Lead Plaintiffs' Shareholdings Draw Chancery Review

In orders issued in two recent high-profile shareholder actions, the Delaware Chancery Court provided new guidance regarding lead plaintiffs’ shareholdings in representative proceedings. Addressing organizational matters in separate actions arising from proposed corporate transactions involving Dell Inc. and NYSE Euronext, Chancellor Leo E. Strine Jr. ordered restrictions on lead plaintiffs’ trading in the relevant shares during the litigation’s pendency. First, lead plaintiffs (except those with outside investment managers) cannot trade any of the securities of the corporations at issue without their counsel’s prior approval, as in In re Dell Shareholder Litigation, C.A. No. 8329-CS (Del. Ch. Mar. 18, 2013), and In re NYSE Euronext Shareholders Litigation, C.A. No. 8136-CS (Del. Ch. Mar. 13, 2013). Second, lead plaintiffs must commit to retaining at least 75 percent of their holdings in the relevant shares throughout the litigation’s pendency; see Dell and NYSE Euronext.

In ordering that lead plaintiffs consult with counsel prior to trading in both Dell and NYSE Euronext, Strine sought to stem the potential for lead plaintiffs to inappropriately trade on the basis of material, nonpublic information learned during the course of litigation, in violation of the securities laws and their duties as class fiduciaries. (See In re Dell Shareholder Litigation, C.A. No. 8329-CS (Del. Ch. Mar. 13, 2013), and In re NYSE Euronext Shareholder Litigation, C.A. No. 8136-CS (Del. Ch. March 8, 2013).) The court’s rulings were not directed to any specific allegations of improper trading by any of the parties to the Dell or NYSE Euronext cases. Rather, the rulings were designed to put checks in place before inappropriate trading could occur. As Strine — noting the prevalence of confidential information in deal litigation and the need for candid discussions between counsel and clients — warned in the March 8 ruling in NYSE Euronext concerning this prohibition: "I suppose if you wish to be a pickle, then jump in that brine; but if you perhaps don’t wish to be, you might want to stay out of it."