Delaware Court Declines to Circumvent Shareholder Representative Structure to Add Individual Stockholders or Compel Discovery
In a recent Delaware case, the Court of Chancery held that a party in a dispute over whether stockholders were entitled to certain post-closing milestone consideration under a merger agreement could not compel the stockholders themselves to participate in discovery as real parties in interest when the merger parties had expressly negotiated for a single shareholders’ representative. The Court also held that the shareholders’ representative did not have control over the stockholders’ discoverable material to compel discovery. Fortis Advisors LLC, v. Allergan W.C. Holding Inc., C.A. No. 2019-0159-MTZ, 2020 WL 2498068 (Del. Ch. May 14, 2020).
Defendant Allergan W.C. Holding Inc. filed a motion requesting stockholders to participate in discovery as real parties in interest, or, in the alternative, requesting that the Court compel the shareholders’ representative, plaintiff Fortis Advisors LLC, to produce documents and testimony from the stockholders in connection with a dispute over whether the stockholders were entitled to certain post-closing milestone consideration under an Agreement and Plan of Merger executed in July 2015. In December 2019, Allergan served initial document requests on the sellers named in the Merger Agreement, which included over fifty individual non-party selling stockholders. Fortis rejected these requests on the basis that they were directed to non-parties and Allergan’s motion followed.
In denying Allergan’s motion, the Court of Chancery noted that the Merger Agreement appointed Fortis as the “sole, exclusive, true and lawful agent, representative and attorney-in-fact of all [s]ellers” in all matters relating to the Merger Agreement. In particular, the Court noted that the Merger Agreement did not “empower Fortis to compel [s]tockholder participation in litigation” but rather appointed Fortis to act in their stead as shareholders’ representative. The Court reasoned that forcing the stockholders to participate in discovery as real parties in interest “would be contrary to the language and purpose of the Merger Agreement’s shareholder representative structure.” Accordingly, the Court concluded that Allergan should get the benefit of its bargain: it “bargained for structural efficiency . . . and cannot now avoid that structure because third-party discovery introduces some tangential inefficiency in litigation . . . .”
The Court of Chancery also concluded that the Merger Agreement did not grant Fortis control over the stockholders or their documents. A party generally has possession and control of documents if it can force production of the documents unaided by a court. The Court reasoned that the Merger Agreement did not give Fortis any right to compel the stockholders to produce documents and concluded that Fortis had no control or obligation to produce such documents in discovery. As such, the Court dismissed Allergan’s motion.
Parties in M&A deals should carefully weigh the consequences of appointing a shareholders’ representative and understand the discovery and other litigation implications, particularly in transactions where production of documents and testimony from individual stockholders may be required post-closing.