IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
STUART TURNER and RICHARD A.
BERNSTEIN,
>
>
>
Plaintiffs.
>
>
.>
v.
>
Civil Action No. 16190
JOEL E. BERNSTEIN, M.D.,
JAMES L. CURRIE, FRANK A..
EHMANN, NEAL S. PENNEYS, M.D.,
JEREMY SILVERMAN and
LAURA PEARL,
Defendants.
M E M O R A N D U M O P I N I O $ :5 cn
N
4
Date Submitted: August 4, 2000
Date Decided: August 11, 2000
Ronald A. Brown, Jr., Esquire, of PRICKETT, JONES & ELLIOTT, Wilmington,
Delaware, Attorney for Plaintiff1
Gregory V. .Varallo, Esquire and Russell C. Silberglied, Esquire, of RICHARDS,
LAYTON & FINGER, Wilmington, Delaware; OF COUNSEL: Professor Martin H.
Redish, Mic.hael S. Poulos, and Lucinda J. Bach, Esquires, of PIPER MARBURY
RUDNICK & WOLFE, Chicago, Illinois, Attorneys for Defendants.
STRINE:, Vice Chancellor
This opinion resolves a hotly-contested motion for class certification
in a case alleging that the former directors of GenDerm Corporation failed to
disclose all the material facts necessary to permit the GenDerm stockholders
to make an informed judgment whether to accept the consideration offered
in a Dmecember 1997 merger with a wholly-owned subsidiary of Medicis
Pharmaceutical Corporation (the “Merger”) or to seek appraisal
I resolve the motion in favor of the plaintiffs. In so doing, I make
three principal determinations.
First, I conclude that the class may be certified under Court of
Chancery Rule 23(l)(b). This case requires a determination of whether
corporate fiduciaries have committed breaches of fiduciary duty in
conne:ction with a corporate transaction and, if so, what the appropriate
class-wide remedy should be. Because those issues involve questions of law
and fact common to the entire “Proposed Class” and because there are no
material questions of law or fact dependent on the individual circumstances
of members of the Proposed Class, Rule 23(l)(b) certification is
appropriate. ’
’ E.g., Jn ye Mobile Conmunications Corporation ofAmerica, Inc. Consolidated Litig., Del. Ch.,
C.A.~Nos. 10627, 10638, 10644, 10656,10697, mem. op., 1991 WL 1392, Allen, C. (Jan. 7,
1991) (discussed in detail, infra), afs’d, Del. Supr., 608 A.2d 729 (1992), cert. denied, 505 U.S.
1221 (1992); Wacht v. Continental Hosts, Ltd, Del. Ch., C.A. No. 7954, mem. op., 1994 WL
5252Z!, Chandler, V.C. (Sept. 16, 1994) (discussed in detail, irzjkz.).
Second, I find that class certification is not untimely, even though
summary judgment has been entered against the defendant-directors on the
question of liability. I reach this conclusion because the defendant-directors
made a tactical decision to defer responding to the plaintiffs’ timely filed
class certi lkation motion, have treated this case as a class action all along,
and thus face no unfair prejudice.’
Finally, I reject the defendants’ argument that the named plaintiffs
cannot adequately represent the Proposed Class because the defendants
solicited affidavits from potential class members stating that those potential
class members did not wish to participate in this lawsuit. I give little weight
to those affidavits, which were procured two years ago by self-interested
fiduciaries accused of a serious breach of duty. While the affiants face
absolutely no harm if this action goes forward, they face potentially serious
harm if the court denies certification on the questionable basis that members
of the Proposed Class have signed away their rights based on an
unsupervised, potentially one-sided presentation of the facts made in
advance of their receipt of any court-approved notice.3
--~_
3See W%cht, mem. op., 1994 WI 525222.
3 As I i-idicated in 111 re Gaylord Container Corporation Shareholders Litig., Del. Ch., 747 A.2d
7 1, 72 11.1 (1999), the fact that parties fail to press for a tirnely resolution of certification issues in
too many purported class actions brought in this court is a matter of serious concern. It may well
be that a more rigid approach should be taken through an amendment to Court of Chancery Rule
23(c)( 1) that would set a firm deadline for the filing and resolution of certification motions.
2
I. Factual Background
This opinion resolves the latest dust-up between the parties in this
litigation arising out of the Merger in which Medicis acquired GenDerm
Corpo-ration for an up-front cash payment of $3.64 per share and the
potent:ial for up to an additional $2.33 per share depending on certain postMerger events. Plaintiffs Stuart Turner and Richard A. Bernstein now press
their motion to certify a class of the former stockholders of GenDerm
Corporation pursuant to Court of Chancery Rule 23(b)(l).” The Proposed
Class is to consist of all holders of common stock as of the date of the
Merger and their successors in interest and transferees and assigns,
excluding defendants and their affiliates. The plaintiffs’ class certification
motion was originally filed on June 9, 1998 -- less than five months after
they filed their complaint.
---
’ The plaintiffs also sought certification under Rule 23(b)(2). Because the relief they seek is
monetary damages only and the only declaratory relief they request is a now-extent liability
finding, the plaintiffs have rightly stressed only Rule 23(b)(l) in litigating this motion. Ironically,
the defendants themselves, however, desire an alternative final remedy consisting primarily of a
supplemental disclosure that would give the Proposed Class information about GenDerm’s value
at the Merger date and the opportunity to elect to participate in a quasi-appraisal action. Defs.’
Br. at 27. This bolsters the notion that a Rule 23(b)(2) certificatron may also be appropriate. See,
e.g., In re Anzsted Industries, Inc. Litig., Del. Ch., CA. No. X224, lett. op. at 3, 1986 WL 12466,
at *l-*2, Allen, C. (Nov. 3, 1988) (plaintiffs’ challenge to consummated merger could be
certified under Rule 23(b)(2) when the court could not conclude that equitable relief might not be
the predominant relief granted). While I do not rule out the possibility that such a remedy might
be appropriate in the future, I do not reach that issue now.
3
After the filing of the class certification motion, the parties chose to
devote their attention to matters other than completing briefing on that
motion. Rather than submitting an answering brief to the plaintiffs’ brief in
support of the class certification motion and seeking a prompt resolution of
that m’otion by the court, the defendants pressed for a decision on a motion
to dismiss. The plaintiffs opposed the motion to dismiss and filed their own
motion for summary judgment.
‘This court, per Vice Chancellor Jacobs, ruled on those motions on
February 9, 1999 and dismissed several of the claims against the
defendants.’ The Vice Chancellor did not dismiss the plaintiffs’ claim that
the defendants who were members of the GenDerm board before the Merger
(“the d’efertdant-directors”) had breached their fiduciary duties by failing to
disclos’e to -the GenDerm stockholders all .material facts bearing on the
decision whether to accept the Merger consideration or seek appraisal. But
he was unwilling to grant summary judgment to the plaintiffs on that claim
until me defendant-directors had an opportunity to conduct discovery on
certain affirmative defenses.”
