In re PLX Technology Inc. Stockholder Litigation, Consolidated C.A. No. 9880-VCL (Del. Ch. Apr. 18, 2022) (Laster, V.C.)

In this memorandum opinion, Vice Chancellor Laster granted an unopposed motion to modify the distribution plan for a settlement. The modified plan provided that the settlement administrator could obtain certain information about PLX Technology, Inc.’s (“PLX”) record holders and excluded holders from the Depository Trust Company (“DTC”) and distribute settlement proceeds directly to DTC participants, rather than make the payments through DTC itself as the original plan contemplated.  Modification of the plan was necessary because DTC had recently begun requiring that participants execute letters before it distributed settlement funds (“Payment Suppression Letters”), and many participants did not execute those letters.  The Court’s decision, described as a “public service announcement,” serves to familiarize corporate litigators with the “bug” in certain settlement technology and “understand the fix.”

In 2014, plaintiffs’ counsel, on behalf of a class of PLX stockholders, filed a complaint alleging that the directors of PLX breached their fiduciary duties in connection with an acquisition of PLX, and asserted claims for aiding and abetting against various third parties.  

On August 17, 2016, class counsel settled with all the defendants except one, and on December 20, 2016, the Court approved the settlement. The settlement called for an administrator to distribute the settlement proceeds through DTC on a pro rata basis to the class members (i.e., all holders of record of shares of PLX common stock at the effective time of the merger). However, the definition of “class” specifically excluded the defendants and their affiliates (the “Excluded Holders”). To facilitate the distribution of the settlement proceeds, the settlement agreement followed the method approved by the Court in In re Dole Food Company, Inc. Stockholder Litigation, whereby the administrator would pay the settlement consideration to Cede & Co., the nominee for DTC, who would then distribute the consideration to DTC and the DTC participants, including custodial banks and brokers. Eventually, after flowing through the network of entitlement holders, the proceeds would reach the ultimate beneficial owners.

However, post-Dole, DTC imposed an additional requirement that caused a logjam for the distribution of the settlement proceeds.  In particular, DTC required 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 must confirm that DTC can withhold payment for the excluded shares and the DTC participant additionally agrees to indemnify DTC against claims arising from withholding that payment.

Here, PLX provided DTC with the names of the account holders associated with the Excluded Holders, the custodial banks or brokers, and the numbers of shares in each account.  However, the custodial banks or brokers did not provide the Payment Suppression Letters.  As a result, the distribution of the settlement proceeds came to a standstill, and class counsel filed a motion to modify the plan of distribution.  As part of the modified plan, the administrator would obtain additional information from DTC, including (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. Thus, the modified plan would avoid the need to obtain Payment Suppression Letters by relieving DTC of the responsibility for distributing the proceeds and instead would authorize the administrator to use the additional information to send payments directly to the DTC participants.

The Court held that the modified plan of distribution was “fair, reasonable, and adequate, and good cause exist[ed] to adopt it” because of the current impediments to obtaining the required Payment Suppression Letters.  Importantly, DTC agreed to provide the required information under the modified plan to the administrator once the Court issued the order.  In addition, the Court noted that the modified plan remained more efficient than the traditional notice-and-claim process for settlement payments. 

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