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In re SS&C Technologies, Inc. S’holders Litig., C.A. No. 1525 (Del. Ch. March 6, 2008) (V.C. Lamb)

March 6, 2008

The Court of Chancery held that the named plaintiffs in a class action and their counsel acted in bad faith when seeking leave to withdraw from a litigation and that, as a result, the defendants were entitled to an award of attorneys’ fees and costs. At issue was a consolidated class action brought by two named plaintiffs challenging the acquisition of SS&C Technologies Inc. by a private equity buyer. Soon after the litigation was commenced and prior to the closing of the acquisition, the parties entered into a settlement agreement providing for dismissal of the litigation in exchange for supplemental disclosures and the payment of attorneys’ fees. The parties did not advise the Court of the settlement until July 2006, nearly six months after the acquisition was closed. At a subsequent settlement hearing, the Court declined to approve the settlement because it had been untimely presented and because the record evidence did not support a finding that the plaintiffs’ counsel adequately represented the interests of the class or that the settlement terms were fair and reasonable. Despite that disapproval, the plaintiffs continued prosecuting the litigation until several damaging facts emerged in the depositions of the two named plaintiffs regarding their adequacy and credibility, as well as the accuracy of a number of court filings. In the deposition of the manager of the first named plaintiff, which was a partnership, facts emerged with respect to the disturbing nature of certain partnerships that held very few shares in roughly 60-80 public companies and the unusually large number of lawsuits filed by those partnerships in which they were were represented by the same law firm, i.e., the firm that was co-lead counsel before the Court. In addition, the manager had made a number of false statements in filings with the Court relating to those partnerships, which the Court characterized as “easily susceptible to the inference that they were made to conceal the existence and nature of the web of partnerships and their evident litigation spawning purpose.” In the deposition of the other named plaintiff, the deponent “demonstrated a striking lack of knowledge of the SS&C litigation and testified to very little participation in the prosecution.” As a result of the damaging facts emerging from the depositions, both plaintiffs sought to withdraw from the litigation. Importantly, the plaintiffs and their counsel offered to withdraw with no notice to the class if the defendants agreed to maintain the confidentiality of the discovery record. When the defendants refused, the plaintiffs moved to withdraw with notice and the defendants moved to unseal the discovery record and for sanctions. The Court decided at oral argument that the case should be dismissed without prejudice and without notice to the putative class. In its written decision addressing the motion for sanctions, the Court found that the record did not support a finding that the entire litigation was brought in bad faith. Although the Court noted that the nature of the partnerships and their relationship with the co-lead counsel raised “very disturbing questions and may well disqualify those partnerships or the persons associated with them from serving in a representative capacity in the future,” it nevertheless could not conclude that those facts alone on the sparse record before it supported a finding of bad faith litigation. However, the Court found clear evidence of bad faith by the plaintiffs in bringing the motion to withdraw conditioned on notice to the putative class, concluding that the condition “was not based on a good faith belief” that notice was required (or even likely) ‘’to advance the best interests of the former SS&C stockholders.” Rather, the decision to demand notice “was simply part of an effort to maintain the confidentiality of the discovery record” and thus  was an effort only to advance “the plaintiffs’ selfish motives.” The Court found that its conclusion was “buttressed by the series of misstatements made in filings that tended to misrepresent or downplay the facts relating to” the partnerships and their role in the litigation. The Court, therefore, concluded that the defendants were entitled to an award of the fees and costs that the defendants reasonably incurred in defending the motion to withdraw and in bringing the motion to unseal and for sanctions.

The full opinion is available here