’ Turner v. Gemstein I, Del. Ch., C.A. No. 16190, mem.
9, 1999).
6 Id., 1999 WL 66532, at “8.
op., 1999 WL 66532, Jacobs, V.C. (Feb.
While those motions were pending, the defendants had not forgotten
that the p.laintiffs were seeking to litigate this case on a class action basis.
To the contrary, the defendants were so aware of the class action nature of
the litigation that they had defendant Joel Bernstein, M.D. (“Dr. Bernstein”),
GenDerm’s former Chief Executive Officer, and other defendant-directors
solicit affidavits from former GenDerm stockholders attesting that they do
not support this litigation and do not wish to be a part of any certified class.
The affidavits are virtually identical7 and state in part that:
I was and continue to be satisfied with the merger
6.
consideration I received in the exchange for my shares and do
not wish to exercise any alternative appraisal right. I did not,
and do not believe that additional information was necessary for
me to make an informed decision whether to demand an
appraisal. I believed at the time 1 transmitted my shares, and
continule to believe, that I received fair value for my GenDerm
shares.
In light of the foregoing, I have no interest in proceeding
7.
with any action, either individually or as part of a class, against
any of the named defendants based upon the allegations in the
Complaint filed in this action. In short, I stand by my election
to receive the merger consideration regardless of the outcome
of plaintiffs’ litigation.
I understand that plaintiffs’ Complaint asks that a class
be formed of all shareholders of GenDerm excluding the named
defendants. I do not wish to be part of such a class, or to be
represented by plaintiffs or their law firms, neither of which I
8.
--
’ So identical that Dr. Bernstein’s affidavit has him confessing to talking to himself. Some of the
affidavits are slightly diftirent in wording, but every version appears to be a form created by
counsel for Dr. Bernstein and his fellow defendant-directors.
5
believe would adequately represent my interests. Moreover, if
plaintifl‘s’ proposed class were allowed by the Court, I would
choose not to participate in and would exclude myself from
such a class, and I would not participate in any proposed
appraisal or other proceeding.
I was contacted regarding this Affidavit and the lawsuit
9.
by Dr. Joel E. Bernstein, Dr. Bernstein explained that he is a
defendant in the litigation and that he was seeking the execution
of this Affidavit on his behalf. ITIe also explained that I was
free to contact plaintiffs’ counsel, counsel representing other
defendants, or independent counsel of my choosing regarding
the allegations in the Complaint and this Affidavit. I have not
been coerced, threatened or offered anything of value by
counsel regarding this Affidavit, which I have signed of my
own free will and based upon my independent judgment.8
Even in a court that handles class action litigation on a regular basis,
this solicitation tactic stands out as an unusually vigorous approach to
opposing class certification. But despite having undertaken such an
extraordinary effort, the defendants continued to stand mute in the face of
the plaintiffs’ certification motion even after Vice Chancellor Jacobs ruled
on the original dispositive motions in the case.
For their part, the plaintiffs did not demand an office conference with
the court to set a schedule for the disposition of that motion either. Instead,
the plaintiffs brought on a renewed motion for summary judgment,
coincident with discovery motions brought by the defendants. In the course
--~_
’ Def:;. Ex. A.
of scheduling and disposing of these motions, the court was informed of the
plaintiffs’ unhappiness with the defendants’ solicitation of affidavits from
prospective class members and of the de:fendants’ position that a class
should not be certified. Yet neither side suggested that the court should
defer disposing of the summary judgment and discovery motions until after a
ruling on the class certification motion.
Instead, the parties fully briefed and argued the summary judgment
and discovery motions. Thereafter, I issued an opinion rejecting the
defendant-directors’ defenses and concluding that the defendant-directors
had breached their fiduciary duties by failing to disclose all the material
facts that GenDerm stockholders needed to determine whether to accept the
merger consideration or seek appraisal:
It is undisputed that the GenDerm board provided the GenDerm
stockholders with extremely cursory information in connection
with the Medicis merger. For example, the GenDerm board did
not give the stockholders any current financial information or
explain why the merger was in the best interests of the
GenDerm stockholders. While the board did tell stockholders
they could call the company if they had any questions, the
board essentially defaulted on its affirmative obligation to
disclose the information material to the decisions it was asking
the GenDerm stockholders to make.
Because the inadequacy of the company’s disclosures is
indisputably clear and because GenDerm’s certificate of
incorporation contained no exculpatory provision immunizing
breaches of the duty of care, the -plaintiffs are entitled to partial
7
summary judgment as to the liability aspect of their disclosure
claims.”
In that opinion, I asked the parties to schedule a conference to chart a course
for ha’w the remainder of the litigation should proceed.”
At the conference, a schedule was set that reflected the need to
determine the class certification issue promptly. Much to the court’s
surprise, -however, the defendants’ primary argument opposing class
certification now rested on the timing of the court’s consideration of that
long-ago-tiled motion - even though the defendants had every opportunity
to raise that timing concern far earlier.
According to the defendants, the court is now powerless to grant class
certification because it has already determined that the defendant-directors
breached their fiduciary duties. Because this determination is a final
decision on the merits (although insufficient in itself to support the entry of a
final Judgment), the defendants contend that class certification is now
inappropriate under Court of Chancery Rule 23(b)(3).
In support of this argument, the defendants cite federal decisions for
the proposition that it is generally improper for a court to certify a class
9 l‘unzc~ v. Bernstein II, Del. Ch., C.A. No. 16190, mem.
Shine, V.C. (June 6, 2000).
“Id., mem op. at 41, 2000 WL 776893, at *16.
8
op.
at l-2, 2000 WL 776893, at *l,
under Federal Rule of Civil Procedure 23(b)(3) after a decision on the merits
has been made. The defendants further argue that even had there been no
ruling on the summary judgment motion, the plaintiffs could only obtain
certification of a Rule 23(b)(3) class - but not a Rule 23(b)( 1) class because monetary damages are the primary relief sought by the complaint
and because the plaintiffs do not seek rescission of the merger. For these
reasons, the defendants now argue that the plaintiffs must pursue this action
individually and not on behalf of a class.
.4dclitionally, the defendants claim that this action should not proceed
on a class basis because their solicitation efforts were so successful that
there is reason to suspect that a healthy percentage of the Proposed Class
would not want this action to proceed even if it would result in a monetary
recovery to them. That is, the defendants argue that the plaintiffs cannot
adequately represent other GenDerm stockholders who have identical legal
claims against the defendants but who, on the basis of the influential
overtures of Dr. Bernstein and his co-defendants, filled out a form affidavit
eschewing their right 1.0 pursue those claims.
