Court of Chancery Stays Action Against Bear Stearns In DE In Favor Of NY Proceedings
In an opinion issued yesterday by Vice Chancellor Parsons (HT: M&A Law Prof and Pileggi), which you can access here, the Court of Chancery ordered a stay of the Delaware actions filed against Bear Stearns in favor of those filed in New York. The Court’s reasoning recognizes the national importance of the matter and a concern for the stability of the financial markets and national economy.
This blog previously reported here on the class actions filed in Delaware against Bear Stearns and its directors, seeking to enjoin the sale to JPMorgan Chase. A few days earlier, however, other Bear Stearns stockholders had filed similar suits in the New York Supreme Court. Based on those earlier New York filings, the defendants moved the Court of Chancery to dismiss or stay the Delaware action. This blog provided coverage of the oral argument here, remarking that the arguments raised several interesting questions, such as (1) the extent to which Delaware courts would defer to New York courts on matters of Delaware corporate law and (2) how Delaware courts would handle the issue of comity urged by the defendants.
Those questions have now been answered. The Court of Chancery decided to exercise its discretion to stay the Delaware proceedings for reasons of comity and the orderly and efficient administration of justice:
As discussed in this memorandum opinion, I have decided in the exercise of my discretion and for reasons of comity and the orderly and efficient administration of justice, not to entertain a second preliminary injunction motion on an expedited basis and thereby risk creating uncertainty in a delicate matter of great national importance.
Stepping back for a minute, it is worth noting that the Court found these competing actions, which were filed days apart, to be contemporaneously filed and thus did not apply the McWane doctrine’s preference for a first-filed action. Instead, the Court based its decision to stay on the six forum non conveniens factors: (1) applicability of Delaware law; (2) the relative ease of access to proof; (3) the availability of compulsory process for witnesses; (4) the pendency or non-pendency of a similar action or actions in another jurisdiction; (5) the possibility of a need to view the premises; and (6) all other practical considerations that would make the trial easy, expeditious and inexpensive. The Court found that the fourth and sixth factors predominated here in favor of a stay.
The plaintiffs argued that the merger agreement contained an exclusive forum selection clause, which stated that any action “based on any matter arising out of or in connection with” the agreement shall be brought in Delaware. The plaintiffs also argued that the dispute raised numerous novel and substantial issues of Delaware corporate law, particularly that “the proposed transactions include perhaps the most extreme combination of deal protections approved by a board of directors of a public Delaware corporation ever considered by this Court.” The plaintiffs added that Delaware has the authority to regulate the internal affairs of its corporations and that the Court of Chancery is uniquely positioned as the regular arbiter of corporate law disputes.
The Court held that the claims in the complaint only required the application of well-settled principles of Delaware law to admittedly unique facts. Further, the Court noted that the extraordinary situation that the case presents is unlikely to recur and thus Delaware’s interest in having this case heard in its courts is somewhat relaxed. The Court distinguished Topps and Ryan v. Gifford, where the Court declined to stay Delaware actions involving novel issues having widespread application in favor of similar litigation in another state.
The Court’s driving concern in reaching its decision appears to be the stability of the financial markets and national economy, a concern that was clearly shared by the Federal Reserve when it got involved in the deal. In determining that the fourth factor weighed in favor of a stay, the Court noted the risk of harm that competing litigations would create in this delicate matter. On the sixth factor, the Court found that the practical considerations included “the risk that inconsistent rulings would negatively impact not only the parties involved, but also the U.S. financial markets and the national economy” and “the involvement of unusual third party players, including, inter alia, the Federal Reserve Bank and the Department of Treasury.” Such considerations made this a rare case warranting a stay.
This one line from the decision sums it up: “What is paramount is that this Court not contribute to a situation that might cause harm to a number of affected constituencies, including U.S. taxpayers and citizens, by creating the risk of greater uncertainty.”