Seyfarth Synopsis: On February 2, 2017, the Appellate Division for the First Department in New York entered an order approving a "disclosure-only" settlement. While acknowledging the "increasingly negative view" of "disclosure-only" or other forms of non-monetary settlements reflected in recent merger litigation decisions in both Delaware and New York, the court signaled that the death knell has not rung for these settlements just yet.
Plaintiff shareholder of Verizon Communications, Inc. ("Verizon" or the "Company") filed a shareholder derivative class action lawsuit against Verizon and board members alleging, inter alia, that the board breached its fiduciary duty to Verizon's shareholders by causing Verizon to pay an excessive price for stock in a 2013 transaction and that it had failed to disclose material information in connection thereto in its preliminary proxy statement. In that transaction, Vodafone Group PLC ("Vodafone") sold its 45% minority stake in Cellco Partnership, Inc. to Verizon for $130 billion in stock and cash.
The parties reached an agreement to settle this action, wherein Verizon agreed to provide certain additional disclosures and to obtain a fairness opinion from an independent financial advisor if Verizon in the next three years entered into certain material transactions. Verizon also agreed that it would not oppose any fee application of plaintiffs' counsel not exceeding $2 million. The lower court rejected the settlement after a hearing because supplemental disclosures "individually and collectively fail[ed] to materially enhance the shareholders' knowledge about the merger[,]" "provide[d] no legally cognizable benefit to the shareholder class, and cannot support a determination that the Settlement is fair, adequate, reasonable and in the best interests of the class members." The lower court additionally found that the corporate governance reform requiring that a fairness opinion be obtained in certain circumstances "could curtail Verizon's directors' flexibility in managing minimal asset dispositions."
The First Department in reversing the lower court's decision found that under New York law the proposed settlement met the five factors of its longstanding Colt standard, including the likelihood of success, the extent of support of the parties, the judgment of counsel, the presence of bargaining in good faith, and the nature of the issues of law and fact. The Court additionally announced that it was "refining" the Colt standard to include two additional factors that it found this settlement also met: (1) whether the proposed settlement is in the best interests of the putative settlement class as a whole; and (2) whether the settlement is in the best interest of the corporation. The Court then remanded the case back to the lower court to determine the fee award after noting the significant number of cases where courts have awarded attorneys' fees even though the benefits of derivative litigation were "'scant,' 'slight,' 'modest,' or even 'minimal.'" In such cases, the court noted that fees have been greatly reduced from the sums demanded.
1. New York May Become a More Favored Venue for M&A Litigation. The Court claimed that its new Colt standard was "comparable" to the Delaware standard enunciated in Trulia.1 It seems likely, however, that plaintiffs' attorneys will view the Court's application of its new standard as indicating that New York is a more favorable forum for seeking the approval of disclosure-only settlements than Delaware, where the "the sun has set on routine approval of disclosure-only settlements."2
2. A Settlement That Includes a Corporate Governance Reform May Be Looked Upon More Favorably By New York Courts. While the Court in deciding to approve the settlement considered the fact that four categories of supplemental disclosures were made to Verizon shareholders, it found that the "most beneficial aspect" of the proposed settlement was the fairness opinion requirement. This prospective corporate governance reform mandated an independent valuation "without restricting the flexibility of directors in making a pricing determination" and thus served to "safeguard the valuation of corporate assets" in the event of a transaction involving the sale of Verizon Wireless assets valued in excess of $14.4 billion.
3. Concurring Opinion Suggests That New York's Standard For Evaluating Class Action Settlements May Still Be in Flux. A concurring opinion suggested that the "purported" new seven factor standard promulgated by the majority need not be adopted because no party took issue with the existing Colt test and the lower court only examined one of the five Colt factors before it declined to approve the settlement.
For a copy of the opinion, click here.
1 In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 890-91 (Del. Ch. 2016).
2 Gregory A. Markel, Martin L. Seidel & Gillian G. Burns, Delaware Judges Have Been Heard, Law360, https://www.law360.com/articles/752948/delaware-judges-have-been-heard ( Feb. 2, 2016).
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