II. Legal Analysis
1 turn to the defendants’ arguments now, proceeding in the following
order. ’ ’ First, I consider whether it is appropriate to certify the Proposed
Class under Rule 23(b)(l), as the plaintiffs contend. Then I determine
whether my prior grant of summary judgment against the defendantdirectors on the issue of liability precludes the certification of the Proposed
Class. Finally, I address the defendants’ Rule 23(a)(4) argument that the
plaintiffs cannot adequately represent the Proposed Class because so many
prospective Class members have expressed the wish that this litigation never
have been filed.
A. IsCertification Under Rule 23(b)(l) Appropriate?
Court of Chancery Rule 23(b)(l) permits the maintenance of a class
action if the requirernents of Rule 23(a) are met and if:
(1) The prosecution of separate actions by or against individual
members of the class would create a risk of:
(A) Inconsistent or varying adjudications with respect to
individual members of the class which would establish
incompatible standards of conduct for the party opposing the
class.; or
(B) Adjudications with respect to individual members of the class
whidh would as a practical matter be dispositive of the
” After oral argument, I determined that the other requirements of Rule 23, particularly those of
Rule 23(a)(l)-(3) were otherwise satisfied.
10
interests of the other members not parties to the adjudications
or substantially impair or impede their ability to protect their
interests . . . .I2
According to the defendants, certification under Rule 23(b)(l) is not
appropriate in this case because the only question left is the remedy for the
defendant-directors’ already-declared breach of fiduciary duties and because
the plaintiffs’ preferred remedy is quasi-appraisal rights or rescissory
damages, i.e., monetary damages. This court may not, the defendants claim,
certify a Rule 23(b)( 1) class when the claims in the case are solely for
monetary damages; otherwise, Rule 23(b)( 1) would swallow Rule 23(b)(3)
and leave no room for that separate category of class action.
This argument, however, is at odds with this court’s prior practice in
addre,ssing stockholder challenges to the conduct of corporate directors in
implementing mergers. For example, in In ye Mobile Communications
Corporation of America, Inc. Consolidated Litigation, the plaintiffs’ attempt
to enjoin a merger had already failed and the court was addressing a
settlement where by the class would receive over $34 million in cash and
stock plus attorneys’ fees in exchange for releasing state and federal claims
for mlone.tary damages arising out of the merger that the objectors contended
were worth approxirnately $1.6 billion. Chancellor Allen rejected the
--
” Ct. C’h. R. 23(b)(l)(A)-(B).
11
objectors’ contention that a Rule 23(b)(l) certification was inappropriate. In
so doing, Chancellor Allen addressed arguments virtually identical to those
asserted by the defendants here, namely, that once it becomes impractical to
unwind a merger and damages are the likely remedy, certification under
Rule 23(b)( 1) or (b)(2) is inappropriate.
Chancellor Allen’s well-articulated reasons for rejecting this argument
bear repetition here:
Typically an action challenging the propriety of director action
in connection with a merger transaction is certified as a (b)( 1)
or (b)(2) class because [I] plaintiff seeks equitable relief
(injunction); [2] because all members of the stockholder class
are situated precisely similarly with respect to every issue of
liability and damages (compare Phillips Petroleum Co. v.
Shut&, 472 U.S. 797 (1985)); and [3] because to litigate the
matters separately would subject the defendant to the risk
of different standards of conduct with respect to the same
action.
The argument has been made that once a preliminary injunction
is denied a (b)(2) action should be treated as a (b)(3) action
because, practically speaking, damages are the likely remedy if
plaintiffprevails. This argument has been rejected, in part, I
suggest, because of concerns reflected in the second and
third of the reasons stated above.
*
*
*
Neither the state nor the federal claims are class actions of
the type that meld somewhat dissimilar individual claims
together for efficient common adjudication, as
contemplated by subsection (b)(3). Rather both sets of
theories involve one set of actions by defendants creating a
uniform type of impact upon tlhe class of stockholders. The
12
Constitution does not require (cJ: Hansberry v. Lee, 3 11 U.S. 32
(1940))., nor do prudential considerations, in my opinion,
commend the granting of an opt-out right in stockholder actions
attacking the propriety of director conduct in connection with a
corporate merger. The propriety of director action should be
adjudicated, if it is to be adjudicated, once with respect to all
similarly situated shareholders.13
That reasoning has full application here. In this case, (1) the
defendant-directors either did or did not breach their fiduciary duty of
disclosure to all or njone of the GenDerm stockholders in the Proposed Class;
(2) if the defendant-directors did commit such a breach (as I have held),
there is no requirement that any member of the Proposed Class have actually
relied upon such breach in order to benefit from a remedy;14 and (3) thus any
monetary remedy due to the Proposed Class will be calculated on a per
share, rather than per shareholder, basis. As in Mobile Communications, this
case therefore involves “one set of actions by defendants creating a uniform
type of impact upon the class of stockholders.“”
---
I3 In reA4obile Communications, mem. op. at 34, 36-37, 1991 WL 1392, at *15, *16 (emphasis
added).
“Malone v. Brincat, Del. Supr., 722 A.2d 5, 12 (1998).
” In re Mobile Communications, mem. op. at 36, 1991 WL 1392, at *16. See also Hynson v.
Di-umrr~~nd Coal Co., IIK., Del. Ch., 601 A.2d 570, 575 (1991) (noting that in a challenge to
corporate transactions, “the particularities of any holder would have no bearing on the appropriate
remedy” and every material issue in the case would affect all of the class equally - and thus a
non-opt-out Rule 23(b)(l) class action was proper); Joseph v. Shell Oil Co., Del. Ch., C.A. No.
7450, mem. op. at 12-13, 1985 WL 21125, at *5, Hartnett, V.C. (Feb. 8, 1985) (certifying a Rule
23(b)( 1) class in a case where monetary damages were the primary relief sought because “if a
finding of damages occurs, the damages will be mathematically allocated on a per share basis to
all stockholders in similar circumstances” and “[tlhere is a total absence of individual issues and
13
Chancellor Chandler reached the same conclusion when addressing a
class certification motion in another case identical in all material respects to
-this case. In Wacht V. Continental IIoosts, Ltd., he certified a Rule 23(b)( 1)
class in his post-trial opinion after concluding that the defendant-directors
had breached their fiduciary duties by failing to disclose all the material
facts needed by the stockholders of Continental to decide whether to accept
the consideration offered to them in a squeeze-out merger or to seek
appraisal. He further concluded that the members of the proposed class were
entitled to quasi-appraisal damages of $4.90 per share.
The defendants in Waclzt argued that class certification was
inappropriate for several reasons. For now, the most important of those
reasons is that during the over nine-year pendency of that litigation, no other
stockholders had filed suit and thus (defendants contended) there was no
realistic chance of inconsistent judgments and no chance of prejudice to
absent ‘class members if no Rule 23(b)(l)(B) certification was granted.
