                                   COURT OF CHANCERY
                                            OF THE
                                   STATE OF DELAWARE

J. TRAVIS LASTER                                                    New Castle County Courthouse
VICE CHANCELLOR                                                     500 N. King Street, Suite 11400
                                                                   Wilmington, Delaware 19801-3734

                             Date Submitted: February 27, 2015
                              Date Decided: March 12, 2015


Stephen E. Jenkins                                   Kevin G. Abrams
Carolyn S. Hake                                      John M. Seaman
Catherine A. Gaul                                    Steven C. Hough
Andrew D. Cordo                                      Abrams & Bayliss LLP
Ashby & Geddes, P.A.                                 20 Montchanin Road, Suite 200
500 Delaware Avenue, 8th Floor                       Wilmington, Delaware 19807
Wilmington, Delaware 19899

       RE:    Swomley v. Schlecht, C.A. No. 9355-VCL

Dear Counsel:

       The parties have asked the court to enter a Stipulation and Order Approving

Notice to Purported Class Members and Scheduling Plaintiffs’ Motion for Attorneys’

Fees and Expenses. The parties included a form of Final Order and Judgment for the

court to enter after the proposed notice and hearing procedure. The parties have

proceeded in this fashion in a commendable effort to comply with the process outlined in

the Advanced Mammography decision by Chancellor Allen. See In re Advanced

Mammography Sys., Inc. S’holders Litig., 1996 WL 633409 (Del. Ch. Oct. 30, 1996).

       The procedure described in Advanced Mammography comes into play when the

parties agree that (i) the defendants have taken action sufficient to render a class or

derivative action moot and (ii) the defendants agree (or someone else agrees on their

behalf) to pay a fee to plaintiffs‟ counsel in light of the benefits the litigation conferred by
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contributing to the action taken by the defendants. Such a scenario presents two concerns.

First, there is the possibility of a surreptitious buyout in which the defendants take

cosmetic action that does not actually moot the plaintiffs‟ claims, but the plaintiffs go

along in return for a fee. The remedy for this concern is to provide notice so that a

different stockholder can argue that the claims were not rendered moot and seek to

continue litigating them. See id. at *1 (citing “the risk of buy off” presented by the

proposed fee payment); accord In re Astex Pharm., Inc. S’holders Litig., 2014 WL

4180342, at *1 (Del. Ch. Aug. 25, 2014). Second, there is the possibility that the

defendants may have rendered the action moot, but somehow acted wrongfully in doing

so, perhaps by paying an excessive attorneys‟ fee or taking self-interested action that was

unwarranted under the circumstances. The remedy for this concern is to provide notice so

that other stockholders are aware of the defendants‟ action and can respond, either by

challenging the defendants‟ decision in a new proceeding or through avenues other than

litigation, such as by engaging with the board or with other stockholders. See In re

Zalicus, Inc. S’holders Litig., 2015 WL 226109, at *2 (Del. Ch. Jan. 16, 2015)

(explaining that “notice is appropriate because it provides the information necessary for

an interested person to object to the use of corporate funds”); Hack v. Learning Co., 1996

WL 633306, at *2 (Del. Ch. Oct. 29, 1996) (noting that a different stockholder might

“challenge the fee payment as waste in a separate litigation”).

       In Advanced Mammography, Chancellor Allen indicated that notice and a hearing

on the question of mootness should be held before the action was dismissed to “afford the
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class an opportunity to show that the case really is not moot [and] that the proposed

payment to counsel is the only motivation for the dismissal on that ground.” 1996 WL

633409, at *1; see also Hack, 1996 WL 633306, at *2. In the more recent Zalicus

decision, Chancellor Bouchard streamlined the procedure by recognizing that a different

stockholder can contend in a subsequent action that either (i) the claims in the original

case had not been rendered moot or (ii) the action taken to moot the claims or the fee paid

was unwarranted. There is no need to keep the original case open so that a hearing can be

held on those issues because they can be addressed, if necessary, in a future case.

       But notice is still required if a representative plaintiff seeks to dismiss class or

derivative claims and compensation in any form will pass directly or indirectly to the

plaintiff or her attorney, as happens whenever a mootness fee is paid. See Ct. Ch. R.

