March 11, 2011 6:49 PM

Special Counsel: Wilson Sonsini, Morris Nichols Acted Appropriately in Nighthawk Matter

Posted by Ross Todd

The lawyers who settled a class action lawsuit connected to the $170 million corporate merger of Nighthawk Radiology and Virtual Radiologic Corporation can breathe a sigh of relief. A special counsel appointed by Delaware Vice-Chancellor J. Travis Laster to look into possible "forum shopping" and "collusive" behavior in the case has concluded in a report released Friday that they acted appropriately in their settlement of the case.

In their 42-page report, Gregory Williams and Blake Rohrbacher of Richards, Layton & Finger in Wilmington found that the settlement of the Nighthawk case was in line with industry standards. (Download the report.)

"Settlements in multijurisdictional deal litigation are nearly always reached quickly—defendants trying to preserve their transactions need to resolve potential injunction motions before the deals close," they wrote. "The timing of settlement here was consistent with similar cases."

The roots of the special counsel report go back to a status conference on a class action lawsuit connected to the NIghthawk merger in December during which Vice-Chancellor Laster aimed blistering remarks at defense counsel at Wilson Sonsini Goodrich & Rosati and Morris, Nichols, Arsht & Tunnell in Delaware.

The vice-chancellor specifically railed against defense tactics in settling the suit brought in connection with the merger, which was announced in September 2010. Laster said the Nighthawk defendants had engineered a "classic reverse auction" by exploiting multiple forums "to force plaintiffs essentially to constructively reverse-bid for the lowest possible settlement." The remaining plaintiffs, Laster said, were then told "to get on board" a settlement reached in Arizona or lose out on the fees.

The Am Law Daily's colleague Amy Kolz raised the curtain on Friday's ruling in the Bar Talk section of this month's edition of The American Lawyer--a ruling which posed high stakes for Wilson Sonsini partner David Berger. "At stake for Berger: his ability to litigate in the country's most important business court," Kolz wrote. "At stake for everyone else: the rules and guidelines for plaintiffs and defense lawyers litigating a swelling wave of merger-related class actions."

The report concludes that under existing Delaware law, forum-shopping to secure an advantageous settlement is not an independent wrong. Williams and Rohrbacher write that "such forum-shopping should not be equated with a collusive settlement."

Forum shopping, the report continues, "is often merely a description of a rational and good-faith pursuit of the client’s best interests." And though the report says that some elements of the Nighthawk negotiations "give rise to suspicion"--including that defense attorneys negotiated with only one set of plaintiffs attorneys with whom they had past dealings while avoiding negotiations with Delaware plaintiffs counsel--the special counsel team concluded the judge "should not impose any remedy on any attorney in this case."

"[G]iven the conclusion that no collusion occurred in this settlement, special counsel would not recommend that this court take any other remedial action besides—as it already has—requiring that the parties keep each forum informed of proceedings in the other," Williams and Rohrbacher write.

Shareholder suits seeking to block corporate mergers surged during the past year in state and federal court. According to Securities Class Action Services, 327 deal-related class actions were filed last year, compared to only 27 in 2006. Qualcomm Inc.'s $3.1 billion acquisition of Atheros Communications alone sparked nine class actions. "It used to be that in significant [merger] deals, you would tell the client to expect to be sued," Kirkland & Ellis partner Yosef Riemer told Kolz. "Now you have that expectation about really small transactions, as well as an expectation that there will be [suits in] multiple forums."

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