Chance:llor Chandler concluded otherwise, stating:
Subsection B of Rule 23(b)(l) permits class certification where
the risk exists that adjudication of a single shareholder’s claim
may have: res judicata effect on the claims of other absent
shareholders, thereby prejudicing those absent shareholders if
the class is not certified. Defendants argue that no shareholder,
therefore there would be no reason for the court to make a separate finding of damages as to each
share or each shareholder’?.
14
other than plaintiff, has expressed an interest in this action
during all nine years of its pendency. Thus, they contend that
there is no real threat of prejudice to other Continental
shareholders if I adjudicate this case as an individual action. I
disagree. First, defendants’ argument in this regard is purely
conjectural - they offer no concrete evidence that other absent
Continental shareholders have no interest in plaintiffs suit. . . .
In fact, it is possible that some Continental shareholders are
aware of this action, and are under the impression (from the
complaint) that it was brought on their behalf, as well. Second,
the Court must keep in mind its limited judicial resources and
attempt to pursue the most efficient course of action. Here, that
course is certifying the class under Rule 23(b)( 1). The
possibility exists of other litigation similar or identical to
plaintifj’s, which compels me to attempt to resolve that
litigation at one time, if possible. Certifying plaintiffs suit as a
class action pursuant to Chancery Court Rule 23(b)(l)(B)
accomplishes that purpose. Accordingly, plaintiffs motion for
class certification is granted. l6
This reasoning is not idiosyncratic to the Delaware Court of
Chancery. To the contrary, it comports with that advanced by some of the
most learned commentators on the application of the Federal Rules of Civil
Procedure, who view Rule 23(b)( 1) as “applicable when practical necessity
forces the opposing party to act in the same manner toward the individual
class -members and [,as] thereby mak[ing.] inconsistent adjudications
unworkable or intolerable.“” Put another way, Rule 23(b)( 1) “clearly
---
‘6 Wucht, mem. op. at 22-23, 1994 WL 525222, at *lo.
” C. A. WRIGHT, A. R. MILLER, & M. K. KANE, 7A FEDERAL PRACTICE AND
PROCEDURE 4 1773, at 434 (1986) (hereinafter “WRIGHT, MILLER & KANE”).
15
embraces cases in w.hich the party is obliged by law to treat the class
members alike . . .[,]“” including claims seeking money damages.‘”
In such cases, “the class members by definition have highly similar
interests and generally are seeking damages and the enforcement or
prohibition of some course of conduct by the opposing party that affects all
of them much the sa-me way. As a result, basically only one recovery is
sought and the determination of the overall amount and the sum due each
class member is not diffcult.“20 This contrasts with actions under Rule
23 (b)(3) where the “members are loosely bound together by common
questj ons of law or fact and considerations of convenience. Even the
‘* Id. $ 1773, at 433. Although this sentence technically refers only to subsection (b)(l)(A) of
Rule 23, a fair reading of Wright, Miller & Kane suggests that the authors would agree that this
view also applies to subsection (b)(l)(B). See, e.g., id. at 5 1772, at 421-26 (1986) & 71 (2000
SUPP.).
I9 E.g., id. at 6 1789, at 41 (2000 Supp.).
” Id., 4 1784, at 77. The Advisory Committee Notes to the 1966 amendments to Federal Rule 23
generally s~~pport the application of Rule 23(b)( 1) to cases like this one:
[Alctions by shareholders to compel the declaration of a dividend[,] the proper
recognition and handling of redemption or pre-emption rights, or the like (or actions by
the corporation for corresponding declarations of rights) should ordinarily be conducted
as class actions, although the matter has been much obscured by the insistence that each
shareholder has an individual claim. The same reasoning applies to an action which
charges a breach of trust by an indenture trustee or other fiduciary similarly affecting the
members of a large class of security holders or other beneficiaries, and which requires an
accounting or like measures to restore the subject of the trust.
Adviso,y Committee Notes for- the Federal Rules of Civil Procedure for the United States District
Cowts, Rule 23, 1966 Amendment (hereinafter “Advisovy Committee Notes to 1966 Amendments
to Federal Rule 23”) (citations omitted), reprinted in 12A WRIGHT, MILLER & KANE, App.
C. at 2136-87. Cj: Ortiz v. Fibrehoavd Corp., 527 U.S. 815, 109 S.Ct. 2295,2309 (1999) (citing
this history and noting that a “classic” example of when Rule 23(b)( 1)‘s conditions are satisfied is
an action by “shareholders to declare a dividend or otherwise fix their rights”) (citation omitted).
16
damages they seek generally are individual in character and disparate in
amount.““’
Closely read, the case the defendants primarily rely upon for the
proposition that a Rule 23(b)(l) c1 ass cannot be certified in a case involving
compensatory damages -In re Dennis Greenman Securities Litigation22 actually relies upon a rationale consistent with the reasoning of
commentators Wright, Miller, and Kane and with the Mobile
Communications and Wacht decisions. In In re Dennis Gveenman
Securities, the court held that it was improper to certify a class under Rule
23(b)(l)(A) because “courts reason that inconsistent standards for future
conduct are not created because a defendant might be found liable to some
plaintiffs and not to others” and “that if compensatory damage actions can
be certified under Rule 23(b)(l)(A), then all actions could be certified under
the section, thereby making the other subsections of Rule 23 meaningless,
particularly Rule 23(b)(3).“2’
Greenman ‘S logic has some force as to the type of damage cases that
frequently come to federal courts in class action clothing, particularly those
” 7B WRIGHT, MILLER. & KANE, 0 1784, at 77; see also id. 9 1786, at 194-95 (making same
point about the distinctions between a Rule 23(b)(l) or (2) c1 ass and a Rule 23(b)(3) class).
x In re Dennis Greenman Securities Lit@, 829 F.2d 1539 (11”’ Cir. 1987), reh g denied sub nom.
Namqflv. Icferrill, Lynch, Pierce, Fenner & Smith, X40 F.2d 25 (1 lth Cir. Feb 12, 1988) (en bane).
z Id.. 829 F.2d at 1545.
17
divers,ity class actions that arise under state tort law. In such class actions,
the imlividual circumstances of each class member are typically of material
importance, and it is not infrequently the case that the substantive state laws
governing class members’ individual claims are widely disparate.24 But that
logic does not apply to cases like this one. In challenges to corporate
mergers brought on behalf of the stockholders not affiliated with the
defendants, it is virhially never the case that there is any legitimate basis that
“a defendant might be found liable to some plaintiffs and not to others.“25
Rather, the actions involve a challenge to a single course of conduct by the
defen’dants that affects the stockholder cl.ass equally in proportion to their
ownership interest in the enterprise.
