[UPDATED, throughout: 04.11.09 @ 10:50 am -- for analysis of Colorado River abstention factors. -- Ed.]
Manson, the plaintiff in the Schering-Plough ENHANCE Securities Litigation, had (on March 10, 2009) filed what looked to be the first New Jersey state court action challenging the Merck reverse merger transaction. I had earlier noted that 15 such suits are now pending -- and at least three of those, in federal court.
Tonight, Manson's lawyers filed a 52-page motion to intervene in each of the three federal suits, with the objective of having them declared "parallel" to the state actions, then asking Judge Cavanaugh, under the doctrine of federal abstention, to decline to hear, or otherwise stay, the federal suits -- so that the central class-action challenging the SCH-MERCK reverse merger might proceed exclusively in the state courts of New Jersey. These state court actions are referred to as Plotkin, below, in the Manson filing (click it, to enlarge):
The argument runs that Manson and the Plotkin parties have moved forward with more urgency (and first-obtained the state courts' jurisdiction), as compared to the Landesbank/LPERF federal plaintiffs. It is also claimed that the New Jersey state courts are more deeply-versed in the nuances of New Jersey state law which will determine the rights of the Schering shareholders, here. It is argued that the only reason the federal court in New Jersey is involved (other than that the Landesbank/LPERF plaintiffs chose the federal forum, which ought to count for something -- shouldn't they be allowed to decide where they bring suit?), is that the parties reside in several differing states, thus creating so-called "diversity" jurisdiction. I am not so sure. Why?
Interestingly, earlier this week, the two large institutional investors in the federal suits filed papers detailing just how significant their collective interests are -- as the process of sorting out lead plaintiff began, in federal court. How significant? Well, collectively, the institutions own about $4.3 million worth of Schering-Plough stock (and I strongly suspect Manson, and the Plotkin parties, own far less than $4.3 million of Schering stock). The "deep-pockets" theory holds that the institutions will be both highly-motivated, and able to fully-finance the challenge's considerable ongoing expenses:
. . . .The Institutional Investor Group, sophisticated institutional investors with the resources to oversee the [federal class] actions, is the most adequate plaintiff to lead this litigation. . . . for instance. . . . 187,900 shares [are] owned by the Institutional Investor Group. . . .
How will these two competing motions -- the Plotkin/Manson one to intervene, and ask federal Judge Cavanaugh to abstain -- and, the other, to have Landesbank and LPERF named lead federal plaintiffs -- turn out? Who knows?
Judge Cavanaugh will be asked to apply the so-called Colorado River formulation of abstention -- in deciding whether the federal proceedings should be stayed. Under Colorado River, the first question is whether the state-, and federal- proceedings are "parallel" actions. These 15 actions all seem pretty close to identical, so let us assume that this threshold inquiry is answered in the affirmative by Judge Cavanaugh.
Next, he must, under the Supreme Court's teachings in Colorado River, decide how five separare factors come out -- in favor of federal abstention, or against it. These factors are: (1) the federal policy against piecemeal litigation; (2) the absence of federal court proceedings beyond the filing of a complaint;(3) the presence of extensive rights governed by state law in the actions; (4) the relative convenience of the state and federal forums; and (5) whether the state courts will adequately protect the federal plaintiffs' interests.
I think all but factors (2) and (3) are toss-ups. That is, I think factors (1), (4) and (5) suggest that that either the state or federal courts would be equally able to handle these matters -- once consolidated.
Factor (2) would usually control here, for often not very much happens shortly after the filing of a federal complaint. That is not the case in these federal suits, though. There has been significant activity, to establish the order, and priority, of federal lead-counsels, and to consolidate the three federal actions, already. So, factor (2) might lean slightly toward continuing the federal "diversity" jurisdiction, here.
Factor (3) probably leans the other way -- toward the state court's exclusive jurisdiction, once the suits are consolidated, under a lead counsel -- that is, most of the claims in these suits will turn on how New Jersey state corporate law views the actions of CEO Hassan, and his deal team, in negotiating the reverse merger.
So, it looks pretty close to a "push" -- to me, at this point.
A-Not-So-Confidential-Hint: Had any of the federal plaintiffs alleged violations of the NYSE Listing Standards, in the NYSE Listed Company Manual [new post!], and thus given their suits a more "national" (i.e., also federal) rub-of-flavors -- the balance might tip their way -- in favor of continuing federal jurisdiction. Who knows?In any event, it is encouraging to see this level of vigor in the pursuit of a more-adequately shopped transaction -- afterall, if Schering is to be broken-up, and sold-off -- it should be to the highest bidder, not the easiest one. Moreover, arguably, it should not be the one that maximizes the cash-out for CEO Hassan (perhaps $78 million!) and his Top Six -- at least not at the expense of a higher-priced (but less-Executives'-cash-laden) offer.
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