Court Rejects Settlement of Claims Challenging Private-Equity Deal

In a recent opinion in In re SS&C Technologies, Vice Chancellor Lamb refuses to approve a proposed settlement of claims challenging a management buy-out led by Carlyle. This fascinating opinion demonstrates that the courts will not hesitate to reject settlements where plaintiffs’ counsel have been dilatory in exploring the merits of their claims–and, perhaps more importantly, raises a host of interesting issues about management’s role in soliciting buyouts from private-equity firms.

SS&C Technologies CEO William Stone approached Carlyle in 2005 to discuss a potential deal. Carlyle eventually proposed a cash-out merger in which Stone would receive, among other things, cash proceeds of more than $72 million. Shareholders sued; their lawyers concluded that the proxy materials related to the transaction were inadequate, and the company agreed to make more extensive disclosures in a supplemental proxy. Without presenting these terms to the court, the company simply mailed the new proxy and closed the transaction.

The Vice Chancellor refuses to approve the settlement, in part because the parties settled the claims, and closed the transaction, without so much as notice to the court. Indeed, the Vice Chancellor explains, the parties sought approval of the settlement a year after having closed the deal. The court is clearly troubled by the implication of such an untimely presentation of the terms–that is, that the court was a mere rubber stamp for the parties’ agreed-upon (and already-performed!) terms.

The court was also concerned, however, that plaintiffs’ counsel had inadequately explored the merits of the case–a view that reveals the court’s skepticism about the terms of the underlying deal itself. Given that Stone sought out the Carlyle deal with the help of company-paid advisers and secured a substantial cash payout for himself, the court concludes that the facts “raise a series of questions” about Stone’s and the board’s conduct, especially “whether, given Stone’s precommittment to a deal with Carlyle, the board of directors was ever in a position to objectively consider whether or not a sale of the enterprise should take place.”

But perhaps most damning to the proposed settlement was the fact that plaintiffs’ counsel mistakenly told the court at the settlement hearing that Stone took no cash out of the deal. How, the court wonders, could plaintiffs’ counsel have ably represented shareholders when counsel was unaware that the CEO took more than $72 million in cash away from the deal? Given that “a manager who has the opportunity to . . . take $72.6 million in cash from the transaction . . . has a different set of motivations than one who does not,” the court clearly thought that plaintiffs’ counsel was not in a position to understand (and thus to settle) their clients’ claims.

Counsel for both plaintiffs and corporate defendants should take seriously the court’s warning that it will not serve as a rubber stamp for already-performed settlement terms. And both sides should also take note that a lack of familiarity with the facts of a case can jeopardize a settlement crucial to an already-closed transaction. But the fascinating questions raised by the Vice Chancellor here–for example, whether the CEO’s role in soliciting a management buy-out from a private-equity firm compromises a board’s objectivity in approving that deal–remain to be answered.