23(e)(“[S]uch dismissal shall be ordered without notice thereof if there is a showing that

no compensation in any form has passed directly or indirectly from any of the defendants

to the plaintiff or plaintiff‟s attorney and that no promise to give any such compensation

has been made.”); Ct. Ch. R. 23.1(c) (same). The order providing for notice need not

contemplate a hearing because the question of mootness and the propriety of the action

taken to moot the claims or the payment of the fee can be challenged in a later case. The

court is not ruling on the question of mootness or the amount of the fee. When defendants

agree to pay a fee in a mooted case, they are not “engaged in court approved „fee shifting‟

justified by a class benefit, but [are] exercising the business judgment of the board, as in

any expenditure of corporate funds.” Advanced Mammography, 1996 WL 633409, at *1.
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       This case involved a squeeze-out transaction in which SynQor, Inc. (the

“Company”), a private corporation, merged with SynQor Holdings, LLC, an entity

owned by members of management that included the Company‟s founder, Chairman,

CEO, and controlling stockholder. The plaintiffs do not dispute that their disclosure

claims are moot, and the parties have agreed on the amount of a fee. A hearing is not

required on either issue, but notice must be provided to the former minority stockholders

of the Company who were cashed out in the merger and who comprised the members of

the putative class. Notice is necessary so that the members of the putative class will know

what has taken place and can respond as they see fit.

       In this case, notice to a wider range of parties is not required. In a scenario where

the entity paying the fee is run by individuals who are themselves acting in fiduciary

capacities, and where the conduct of those individuals or the entity has been called into

question by the litigation, then it may be appropriate to provide some form of notice to

the stockholders of that entity. A common example involves a publicly traded acquirer

who allegedly aided and abetted a breach of fiduciary duty by the directors of the target

corporation and who agrees to pay a mootness fee on behalf of the defendant directors. In

that case, some form of notice to the acquirer‟s stockholders, such as disclosure in a

securities filing, may be appropriate. See In re Zalicus, Inc. S’holders Litig., Consol. C.A.

No. 9636-CB (Del. Ch. Mar. 10, 2015) (ORDER) (requiring that the acquirer, “as the

payor of the fee payment, shall file a Form 8-K providing notice to its stockholders of the
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payment”). In this case, the party paying the fee is a private entity owned by the

individual defendants, so there is no need for additional notice to its stockholders.

       The notice shall be accomplished by mailing. There does not appear to be a

reasonable alternative means of providing notice, such as through some combination of a

press release, a Form 8-K, and disclosure on the company‟s and plaintiffs‟ counsel‟s

websites. In other situations involving publicly traded corporations, the court has

permitted notice by reasonable alternative means to alleviate the expense of a direct

mailing. See, e.g., See id. (publication through PRNewswire and posting on surviving

entity‟s website in addition to issuance by acquirer of Form 8-K regarding payment); In

re DFC Global Corp. S’holders Litig., Consol. C.A. No. 9520-CB (Del. Ch. Mar. 10,

2015) (ORDER) (publication in Investor‟s Business Daily and posting on plaintiff

counsel‟s website); In re Astex Pharm., Inc. S’holders Litig., Consol. C.A. No. 8917-

VCL (Del. Ch. Nov. 4, 2014) (ORDER) (publication in Investor‟s Business Daily and

GlobeNewsire and posting on surviving entity‟s website).

       The notice shall describe clearly the nature of the claims that were rendered moot

and how the action taken by the defendants rendered the claims moot. The notice shall

state the amount of the fee and identify specifically who is paying the fee. The notice

shall state that the court has not passed on the amount of the fee. The notice shall provide

contact information for plaintiffs‟ counsel and defense counsel so that they can be

reached if anyone has questions or concerns.
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       The parties shall submit a revised form of stipulated order (i) dismissing the

disclosure claims, (ii) directing that notice be provided to the putative class, and (iii)

eliminating references to a pre- or post-dismissal hearing and the procedures for

appearing and objecting at a hearing. The dismissal shall be with prejudice as to the

named plaintiffs and without prejudice as to other stockholders. The stipulated order shall

state that the dismissal of the litigation shall become effective upon the filing of an

affidavit of mailing evidencing that notice was provided as contemplated by the

stipulated order. The stipulated order shall specify that once that has occurred, the court

no longer will retain jurisdiction over the case.

                                           Very truly yours,

                                           /s/ J. Travis Laster

                                           J. Travis Laster
                                           Vice Chancellor
