The End of “Tag-Along” Derivative Settlements? Reflections on Recent Case Law from Delaware

Almost a decade ago, in the Trulia case, Chancellor Bouchard on the Delaware Court of Chancery sounded the death knell for “disclosure-only” settlements of merger and acquisition (M&A) litigation. In re Trulia, Inc. S’holder Litig., 129 A.3d 884 (Del. Ch. 2016). Before Trulia, public companies that engaged in M&A activity would routinely settle stockholder litigation by agreeing to make incremental deal disclosures in exchange for a class-wide release and paying a fee to stockholders’ counsel. See id. at 891–92. In Trulia, Chancellor Bouchard concluded that “far too often such litigation serves no useful purpose for stockholders.” Id. Not content to reject the specific settlement before him, he made clear that such settlements would be subject to “enhanced judicial scrutiny” going forward. Id. at 899. “Trulia effectively ripped out the final page in the nearly empty playbook that the plaintiffs’ bar had used in pre-closing deal litigation.” Anderson v. Magellan Health, Inc., 298 A.3d 734, 746–47 (Del. Ch. 2023).

The Court of Chancery may now be tolling the bell for settlements of a different kind: settlements of the “tag-along” derivative cases that routinely follow in the wake of securities class actions against public companies. Such derivative cases typically rely on the same substantive allegations of fraud that form the basis for a federal securities fraud claim in the parallel class action, claiming that officers and directors breached their fiduciary duties to the company by committing the fraud or failing to prevent it. In 2023, about 40 percent of securities class actions were accompanied by at least one such derivative case. See Cornerstone Research, Securities Class Action Settlements: 2023 Review and Analysis 11 (2024). Such tag-along derivative cases are often stayed while the underlying class action proceeds through a motion to dismiss (and sometimes even after a motion to dismiss). See, e.g., Brenner v. Albrecht, 2012 WL 252286, at *6–7 (Del. Ch. Jan. 27, 2012) (finding “simultaneous prosecution of both actions unduly complicated, inefficient, and unnecessary,” and therefore staying derivative action beyond denial of motion to dismiss in parallel securities class action).

These tag-along derivative cases tend to produce tag-along settlements. If and when the class action settles, the derivative cases often settle as well. These derivative settlements often do not involve monetary consideration for the company. Instead, the company typically agrees to implement corporate governance reforms, and derivative plaintiffs’ counsel then seek a fee on the basis that these reforms confer a benefit on stockholders. See Cornerstone Research, supra, at 11.

The BioMarin Decision

In a recent case, Vice Chancellor Cook rejected such a tag-along settlement and, in the process, levied criticisms similar to those Chancellor Bouchard made against disclosure-only settlements in Trulia. See Transcript, Wang ex rel. BioMarin Pharm., Inc. v. Bienaimé (BioMarin), C.A. No. 2023-0058-NAC (Del. Ch. July 23, 2024). In April 2023, the company had announced the settlement of a parallel securities class action for $39 million. Id. at 9:4–9. In November 2023, in the tag-along case, the parties reached a settlement that was submitted for court approval. Id. at 9:23–10:16. In the proposed settlement, the company agreed to a number of reforms concerning “governance and oversight,” such as “formal establishment of a management-level disclosure and controls committee” and “enhancements” to the company’s “science and technology committee.” Id. at 11:5–11, 13:21–23. The defendants stipulated that the plaintiffs were entitled to a fee of $1.25 million for the “benefits” these reforms had conferred on stockholders. Id. at 22:1–18.

In rejecting the settlement, Vice Chancellor Cook expressed skepticism about these “asserted benefits,” describing them as “therapeutic” and “a sort of squishy thing that folks come forward with in these sorts of circumstances, where there’s just not really a benefit achieved.” Id. at 53:17–21. He also expressed concerns about “a settlement agreement that provides for, among other things, an extremely broad release of claims” in exchange for modest consideration, pointing to Trulia as precedent. Id. at 52:21–53:2. And while he acknowledged that the plaintiffs risked dismissal on grounds of demand futility, he did not see that risk as a reason to approve the settlement: While the settlement involved “a release of the company’s claim,” the “company would not be subject to a demand futility argument.” Id. at 48:15–20.

Vice Chancellor Cook went on to question the value of tag-along derivative claims more generally:

I personally have real questions about whether it is a positive social good, in sort of considering corporate governance, the corporate governance world as society, whether it’s really a good thing. . . . [A]nd this is why I asked you about whether it could be referred to as tag-along litigation; whether that sort of litigation is really adding value and is something that I in any way want to incentivize; or whether that sort of litigation, frankly, gives rise to precisely or very similar concerns as those discussed in Trulia and other cases.

Id. at 64:23–65:9.

Under the circumstances, Vice Chancellor Cook concluded, approving the settlement and $1.25 million fee award would “send[], frankly, the wrong message about this whole rubric of what I think some would call a tag-along litigation.” Id. at 67:21–23. “I think the calculus should be if there’s no claim and there’s no, really, benefit that folks can come in here and show to me, then maybe just pull up stakes and go somewhere else.” Id. at 67:23–68:3.

A Clampdown on “Tag-Along” Derivative Suits—and Other “Copycat” Claims?

BioMarin stands out for the breadth of the Court of Chancery’s discomfort with tag-along derivative settlements and the merits of the underlying lawsuits. To be sure, BioMarin is not the first time Delaware courts have expressed doubts about “tag-along” cases. In 2012, Vice Chancellor Laster concluded that plaintiffs’ counsel in one derivative case had failed to provide adequate representation where “the plaintiffs hurried to file a tag-along indemnification action” related to “far-from-resolved federal securities actions.” South ex rel. Hecla Mining Co. v. Baker, 62 A.3d 1, 25 (Del. Ch. 2012). But the BioMarin ruling went well beyond the specific case at hand, raising larger concerns about whether tag-along derivative litigation had social value and expressly invoking Trulia.

