In In re Madison Square Garden Entertainment Corp. Stockholders Litigation—a derivative action stemming from the acquisition of Madison Square Garden Entertainment, Inc. (MSGE)—the Court of Chancery held that notice by publication was an appropriate means of providing MSGE’s beneficial stockholders with notice of the parties' pending settlement. C.A. No. 2021-0468-LWW (Del. Ch. May 26, 2023) (letter op.). Per Vice Chancellor Will, “notice to record holders by mailing and to beneficial holders by publication is the best notice practicable under the circumstances of this case and satisfies the requirements of both [Court of Chancery] Rule 23.1 and due process.”
Under Court of Chancery Rule 23.1(c), derivative actions cannot “be dismissed or compromised” unless “notice by mail, publication or otherwise of the proposed dismissal or compromise [has been] given to [stockholders] in such manner as the Court directs.” As observed in the letter opinion, corporations “ordinarily discharge [their] obligation under Delaware law” by directly mailing notice to stockholders of record. It should be noted, however, that there are certainly circumstances where notice by publication is appropriate for both record and beneficial stockholders alike. E.g., Rux v. Meyer, C.A. No. 11577-CB (Del. Ch. Oct. 23, 2019) (ORDER) (permitting notice by publication and noting that “a mailing would involve printing and mailing…an estimated 340,000 notices at a cost of several hundred thousand dollars (plus brokerage search costs)”).
In Madison Square Garden, Vice Chancellor Will held that a direct mailing to MSGE’s “roughly 700 record holders” was warranted in light of the “modest” costs associated with the mailing. The Court went on to find that notice to MSGE's beneficial stockholders by publication was appropriate, citing the following factors:
- “As of June 30, 2022, there were over 27 million shares of MSGE Class A common stock outstanding.”
- “MSGE averages trading volumes in hundreds of thousands of shares per day.”
- Beneficial stockholders have opted to take the risks associated with beneficial ownership, including that they may not receive notice of corporate proceedings.
- The expenses associated with the mailing (and the burden that it would impose on the company) would outweigh any marginal benefit.
Based on the foregoing, the Court allowed notice (to MSGE's beneficial stockholders) to be provided by: (i) MSGE filing a copy of the notice of settlement as an exhibit to a Form 8-K; (ii) MSGE posting a copy of the stipulation of settlement, along with the notice, to the Investor Relations section of MSGE's website; and (iii) plaintiff's counsel posting the stipulation of settlement, along with the notice, on plaintiff's counsel's respective websites.