that basis.
After all, what was the DTC participant receiving in return other than the opportunity to
pass on the consideration its own entitlement holders?
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custodial banks or brokers, and the number of shares held in each account. The impediment
is the need for Payment Suppression Letters. The custodial banks or brokers have either
declined to provide them, or they have failed to respond to the Administrator and Class
Counsel. DTC therefore has not received the Payment Suppression Letters that it requires,
and the process for distributing the Common Fund has seized up.
Class Counsel conferred with DTC and the Administrator regarding potential
solutions, and they developed a workaround. To implement it, Class Counsel filed the
Motion. Dkt. 409.
In the Motion, Class Counsel asks the court to approve a modified plan of
distribution (the “Modified Plan”). The order approving the Modified Plan would empower
and instruct the Administrator to obtain from DTC:
(1) an allocation report used by DTC to distribute the Merger consideration,
(2) any additional information necessary to identify all DTC participants who
received the merger consideration in exchange for their shares of PLX
common stock,
(3) the number of shares as to which each DTC participant received payment
or the amount of consideration each DTC participant received, and
(4) the correct address or other contact information used to communicate
with the appropriate representatives of each DTC participant that
received Merger consideration.
Id., Proposed Order ¶ 1 (the “Additional Information”). The Modified Plan would authorize
the Administrator, rather than DTC, to use the Additional Information to send payments
directly to the DTC participants. By relieving DTC of the responsibility for distributing the
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proceeds, this solution avoids the need to obtain Payment Suppression Letters and should
enable the Administrator to distribute the proceeds promptly.
II. LEGAL ANALYSIS
A distribution plan “must be fair, reasonable, and adequate.” Schultz v. Ginsburg,
965 A.2d 661, 667 (Del. 2009), overruled on other grounds by Urdan v. WR Cap. P’rs,
LLC, 244 A.3d 668, 678 (Del. 2020). Where a movant seeks to modify a settlement to alter
the plan of distribution, the court treats it as a “request to modify the plan of [distribution]
for good cause shown.” Dole, 2017 WL 624843, at *4. When considering the
reasonableness of a plan of distribution, the court can “take into account the administrative
difficulties involved in achieving a proposed plan of allocation, including the anticipated
expenses.” Id.The Modified Plan is fair, reasonable, and adequate, and good cause exists to adopt
it. As noted, the Administrator is currently unable to distribute the settlement proceeds to
record holders through DTC because of the inability to obtain the Payment Suppression
Letters. The current Plan of Distribution has gotten stuck.
The court’s ability to address this particular logjam is limited. DTC is not a party to
this proceeding, and the court has no power to order DTC to modify its approach. The DTC
participants who have failed to provide Payment Suppression Letters also are not parties to
this proceeding, and the court can neither order them to respond, nor direct them to provide
the Payment Suppression Letters.
Under the Modified Plan, the Administrator will be instructed and empowered to
obtain the Additional Information from DTC. Class Counsel has indicated that DTC is
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willing to provide the Additional Information if the court enters the proposed form of order.
There are potential means by which Class Counsel might be able to use the judicial process
to secure information from DTC, but hopefully it will not be necessary to explore those
avenues. The court expresses its appreciation to DTC for having worked with Class
Counsel in an effort to move the settlement forward.
With the Additional Information, the Administrator will distribute to each DTC
participant its pro rata share of the Common Fund, less its share of the proceeds associated
with shares held by an Excluded Holder through that DTC participant. The Administrator
will send instructions to each DTC participant to withhold payments from the Excluded
Holders. As in Dole, however, it will be up to each DTC participant to distribute its share
of the settlement consideration to its entitlement holders, and any disputes about whether
the DTC participant distributed the settlement consideration properly will be “between the
beneficial owners and their custodial banks and brokers.” Dole, 2017 WL 624843, at *6.
“Addressing those disputes is not part of the settlement process and therefore not a task for
[the Administrator] or this court.” Id. The Modified Plan appropriately places the “risks
inherent in choosing to hold in street name” on the “beneficial owner who made that
choice,” including the risks that “[a] custodial bank or broker could err in processing the
settlement consideration and the beneficial owner might not find out” or that “a beneficial
owner might have to sue its custodial bank or broker” to correct the issue. Id. at *6.
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To assist beneficial owners in overseeing the distribution process, the Administrator
shall update the settlement website,3 promptly after making the distribution, to reflect the
date and per-share amount. That information will enable members of the Class to make
inquiries if they do not receive the settlement proceeds that they expect.
III. CONCLUSION
The Modified Plan is fair, reasonable, and adequate. The Motion is granted.
3
http://www.plxsecuritieslitigation.com.
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