Enhanced Scrutiny Weblog Sample Vitality: Extra gasoline for pre-litigation 220 requests
A recent decision in the federal securities class action lawsuit relating to Pattern Energy’s private transaction supports plaintiffs, who are relying on an aggressive pre-litigation strategy to pursue detection through a 220 claim. The plaintiffs in the federal proceedings have decided not to bring an action against 220. Instead, in the face of a motion for dismissal, they sought relief on the deferral of the Private Securities Litigation Reform Act (PSLRA) in order to obtain the same 220-demand discovery that Chancery Court plaintiffs had received in parallel litigation. The discovery request was denied and the request for release was recently granted. Conversely, for the plaintiffs of the Chancellor’s Court, the breadth of 220 discoveries that they could achieve became the basis for the appointment of a lead plaintiff by the Chancellor’s Court. These disparate outcomes send another message to plaintiffs that if they do not aggressively pursue the pre-lawsuit discovery, they are at real danger.
The Pattern Energy litigation arises out of a 2020 transaction that paid off existing shareholders and privatized the company. As is common with public company mergers and acquisitions, a security class action was first filed in Delaware federal court challenging the disclosure to shareholders voting on the transaction. In these cases, commonly known as strike actions, violations of the disclosure of Section 14 of the Securities and Exchange Act of 1934 (Exchange Act) are asserted. An amended complaint was later filed to add breach of fiduciary duty. The federal case is labeled In re Pattern Energy Group, Inc., Securities Disputes, Case No. 20-275-MN-JLH. At the same time, the shareholders initiated two class action proceedings before the Chancellery, in which the violation of fiduciary claims was also prosecuted. These cases have been consolidated and titled In re Pattern Energy Group, Inc. Shareholder Disputes Case No. 2020-0357-MTZ.
Although claims in state and federal courts are similar, the strategy cited by plaintiffs was very different. Federal plaintiffs, who were likely in a rush to file a case, did not request documents under Section 220 of the Delaware General Corporation Law prior to filing the lawsuit. However, both plaintiffs, who filed in the Chancery Court, made 220 claims and received documents before filing their complaints. The difference could likely prove fatal for the federal plaintiffs.
Since the federal complaint contained claims under the Exchange Act, the case was immediately submitted to the PSLRA, which, among other things, requires automatic postponement of discovery until a complaint has passed a motion to dismiss. The general purpose of auto-residence is to protect the accused from costly discoveries for otherwise frivolous claims. This is a significant benefit for security defendants and is a corollary in cases where exposure is often the greatest cost of litigation.
In the Pattern Energy federal case, just a week before the defendants filed their motion for dismissal, plaintiffs filed a PSLRA residency permit so they could obtain the same documents that Chancery Court plaintiffs had previously received through 220 claims . Why file such a motion just before the defendants petitioned for dismissal? Because a week earlier, the Chancellor’s Court held a hearing to appoint a lead plaintiff in the state case, and the hearing’s argument revealed how the pre-lawsuit discovery might support plaintiffs’ claims. In their motion to facilitate PSLRA residence, federal plaintiffs argued (1) that allowing such a discovery was not a burden, as they only requested a copy of the documents already submitted, and (2) that federal plaintiffs had acute prejudice because of the record in their case did not include the discovery, while in the state case, which contained the same claims, the record contained the favorable discovery. Defendants vigorously denied the motion, arguing that any prejudice was the result of plaintiffs’ own strategic decision not to advance charges against 220, citing the Delaware jurisprudence prohibiting plaintiffs in federal securities cases from making 220 claims put.
The federal judge rejected the plaintiffs ‘request for exemption from PSLRA residence and at the same time made a recommendation to the district judge that the defendants’ request for release be granted. When the court denied the discovery request, it agreed with the defendants that the plaintiffs themselves caused the mystery: “The reason plaintiffs do not have the information that the Chancellor’s plaintiffs have is because the plaintiffs have decided to previously file their securities lawsuit with the federal court looking for this information. “(Order of discovery at 3). By filing their case, plaintiffs were subject to PSLRA residency, and the court would not save them, even if the defendants were barely incriminated in creating the 220 document productions. I would. The district judge agreed Motion for dismissal held, and plaintiffs must now attempt to amend their complaint without making use of the same 220 discoveries used in the state court.
At the same time, the decision of the plaintiffs of the Chancellor’s Court to request a discovery prior to the lawsuit was upheld. Two plaintiffs filed cases supported by two different groups of plaintiff firms. In deciding which lead plaintiff to appoint, the Chancellor Court’s decision was based solely on the selection of the plaintiff, who pursued her claim more aggressively and, as a result, received more documents in the pre-lawsuit investigation than the other plaintiff. Lead Plaintiff Order at 5-7.
The Chancery Court has not been shy in recent years in inducing plaintiffs to seek pre-lawsuit discovery through 220 claims. And Delaware jurisprudence has continued to shift positively to shareholders making 220 claims, most notably AmerisourceBergen Corp. v Lebanon County Employees’ Retirement Fund, et al., Case No. 60, 2020 (Del. December 10, 2020). The different paths for the various plaintiffs of Pattern Energy reinforce this approach and indicate even more 220 claims against public companies.