Vice Chancellor Cook’s reasoning thus suggests that the Court of Chancery is ready for a Trulia-style clampdown on “tag-along” derivative cases. As in Trulia, the court could clamp down by refusing to approve settlements of marginal cases. That would present plaintiffs’ lawyers considering such cases with an unenviable choice: either enter into a settlement that will be rejected by the court or prosecute the case and face likely dismissal on demand futility grounds.

In a similar vein, there are signs that the Court of Chancery is growing weary of other “copycat” cases that bring largely the same claims that have been brought before. Vice Chancellor Fioravanti recently considered a mootness fee for a suit challenging a company’s implementation of a “net operating loss pill” (a corporate action designed to protect certain tax advantages). Transcript, Assad v. Williams, C.A. No. 2024-0426-PAF (Del. Ch. Nov. 20, 2024). The court observed that “this case is one of many where counsel to this plaintiff and others have attempted to leverage and scale a lone, single theory against several corporate defendants in multiple cases.” Id. at 7:12–15. While taking care not to “disparage that business model,” which is “well-established,” Vice Chancellor Fioravanti found “the fact that counsel have repeated the same legal theory over multiple defendants must be considered in assessing the amount of any mootness fee award.” Id. at 7:15–20.

Given the repetitive nature of the claim, Vice Chancellor Fioravanti awarded a much smaller fee than he had in similar cases—and hinted that future awards might be even lower. Plaintiff’s counsel had initially requested a fee of $2.4 million, then lowered the request to $600,000, which the vice chancellor had awarded in a similar case. See id. at 7:21–8:3. But the vice chancellor awarded only $300,000, noting that “this case involved no discovery, no motion practice, [and] followed many other similar complaints asserting the same legal theory.” Id. at 8:15–17. And he made clear, “for the benefit of others who might be seeking a mootness fee under analogous circumstances and the same legal theory, they should not have any illusion that $300,000 will be the floor.” Id. at 8:21–24.

While distinct in several ways, Vice Chancellor Fioravanti’s decision in Assad reinforces that the Delaware bench is increasingly reluctant to reward attorneys for pursuing cases that require marginal effort from counsel and confer marginal benefits on stockholders. And BioMarin reflects a recognition that tag-along derivative cases fall at the far end of the spectrum, copying and pasting from underlying securities class actions and ultimately conferring questionable (if any) benefits on stockholders.

Implications of BioMarin Outside Delaware

BioMarin raises the prospect that tag-along derivative cases will become a thing of the past in Delaware: Unable to secure a quick and easy settlement, most lawyers will abstain from filing these suits in Delaware (and those who do will face dismissal on demand futility grounds). But as Trulia’s example shows, what happens in Delaware sometimes stays in Delaware.

While Trulia curtailed the volume of M&A-related stockholder litigation in Delaware, such litigation did not go away; it moved to federal court. “[I]n the wake of Trulia, attorneys who specialized in this work began filing elsewhere. The deal-litigation diaspora spread mainly to federal courts, where plaintiffs’ attorneys repackaged their claims for breach of the fiduciary duty of disclosure as federal securities claims.” Magellan Health, 298 A.3d at 748; see also In re Dell Techs. Inc. Class V S’holders Litig., 300 A.3d 679, 707 n.16 (Del. Ch. 2023) (noting “a diaspora in which the lawyers responsible for filing the lowest quality lawsuits fled from Delaware to the federal courts”), aff’d, 326 A.3d 686 (Del. 2024). Federal courts seem to be catching on, though: Writing for the Seventh Circuit, Judge Easterbrook recently took notice of this trend and went so far as to suggest, in dictum, that the trial court should consider Rule 11 sanctions to deter such cases. See Alcarez v. Akorn, Inc., 99 F.4th 368, 372–73, 376–77 (7th Cir. 2024).

The same mass migration to federal court may happen with tag-along derivative litigation. Even before BioMarin, some tag-along derivative cases were being filed in federal court, and 2023 saw a reduction in “tag-along” derivative actions in Delaware. See Cornerstone Research, supra, at 11 (noting “a reduction in the number of cases filed [in 2023] in Delaware (13) compared to the prior four-year average (17)”). While forum-selection clauses in corporate charters often require derivative cases to be brought in Delaware, lawyers have sought to get around these restrictions by bringing claims under the Securities Exchange Act of 1934. These claims are often some combination of section 14(a) (asserting that disclosure in an annual proxy statement was misleading based on the same allegations in the parallel class action), claims for contribution under section 21D (asserting the officers and directors must reimburse the company for any liability in the underlying class action), and even section 10(b) (asserting that the officers and directors defrauded the company—in effect, that the company defrauded itself).

Efforts to bring derivative claims in federal court have already engendered a circuit split. Compare Lee ex rel. The Gap, Inc. v. Fisher, 70 F.4th 1129 (9th Cir. 2023) (en banc) (holding that forum-selection clause barred bringing derivative ’34 Act claim outside Delaware), with Seafarers Pension Plan ex rel. Boeing Co. v. Bradway, 23 F.4th 714 (7th Cir. 2022) (concluding the opposite, over a dissent by Judge Easterbrook).

If federal judges begin to apply the same scrutiny to tag-along derivative cases that was seen in BioMarin, that may level the playing field, slowing any migration of these cases away from Delaware and toward federal court. If not, a consequence of BioMarin may be to intensify the trend of filing tag-along derivative cases in federal court.