A securities fraud class action was filed over the 2018 merger between McDermott, an upstream offshore development company, and Chicago Bridge & Iron Company, a downstream engineering and construction company. After the merger, CB&I ceased to exist and became a part of the new McDermott entity. CB&I stockholders received 0.82407 shares of McDermott stock in exchange for every one share of CB&I stock they held pre-merger. Pre-existing McDermott stockholders became the owners of about 53% of the new entity and former CB&I stockholders became the owners of about 47%. The merger was pitched as an opportunity for McDermott to diversify its holdings and form a vertically integrated, downstream-upstream company, while offering the struggling CB&I an alternative to bankruptcy. The Lead Plaintiff, NSHEPP, alleged that Defendants made misleading or untrue statements of material fact that caused McDermott’s shares to be inflated at the time of the merger, and that, on the release of subsequent corrective disclosures, McDermott’s stock price fell and resulted in economic damage to NSHEPP and other McDermott stockholders.

The District Court certified a class with two sub-classes and the Court of Appeals affirmed.

“Importantly, when a court analyzes adequacy and determines that a fundamental conflict exists, that conflict is between the class representative and other members of the class it represents — as opposed to conflicts among unnamed class members themselves….  Here, the court did not abuse its discretion when it found a fundamental conflict between purchasers and exchangers. The magistrate judge reasoned that this issue of comparative inflation would only impact exchangers because purchasers do not have any reason to care about the CB&I stock inflation, and NSHEPP’s exchanger role will require it to spend a lot of time briefing and arguing issues related to CB&I inflation that would do little to nothing to vindicate the interests of purchasers. The court reasoned that if half the class are exchangers and half are purchasers, two subclasses would be the best way to resolve the conflict so that a significant part of a merits trial is not focused on an issue of importance to only half the class. Similarly, the court reasoned that certain issues would be only relevant to purchasers, such as post-merger market efficiency and the ‘correctiveness of the last five alleged corrective disclosures,’ which occurred post-merger. The court did not abuse its discretion when it determined, based on the evidence before it, that subclassing was the most appropriate path to resolve the conflict it identified. However, we must also address whether the court abused its discretion in holding that class members who are both purchasers and exchangers can hold claims in both classes. Defendants maintain that the fundamental conflict multiplies if the court allows class members who are both exchangers and purchasers — that is, someone who both held CB&I stock that was converted in the merger, and who also went out on the open market during the Class Period to purchase McDermott stock — to hold claims in both classes. We disagree.

“We shall use an imaginary investor, John Doe. Assume that Doe was both an exchanger and a purchaser. Doe therefore has two interests that he wants adequately represented in this class action: (1) he wants damages in connection with his exchanged shares and, to further that interest, he wants NSHEPP to prove minimal inflation in CB&I stock and maximum inflation in McDermott stock (to maximize the difference and thus his damages); and (2) he wants the purchaser subclass’s lead plaintiff to prove that defendants’ misrepresentations fraudulently inflated McDermott stock price so he can recover the difference between his purchase price and the price it should have been priced at but for the misrepresentations. NSHEPP will adequately represent his exchanger interest — maybe trial proves he has a net negative; maybe it proves he has a net benefit — but, either way, NSHEPP will be protecting his exchanger interest and will fight to maximize his exchanger recovery because NSHEPP itself wants maximum recovery under this theory. The purchaser lead plaintiff will then protect Doe’s purchaser interest by bringing its strongest fraud-on-the-market case — again, because that lead plaintiff itself will be incentivized to maximize its own recovery as a purchaser. We see no logical reason why Doe cannot recover with respect to both of these separate interests — any conflict between purchasers and exchangers from a class-representative standpoint does not to trickle down to unnamed class members seeking only their own personal damages.”

 

Nova Scotia Health Employees’ Pension Plan v. McDermott International, No.24-20326, 2025 WL 2814735 (5th Cir. Oct. 3, 2025).