That such actions can be certified under Rule 23(b)(l)(A) hardly
make:3 all claims for damages certifiable under that subsection, Rather, there
remains an abundance of damage claims involving common and uncommon
issues of law or fact that can be asserted on a class basis only by meeting the
criteri.a applicable under the more flexible Rule 23(b)(3). In this respect, it is
in reality the Greenman court’s reading that is more likely to render a
subsection of Rule 23(b) meaningless. By holding that a Rule 23(b)(l)(A)
l4 See, ,e.g., Ortiz, 527 U.S. 815, 109 S.Ct. 2298.
” In re Dennis Greenman Securities, 829 F.2d at 1545.
18
class can be certified only for claims for injunctive and declaratory relief, the
Greenmalz court renders Rule 23(b)(l) largely redundant of Rule 23(b)(2),
whit-h expressly addresses injunctive and declaratory relief.2” For this
reason also, I respectfully must part company from the apparently contrary
decision in Dieter v. Prime Computer, Inc.27 and join the position taken in
Wacht, Mobile Communications, Hynson, and Joseph decisions.28
In my view, the case now before the court tits neatly within the
application of our court’s Rule 23(b)(l) in those cases.29 None of the legal
l6 Cf: Aa’visojy Committee Notes to I966 Amendments to Federal Rule 23, 12A WRIGHT,
MILLER & KANE, App. C. at 288,285-88 (expressly stating that Rule 23(b)(2) “does not extend
to cases in which the appropriate final relief relates expressly or predominantly to money
damages” but not making a similar statement about Rule 23(b)(l)).
“Dieter v. Prime Computer, Inc., Del. Ch., 681 A.2d 1068, 1075-76 (1996).
“See also Nehel v. Southwest Bancorp, IX., Del. Ch., C.A. No. 13618, tr. at 6-7, Jacobs, V.C.
(Oct. 29, 1997) (certifying a Rule 23(b)(l) class in a post-merger fiduciary duty case involving a
damages claim in reliance on Wacht and Mobile Communications and describing Dieter as a
discretionary decision to apply 23(b)(3) rather than (b)(l) as opposed to a holding that this court
“lacks the power to certify under subsection (b)(l)” in such a case).
” In conl:luding that certification of a Rule 23(b)(l) L,I ass is appropriate, I am cognizant of the
concern I.hat the Due Process Clause of the United States Constitution might require that the
members, of the class be given the right to opt out. Although the defendants raised this point
obliquely at oral argument, they have failed to present that argument fairly. Much less have they
provided the court with briefs addressing this issue on more than a cursory basis. For now,
therefore, I am content to rely on the well-reasoned analysis of Chancellor Allen in both the
Mobile C~~f?znlur2icatiorzs and Hynson cases and on the views of learned commentators such as
Wright, Miller, and Kane that as long as (1) the class fits within the rigorous requirements of Rule
23(b)( 1); (2) there is adequate class notice; and (3) the other requirements of Rule 23 are
satisfied, then sufficient guarantees of adequate representation and fairness exist so as to preclude
the need for an opt-out mechanism. In reMobile Communications, mem. op. at 36-37, 1991 WL
1392, at ‘ti 16 (federal due process clause does not require granting of an opt-out right “in
stockholder actions attacking the propriety of director conduct in connection with a corporate
merger”); Hynson, 601 A.2cl 570 (holding that a single adjudication by a court of the
corporatisan’s state of incorporation may bind all stockholders, regardless of residence, in a proper
Rule 23(b)( 1) and (b)(2) class action involving claims of breach of fiduciary duty against the
corporatitan’s directors and that no opt-out rights had to be afforded to class members); 7B
WRIGHT, MILLER & KANE $ 1789, at 41-42 (2000 Supp.) & 5 17X9, at 255-56 (1986)
19
or factual issues at stake in this case turn on issues individual to class
members ,30 Rather, all of the issues affect class members equally. It would
be wasteful and illog;ical to have this matter tried several times, so that
different courts could reach irreconcilable decisions about identical issues
such as the adequacy of the disclosures rnade to GenDerm stockholders by
the defendant-directors and the fair value of GenDerm on the date of the
Merger.3’ The devotion of scarce judicial resources to repetitive exercises of
this sort on behalf of one identically situated class quite obviously would
come at a large price to other litigants who need judicial attention. 32
As Wright, Miller, and Kane point out, class actions usually meet both
subparts of subsection (b)( 1) of Rule 23 or neither of them.33 Although the
language of Rule 23l(b)( l)(A)IS somewhat unclear, I believe that it would
“establish incompatible standards of conduct”34 for the defendants if, for
---
(suggesting that no opt-out is required for Rule 23(b)(l) classes). And as adverted to above, the
recent federal cases, such as Urtiz, arise in the far different context of class actions in which the
individual circumstances of each plaintiff differ in materially important respects. If the
defendsants .wish to revisit this argument, however, they are free to do so, Ct. Ch. R. 23(c)(l), but
they should be mindful to address the issue squarely, which would require a thoughtful attempt to
distinguish Hynson, a case the defendants do not even address.
” Hynson, 601 A.2d at 575.
31 In’. at 575-76 (litigative efficiency is a relevant concern in the application of Rule 23); F’acht,
mem. op. at 22-23, 1994 WL 525222, at *lO (same). As in Yacht, it is probable that there are
members of the class who are aware of this action and relying upon it as a means to secure relief.
If a class is not certified here, some of them may well bring their own indistinguishable actions.
” Wucht, mem. op. at 22, 1994 WL 525222, at *lo.
j3 7A WRIGHT, MILLEF! & KANE $ 1772, at 421-26 (1986) & 71 (2000 Supp.).
” Ct. Ch. R. 23(b)(l)(A).
20
example, they were found to owe $2.00 a share in quasi-appraisal and/or
rescissory damages to plaintiffs Turner and Bernstein in this case but $3.00
in quasi-appraisal and/or rescissory damages to identically situated plaintiffs
in anothe-r case. If nlot for the defendants’ unusual tactic of securing “opt-out
affidavits,” the defendants themselves would probably agree.
Otherwise, individual plaintiffs could file test cases that could then
set, at the very least, a practical damages floor for subsequent plaintiffs.
What could be more maddening for corporate defendants than to be locked
into a quasi-appraisal award but possibly subject to having to pay a larger
amount if a subsequent plaintiff who is identically situated seeks and obtains
a higher award? The practical need of corporate defendants to treat all
stockholders equally and the more powerful role stare decisis plays in this
context (which I next discuss) suggest that Rule 23(b)(l)(A) is satisfied in
cases such as this one.35
Certification under Rule 23(b)(l)(B) is equally appropriate. That
subsection is satisfied where there is a “risk” that an individual adjudication
would “as a practical matter be dispositive” of the interests of other class
members.“” Here, there is no doubt that there is a “risk” that the disposition
” Hymen, 601 A.2d at 575 (reaffirming prior certification of a Rule (b)(l)(A) class in a case
challenging fiduciary behavior in connection with a consummated merger).
