Commercial Division Blog

Posted: January 6, 2015 / Categories Commercial, Class Actions, Corporations

Court Rejects Class Action Settlement

On December 19, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Gordon v. Verizon Communications, Inc., 2014 NY Slip Op. 33367(U), refusing to approve a settlement of "a putative class action litigation centered on an acquisition by Verizon . . . of a substantial, minority interest in a wireless company."

Justice Schweitzer's decision in Gordon should be read in its entirety. The key point, which we repeat below, is his concern over the prevalence of what appear to be weak class action claims that are followed by settlements that appear to favor the interests of counsel over those of both the defendant and the class.

An increasing body of commentary has decried the tsunami of litigation, and attendant suspect disclosure-only settlements, associated with public acquisitions today. Anyone objectively analyzing this phenomenon will find its root cause in the judicial precedents of the last twenty-five years dealing with corporate governance in connection with mergers. A body of law meant to protect shareholder interests from the absence of due care by the corporation's managers has been turned on its head to diminish shareholder value by divesting them of valuable rights via the broad releases that plaintiffs have fashioned at the demand of concerned defendants and their counsel and imposing additional gratuitous costs, i.e. attorneys legal fees on the corporation.

Also in this connection, the remarkable parade of the most experienced, highly regarded corporate merger lawyers who ostensibly are failing to draft merger disclosure documents which do not require enhancement or correction strikes the court as implausible. Corporate lawyers drafting complex disclosure documents in connection with the sale of securities in public capital markets experience no such problem. They do not need litigation lawyers to teach them how to correctly craft disclosure documents. Why do merger lawyers?

The totality of the situation here is captured by the court in Creative Montessori Learning Centers v. Ashford Gear, LLC . . . :

[W]e and other courts have often remarked the incentive of class counsel, in complicity with the defendant's counsel, to sell out the class by agreeing with the defendant to recommend that the judge approve a settlement involving a meager recovery for the class but generous compensation for the lawyers-the deal that promotes the self interest of both class counsel and the defendant and is therefore optimal from the standpoint of their private interests.

It is the court's judgment here, after further study and reflection, that were it to approve the Settlement based on either of its components discussed above, it would be an enabler of an
unwarranted divestiture of shareholder rights by virtue of plaintiff's release, as well as a misuse of corporate assets were plaintiff's legal fees to be awarded. Accordingly, the coµrt simply
cannot, and thus does not, approve this Settlement.

This story has something for everyone to hate: technical, disclosure-related claims; class action plaintiffs' lawyers; and big firm defense lawyers with a large corporate defendant. What it does not have is a suggestion of what should have been done differently.

NOTE: While Schlam Stone & Dolan was not involved in this action, it acts, from time-to-time, as counsel to Verizon Communications, Inc., the defendant in this action.