DealLawyers.com Blog

This Shearman & Sterling blog discusses Vice Chancellor Laster’s recent bench ruling in In re Good Tech Corp. Stockholders Litigation (Del. Ch.; 5/17), where the Vice Chancellor permitted claims against a company’s financial advisor to be severed from settled claims against the other defendants – despite provisions in the bank’s engagement letter designed to prevent that. Here’s an excerpt:

The financial advisor opposed the severance and sought a continuance of the trial, arguing that the settlement contravened the settlement consent and indemnification provisions in its engagement letter with Good—drafted in the wake of In re Rural Metro Corp., 88 A.3d 54 (Del. Ch. 2014)—intended to protect against just such an eventuality.

Noting that neither plaintiffs nor the settling defendants were parties to the engagement letter, and concluding that the advisor could recover money damages were it subsequently determined that the provisions were breached, Vice Chancellor Laster granted the severance request, denied the continuance request, and ordered the claims against the financial advisor to proceed to trial as previously scheduled.

Investment banks are deep pockets, and the prospect of their clients settling out & leaving them holding the bag as the sole remaining defendant has long been an area of concern to them.  That concern was heightened by the staggering damage award in Rural Metro.  As a result, increased attention has been paid to engagement letter language limiting the ability of other parties to settle without the bank’s consent.  But those contractual protections may not be much help if the other defendants aren’t parties to the contract.

– John Jenkins