36 Ct. Ch. R. 23(b)(l)(B).
21
of this case as a “practical” matter will influence the disposition of future
identical cases for members of the Proposed Class. In so concluding, I
acknowledge that there is federal case law indicating that the mere fact that a
prior adjudication will have stave decisis effect is not sufficient to satisfy
Federal Rule 23(b)(l)(B). But for many of the reasons cited in the Mobile
Comnzunications, Wkht, Joseph, and Hjinson cases, the reality is that a
determination in one case that directors have or have not breached their
fiduciary duties in implementing a transaction and of the per share damages
to be ,awasded for any such breach has a profoundly “practical” and
“dispositive” effect on future cases.37 This is especially so if the judgment in
the first case is affirmed on appeal by our Supreme Court. Given the
importance Delawarle rightly places on the consistent administration of our
state’s corporate law, it could hardly be otherwise.
A recent decision of this court illustrates the “practicalities” of this
issue well. In Kohls v. Kenetech Cor~.,~~ it was held that plaintiffs were not
bound by the judgment in a prior non-class action rejecting claims that a
corporation and its directors breached their contractual and/or fiduciary
duties in connection with certain transactions. Nonetheless, the plaintiffs’
Del. Ch., C.A. No. 17763, mem.
*4 -*6, Lamb, V.C. (July 26,200O).
” Kolds v. Kenetech Corp.,
22
op.
at 12-17, 2000 WL 1041220, at
comp’lain t, which challenged the same transactions, was dismissed under
Rule 12(b)(6) because the plaintiffs could not distinguish the facts or
theories underlying their claims from those adjudicated in the prior case:
[T]his court considered all of the arguments here advanced and
held contrary to the plaintiffs’ position. That opinion has now
been afkmed by the Supreme Court and conclusively
represents the law of this State. Allowing the parties to litigate
about settled issues is an affront to both court~.~”
B. Does The Fact That This Motion Is Beinrr Decided
After Summarv Judgment On Liabilitv Was Granted
Against The Defendant-Directors Preclude Certifvine: A Class?
Premised largely on their argument that a Rule 23(b)( 1) class cannot
be certified, the defendants have advanced the argument that no class may be
certified here because the plaintiffs have pressed for a decision on this
motion too late. On a Rule 23(b)(3) c ass motion, the defendants assert, a
1
ruling on class certification must precede any determination on the merits,
not just a final judgment.
I reject the defendants’ argument that it is too late to certify a class.
Initially, I note that because certification under Rule 23(b)( 1) is appropriate,
the defendants’ argument loses much, if not all, of its force. The federal
cases that frown upon certifying a class after any merits determination
mostly address the Rule 23(b)(3) context, in which notice and an opportunity
3g Id., rxm.
op. at 17, 2000 WL 1041219, at *6.
23
for class members to opt out is mandatory.40 Even in that context, it is by no
means sel.tled that a federal court may never certify Rule 23(b)(3) class after
any merits ruling.4’ Regardless, a more relaxed approach is generally taken
to cases arising under Federal Rules 23(b)( 1) and (b)(2).42
‘” This heightened concern in the Rule 23(b)(3) context arises because of the mandatory opt-out
feature that is integral to that kind of class. The concern is that named plaintiffs will seek to
certify a class only after the defendants have suffered an adverse merits ruling, thus deferring the
opt-out election until such time as there is virtually no uncertainty for prospective class members.
The discouragement of this so-called “one-way” intervention was an intended purpose behind the
1966 amendments to Federal Rule 23. American Pipe & Construction Co. v. Utah, 414 U.S. 538,
547 (IB74), I-eh’g denied, 415 U.S. 952 (1974); Jimelzez v. Weinbergeu, 523 F.2d 689, 698 (7”
Cir. 19’75), cert. denied, 427 U.S. 912 (1976). The lack of a right to opt out of a Rule 23(b)(l) or
(b)(2) class itself minimizes the potential for such prejudice and has been held to justify a more
flexible approach. E.g., Jimenez, 523 F.2d at 697-99; H. B. NEWBERG & A. CONTE, 2
NEWBERG ON CLASS ACTIONS $ 7.15, at 7-54 (3d ed. 1992) (hereinafter “NEWBERG”)
(one-way intervention concerns present in Rule 23(b)(3) context do not operate under Rule
23(b)(l) or (2) so as to preclude an earlier or simultaneous merits determination).
” See SB WRIGHT, MILLER&KANE 0 1785, at 98-100 (1986) & 16-18 (2000 Supp.)
(discussing the divergent federal decisions on this issue); 2 NEWBERG 5 7.15, at 7-54 (noting
that it is “unsettled” whether summary dispositions on the merits may be proper in a class action
under Federal Rule of Civil Procedure Rule 23(b)(3)).
” Indeed, the defendants go so far as to concede that if they are wrong about their argument that
Rule 23(b)( 1) does not apply, then their timing argument falls by the wayside. Because I do not
think the federal cases are so clear-cut, I therefore address the substantive thrust of the
defendants’ argument.
A few of the cases the defendants cite show the murky nature of this area of federal
jurisprudence. For example, Horn v. Associated Wholesale Grocers, Inc., 555 F.2d 270 (10”’ Cir.
1977), reversed a district court’s denial of class certification which was made simultaneously with
its post-trial liability finding in favor of the plaintiffs. The Circuit Court expressed disapproval of
the trial court’s delay but, more importantly, went on to remand the case so that a certification
order c’ould be entered that would allow the entire class to take advantage of the favorable ruling.
In the course of its decision, the court expressly noted cases recognizing that “when the actions
and assumptions of the parties and the trial court show clearly that the action was treated as a
class action, a post trial certification by the trial court OY the Court @Appeals that comports
with th’e requirements of Rule 23(a) and (b) will stand.” Id. at 274 n.1 (emphasis added).
Likewise, in Jimenez the Court of Appeals for the Seventh Circuit upheld a district court’s
decision to grant class certification when the case was remanded to it after an important merits
ruling in favor of the plaintiffs had been made by the United States Supreme Court. Although the
Court of Appeals recognized the strong policy against certifying a class after a merits
determination, it concluded nonetheless that the rule “contemplates some flexibility in its
enforcement” and that the district court’s decision to certify a Rule 23(b)(2) class was not
erroneous, Id. at 702. Finally, Paxton v. Union National Bank held that it was error for the
24
The more substantive reason for rejecting the defendants’ argument is
that it is premised on an unduly rigid and inflexible approach taken by some
federal courts that this court has rejected as a matter of Delaware law for the
sound reasons stated in Wacht. There, the plaintiffs did not move for class
certification until nine years into the case and the court deferred that motion
to a post-trial determination. As noted previously, in its post-trial opinion,
the court first decided the merits, found that the defendants had breached
their fiduciary duties, and awarded $4.90 a share in damages against the
defendants. Only then did it go on to address the issue of class certification.
