Delaware Courts and the Validation of Misleading Disclosure: In re Transkaryotic (Excessive Pleading Standards)(Part 5)

We are discussing In re Transkaryotic, a relatively recent Delaware case that contains bad law and reflects the anti-plaintiff bias of the Delaware courts.  

We have noted numerous times on this Blog how Delaware courts use excessively high pleading standards to dismiss meritorious cases.  This is another example.  Plaintiffs alleged that the votes in the election were miscounted.  The motion for summary judgment was decided about three years after completion of the merger.  This "delay" caused the Court great consternation.

• Given the peculiar facts and history of this case, the Court must acknowledge its reluctance to allow this claim to continue. . . . the Court is not unaware that allowing this claim to advance beyond TKT's motion for summary judgment implicates important policy concerns regarding the need for finality in corporate transactions.  Thus, as with a delayed challenge to an election vote, the Court will demand clear and convincing evidence -- not merely raising a genuine issue of material fact with the benefit of all reasonable inferences -- that the vote was invalid.  

Indeed, the Court was "reluctant to permit even the specter of undermining the finality of this merger, which was consummated nearly three years ago. . . "  In other words, the Court was troubled by the lateness of the suit relative to completion of the merger.  But in the Complaint, the Plaintiffs noted that it was only because of the discovery in the appraisal action.  See Complaint, at para. 77 ("Thus, based on the discovery provided during the appraisal action, there is substantial doubt that TKT actually obtained the necessary votes in favor of the merger.").   Moreover, the Complaint is replete with allegations that the discovery process in the appraisal action was subjected to delay.

• TKT's conduct in the appraisal litigation (conduct that was controlled by Shire, its new corporate parent) was underscored these substantive breaches of duty.  It utterly failed to comply with the Court's discovery orders and then waited until after fact depositions had ended to produce tens of thousands of pages of relevant documents.  These violations of Court orders and rules certainly suggest that TKT and Shire were in no hurry to conclude the litigation or to have evidence of their wrongdoing finally come to light.

Complaint, at para. 7.  In other words, at least according to the Complaint, a portion of the delay resulted from the behavior of some of the Defendants.  In the course of the fiduciary duty case, the Plaintiffs filed a motion to compel, arguing that:

• Rather than provide the requested information, however, defendants assumed an aggressively non-responsive posture that has affected discovery at macro level.  They sidestepped straightforward financial inquiries.  They ignored or recharacterized questions about the core issues in this case.  And with one limited exception, they insisted that they were under no obligation to disclose any information about their affirmative defenses.

Motion to Compel, July 10, 2007, at para. 4.  Plaintiffs noted that "if this case is to stay on-track for trial," there was a need for "judicial intervention." 

While these are only allegations, the record suggests that at least some of the delay in bringing and resolving the matter can be attributed to the behavior of the Defendants.  The Court makes no mention of this, merely referring to the "peculiar facts" in the case.  Yet the Court relies on the delay to raise the bar on Plaintiffs.  From now on, they will need to show not genuine issues of material fact but clear and convincing evidence.  Thus, there is a possibility in this case that the Defendants caused delay and then benefited through the imposition of a higher evidentiary standards.  In other words, the Court used this case as an excuse to try to lift the procedural bars imposed on Plaintiffs. 

We have noted repeatedly that the Delaware courts do this.  This is another example.  As for the requirement of clear and convincing, the Chancery Court relied on an opinion that imposed the standard in a challenge to a corporate election that took place 37 years after the election.  See Opinion at note 125.  First, this case involved an action filed approximately 19 months after the challenged behavior.  This is in no way comparable to a case where the gap was 37 years.  Second, as noted, the 19 month delay (and the three year delay in resolving the matter) may have been a result, at least in part, of the behavior of some of the Defendants. 

We have posted a copy of the opinion and many of the primary documents involved in the case  on the DU Corporate Governance web site.