Denial of Motion for Certification of Defendant Class

Securities and Corporate Attorney Joseph MarrowBy: Joseph Marrow

A recent decision of the Massachusetts Federal District Court denied a motion to certify a defendant class related to an indemnification claim concerning tax liabilities from an alleged breach of a merger agreement. In Mercury Systems, Inc. v. Shareholder Representative Services, LLC, et al., Civil Action No. 13-11962-RGS, the plaintiff, Mercury Systems, filed a motion to certify a defendant class (the defendant securityholders and the stockholder representative appointed to resolve post-closing disputes). The stockholder representative moved to dismiss the defendant class. The District Court noted that the certification of a defendant class is rare. In reviewing such a request, the court conducts a two-prong test. In Mercury Systems, the court held that the motion failed to satisfy the second prong – “that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.” The court held that “[t]here is nothing of a superior nature to be gained by converting this fairly commonplace litigation into a class action.” Most significantly, the court recognized that the defendant securityholders had appointed a stockholder representative under the merger agreement “to act on behalf of the KOR securityholders (who are the proposed class defendants) on all matters arising out of the [merger agreement].” Given the powers vested in the stockholder representative to resolve all post-closing claims on behalf of the defendant securityholders and the presence of an indemnity escrow sufficient to cover the tax liabilities, the court concluded that certification of the defendant class would only add complexity and additional cost to the litigation. The court recognized the benefits of appointing stockholder representatives as an efficient and cost effective way to resolve post-closing disputes. As such, the court held that a class action would not be superior to the methodology in place to resolve the dispute.

The Mercury Systems decision reinforces the usefulness of stockholder representatives to resolve post-closing disputes. Appointing a stockholder representative may be an effective way of preventing a successful motion to certify a defendant class.

For more information on this topic, please feel free to contact Joe.

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