The defendants argued that the court could not certify the class at that
late stage because tbz class certification motion had not been brought “[a]s
soon as p:racticable” as is required by subsection (c)(l) of Rule 23. The
court rejected that argument, stating:
Although defendants cite numerous federal cases for the
proposition that delay in filing for class certification is adequate
grounds’ for denial of that certification, I am convinced that the
law in Delaware requires a showing of actual prejudice to deny
properly class certification because of a delay in requesting
certification. . . I In particular, defendants cannot show
prejudice because . . . plaintiff drafted his complaint as a class
action. As a result, plaintiff will not need to amend the
district court to deny certification of a Rule 23(b)(2) class after trial when both parties had
acquiesced in the delay of the certification issue, the parties had proceeded as if the case was a
class action, and there was no prejudice to either the defendants or absent class members. Paxton
v. Union National Bank, 688 F.2d 552, 558-59 (8”’ Cir. 1982), cert. denied, 460 U.S. 1083 (1983).
25
complaint if I grant his motion for class certification.
Moreover, the class allegations in the complaint put defendants
on notic,e that plaintiffs action may be converted into a class
action. Thus, from the outset of this case, defendants knew that
plaintiff’s suit was potentially a class action. Accordingly, I am
of the olpinion that defendants have not shown that they will
suffer actual prejudice if I grant plaintiffs motion for class
certification.43
Similarly, Wright, Miller, and Kane note that “it generally seems
agreed that certification at the judgment stage is not automatically
prohibited. However, it must be undertaken cautiously, taking into account
whether the lateness of the certification is prejudicial to the parties who may
.have tried the case differently had they been aware that a class judgment was
at stal<e.“44
Here, there can be no conceivable prejudice to the defendants by the
timing of this certification decision, which is made well in advance of any
final judgment on the merits. The plaintiffs’ certification motion was timely
‘3 Wach,: mern. op. at 19-20, 1994 WL 525222, at *g-*9. Wucht is not the only case in which this
court has taken such an approach. See, e.g., Zimnzennan v. Home Shopping Network, Inc., Del.
Ch.; CA. Nos. 10911 & 10919,mem. op., 1990 WL 118363, Jacobs,V.C. (Aug. 14, 1990,rev.
Aug. 30, 1990) (in same opinion, court granted summary judgment on liability against
defendants, certified two classes of holding and converting bondholders, respectively, who sought
primari1.y declaratory and injunctive relief under Rule 23(b)(2), and provisionally certified a class
of selling bondholders who sought monetary damages under Rule 23(b)( 1) or (b)(3) but deferred
a decision as to which subsection would apply until receipt of further briefing), motion to amend
denied, Del. Ch., 1990 WL 140890, (Sept. 25, 1990), uppeal denied, 582 A.2d 935 (1990); Nebel
v. South.Ajest Bancol-p, Inc., Del. Ch., C.A. No. 13618, mem. op., 1995 WL 405750, Jacobs, V.C.
(July 5, 1995) (holding that the defendants violated their disclosure duties in connection with a
rnerger and indicating that ;an award of quasi-appraisal rights for the stockholders was the
appropriate remedy) & Nebel, tr. at 7 (Oct. 29, 1997) (certifying Rule 23(b)(l) class two years
later).
” 7B WRIGHT, MILLER & KANE Q 1785, at 99-100 (1986).
26
tiled. From that motion and the face of the complaint, as well as the
plaintiffs’ consistent conduct of this litigation as a representative one, the
defendants were on full notice of the class action character of the claims they
were facing. As noted, the defendants even went so far as to solicit nonparticipation affidavits from members of the Proposed Class.
Had the defen’dants w‘anted an earlier determination of the class issue,
they could have filed an answering brief and asked this court to decide the
motion promptly. That would have protected them against any legitimate
prejudice and, to be (candid, would have .been much appreciated by the court.
They did not do so. Instead, they, like the plaintiffs,45 made their own
tactical decision to defer the resolution of the certification issue until now.46
It is not unfair to require them to accept the consequences of their own
choice, which I deem to constitute acquiescence.47
--__
” Plaintiffs’ Reply Br. at 9.
46 E.g., Smith V. Bounds, 813 F.2d 1299, 1305-06 (4”’ Cir. 1987) (finding no reversible error
where district judge certified a class five months after granting summary judgment against the
defendants because, in addition to the plaintiffs’ satisfaction of the certification requirements and
the absence of prejudice to the defendants, the defendants had “conducted the litigation as a class
suit” and would not be prejudiced), r-eh ggranted, 821 F.2d 222 (4”’ Cir. 1987), on reh ‘g, 841
F.2d 77 (4”’ Cir. 1988) (en bane) (affirming district court), cert. denied, 488 U.S. 869 (1988).
47 See t’axtorz, 688 F.2d at 558-59 (defendant could not claim prejudice where it acquiesced to
delay of certification decision until after trial and thus could not rely on untimeliness to defeat the
certification of a class on that basis); cf: Katz v. Carte Blanche Corp., 496 F.2d 747, 761 (3d Cir.
1974) (defendant may expressly waive the right to a timely class certification decision), cert.
denied, 419 U.S. 885 (1974).
27
In ruling as I do, I admit that there is some tension caused by the fact
that the language of Rule 23(c)( 1) that permits modification of a class
certification order at any time before “the decision on the merits” can be
read as a rigid bar to class certification after “a decision on the merits” has
been made. But the words “the decision on the merits” are perhaps better
read als being a poor substitute for the words “the final judgment” and, in any
case, have not been construed by either the Delaware courts or the federal
courts as creating some insurmountable barrier to class certification after any
merits decision in a case has been made.“’ Certainly, it would make little
sense to conclude that this court may issue its certification decision after trial
at the same time it enters a final judgment on all the merits, as in Wacht, but
cannot do so well before trial when there is no prejudice and when no final
judgment is imminent.
C. Do The Affidavits Solicited Bv Dr. Bernstein
Preclude Class Certification?
The defendants’ final argument is a rather novel one. As noted, Dr.
Bernstein (and others of the defendant-directors) went out and pedaled a
form affidavit to potential class members through an organized solicitation
effort. That form affidavit indicates that the aftiant objects to this lawsuit,
4X Wacht, mem. op. at 19-20, 1994 WL 525222, at *g-*9; Zimmerman, 1990 WL 118363, at *15 *16; WRIGHT, MILLER & KANE $ 1785.
28
does not wish it to proceed, and has no interest in any recovery that will
result
from
it. Because a large amount of GenDerm’s stock was held by the
defendants or their affiliates, the defendants were able to obtain affidavits
from stockholders who owned an overwhelming majority of the GenDerm
shares before the Merger. As such, it is not surprising that the vast majority
of the shares represented by the affiants are not even owned by members of
the Proposed Class -- a class that expressly excludes the defendants and
their affiliates. Moreover, the plaintiffs note that most of the affidavits are
now over two years old.
Nonetheless, having won this self-initiated plebiscite, the defendants
now c.ontend that the: majority has spoken and that there is an undeniable
antagonism between the interests of a large percentage of the Proposed Class
and the named plaintiffs.49 On this ground, they say, the named plaintiffs
are not adequate representatives of the Proposed Class and that certification
must be denied under Court of Chancery Rule 23(a)(4).
Without dilati:ng on the propriety of the defendants’ solicitation
efforts, I conclude that the named plaintiffs will adequately represent the
” By the plaintiffs’ count, 41 of the affidavits were from rnembers of the 127-member Proposed
Class.
29
legal mterests of the Proposed Class in this action.50 In so concluding, I start
by reiterating that the plaintiffs do not propose to include the defendants or
their affiliates in the Class. As such, no member of the Proposed Class will
suffer harm if this action proceeds. While the affants may not gain from the
action if no damages or other relief is awarded to the Proposed Class, they
face no injury in that scenario. On the other hand, the Proposed Class stands
to gai-n financially if an award of quasi-appraisal or rescissory damages is
determined to be appropriate.
The mere fact that some members of the Proposed Class may not want
to hold the defendants accountable for breaches of fiduciary duty does not
create a conflict precluding class certification “In other words, the class
member[s] who wish[] to remain . . . victim[s] of unlawful conduct do[] not
have a legally cognizable conflict with the class representative.“5’
In this case, moreover, it would be irresponsible to deny class
certification on the basis of the proffered affidavits. The defendants have
presented the court with no reliable basis to conclude that Dr. Bernstein (or
the other defendant-directors) gave the affiants a balanced rendition of the
” The named plaintiffs, through their counsel, have thus far conducted this litigation with skill
and vigor.
” 1 NEWBERG 9 3.30, at 3-153. See also Norwalk CORE v. Norwalk Redevelopment Agency,
395 F.2d 920, 937 (2d Cir. 1968) (the fact that some class members believed that the defendant
agency’s conduct was acceptable did not preclude a class action challenging that conduct).
30
case or their legal rights. While the affidavits state that the affants were told
where they could get additional information, form affidavits of this sort
resulting from unsupervised, one-sided communications to class members
are entitled to very little, if any, weight. As the Court of Appeals for the
Eleventh [Circuit has noted:
Unsupervised, unilateral communications with the plaintiff
class sabotage the goal of informed consent by urging exclusion
on the basis of a one-sided presentation of the facts without
opportunity for rebuttal. The damage from misstatements could
well be irreparable.52
It would encourage future tactics of this sort to refuse to certify a class
in this case on the basis of affidavits of the kind procured by Dr. Bernstein
and his fellow defendants-directors.53 Although this action will proceed
-----
” Klebw v. First National Bank ofAtlanta, 751 F.2d 1193, 1203 (11”’ Cir. 1985); see also
Jenifer v, Delaware Solid JYaste Authority, 1999 WL 117762, at *2 (D.Del. Feb. 25, 1999
(Schwartz, J.) (emphasizing the concerns raised by communications between defendants and
prospective class members and noting that “[tlhis court has condemned a defendant’s
communications attempting to affect a class member’s decision to participate in the litigation”);
61 re n/fcKessorz Hl?OC, Inc. Securities Litig., 2000 U.S. Dist. LEXIS 5828, at *lo-*1 1 (N.D.Cal.
2000) (limiting pre-certification communications designed to generate opt-outs because there “is
no meaningful opportunity to choose when a concerted multimedia effort is made to secure optout authorizations before any class is certified”); MANUAL FOR COMPLEX LITIGATION
5 30.24, at 233 (3d ed. 1995) (“Defendants ordinarily are not precluded from communications
with putative class members, including discussions of settlement offers with individual class
members before certification, but may not give false or misleading information or attempt to
influence class members in making their decision whether to remain in the class.“).
” In this regard, it is noteworthy that the plaintiffs have cited deposition testimony indicating that
the GenDerm directors were informed by counsel that they had a duty to disclose all the material
facts to tile GenDerm stockholders. Silverman Dep. at 52-53. But as indicated in my prior
opinion, the disclosures actually made fell far short of a serious affirmative effort to provide all
the material facts necessary to the decision the GenDcrm stockholders faced. Thus the plaintiffs
contend that the defendants’ failure to disclose all the material facts was intentional.
While that assertion remains to be proven, the testimony cited by the plaintiffs does
highlight the danger of relying on the affidavits solicited by Dr. Bernstein and his fellow
31
under Rule 23(b)(l) and therefore no opt-out right must be afforded to Class
members, I will, however, direct the parties to confer with one another
regarding when notice should first be provided to the Class and what the
contents of that notice should be. After further input from the parties, a
decision can be made whether to include a provision in the notice enabling
Class members to renounce any right to their aliquot share of the proceeds of
any recovery, net of fees and expenses awarded by the court. This sort of
provision would preserve the legitimate interests of any affiants who
continue tso object to this lawsuit and I see no reason to compel any Class
member to accept her portion of a damages award, if one is made. On the
other hand, there is no rational basis to presume (as the defendants would
have me do) that all of the affiants will renounce their right to share in any
recovery achieved in this lawsuit once they have received a balanced
recitation of the relev,ant facts in a court-approved notice. It would also
seem advantageous to1 the Proposed Class, ifnot to the defendants, to permit
any renunciation option to be exercisable at the latest possible time.54
defendant-directors. As defendants to non-frivolous claims of intentional wrongdoing, Dr.
Bernstein and his fellow defendant-directors can hardly be deemed objective commentators on
the litigation, Whether or not they tried their best to be unbiased in their solicitation efforts, the
preferable approach is to permit class members to express their views after receiving a notice that
has been reviewed by the court.
” At oral argument, counsel for the defendants admitted that this case is paradoxical because the
defendants are simultaneously arguing on behalf of themselves as defendants and on behalf of
their view of the best interests and rights of the Proposed Class. This paradox was created by the
32
III. Conclusion
For the foregoing reasons, the plaintiffs’ motion for class certification
is granted. Counsel for the plaintiffs should submit a conforming order,
upon approval by the: defendants as to form, and counsel shall schedule an
off-ice conference to discuss notice to the Class and the identification of the
precise members of the Class, after such time as they have conferred in good
faith and tried to reach agreernent about those issues.
defendants’ rather innovative strategy, which involved aggressive out-of-court efforts to defeat
class ceriification and torpid in-court efforts to do so. Of course, there is one common element to
all of the arguments made by the defendants: if successful, each argument limits the defendants’
exposure to monetary liability to the Proposed Class.
33
