Commercial Division Blog
First Department Expands Factors Governing Approval of Nonmonetary Class Action Settlements
On February 2, 2017, the First Department issued a decision in Gordon v. Verizon Communications, Inc., 2017 NY Slip Op. 00742, expanding the list of factors governing approval of nonmonetary factors governing approval of nonmonetary class action settlements.
Gordon involved a nonmonetary class action settlement. As the First Department explained:
The rise of nonmonetary class action settlements began in the 1980s and continued into the 1990s, when complaints of corporate misconduct in the context of mergers and acquisitions prompted calls for corporate governance reforms. . . . In the ensuing decades, however, the use of nonmonetary settlements became increasingly disfavored. Complaints arose that the remedies of "disclosure-only" and other forms of non-monetary settlements themselves proved problematic because they provided minimal benefits either to shareholders or to their corporations. Both courts and commentators came to view the shareholder class action in this context as a "merger tax" and as a cottage industry for the plaintiffs' class action bar, used to force settlements of nonmeritorious suits and to generate exorbitant attorneys' fees, causing waste and abuse to the corporation and its shareholders.
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In its capacity as gatekeeper, a court conducting a settlement review in a putative shareholders' class action has a responsibility to preserve the viability of those nonmonetary settlements that prove to be beneficial to both shareholders and corporations, while protecting against the problems with such settlements recognized since Colt, in order to promote fairness to all parties. Such a review must begin by examining the proposed settlement through the lens of each of the factors we have articulated in our longstanding standard in Colt: the likelihood of success, the extent of support from the parties, the judgment of counsel, the presence of bargaining in good faith, and the nature of the issues of law and fact.
(Internal quotations and citations omitted). The standard in the First Department for reviewing such settlements had been set forth in Matter of Colt Indus. Shareholders Litigation (Woodrow v Colt Indus) (155 AD2d 154, 160 [1st Dept 1990]. In Gordon, the First Department both applied and expanded the Colt factors, explaining:
With respect to the first Colt factor, the likelihood of success on the merits, we have stated that courts are to weigh that factor against the form of the relief offered in the settlement. Here, plaintiff withdrew her claims for monetary damages upon recognizing that they would be difficult to prove at trial. It would be speculative, at best, to assume that plaintiff could have obtained any more helpful disclosures from Verizon by proceeding to trial. The negotiation process, however, provided certainty that plaintiff would obtain at least some additional disclosures, as well as the corporate governance reform she sought. Thus, this factor weighs in favor of approval of the proposed settlement.
With respect to the second Colt factor, the extent of support from the parties for the proposed settlement, although the notice of settlement and final approval was mailed to approximately 2.25 million Verizon shareholders, only three objections to the settlement were filed, all by attorney stockholders, and fewer than 250 Verizon shareholders, or .01 per cent, opted out of the settlement. And on this appeal, neither the parties nor the objectors have opposed the proposed settlement. Rather, their sole opposition is to the award of attorneys' fees. Because the settlement had the overwhelming support of Verizon shareholders, the second factor also weighs in favor of the proposed settlement.
The third factor to be considered is the judgment of counsel. Here, the parties were represented by counsel who were competent and experienced in the field of complex class action litigation involving breach of fiduciary duties. Thus, counsel were equipped to assist their respective clients in making a reasonable and informed judgment regarding the fairness of the proposed settlement. Thus, this factor also weighs in favor of the proposed settlement.
With regard to the fourth factor, the presence of bargaining in good faith, negotiations are presumed to have been conducted at arm's length and in good faith where there is no evidence to the contrary. Here, there being no evidence to the contrary, good faith bargaining between petitioner and respondents in arriving at the settlement is presumed, and this factor also weighs in favor of the settlement.
With respect to the fifth Colt factor, the nature of the issues of law and fact, here, plaintiff has abandoned her claims for monetary relief. The remaining issue presented is whether respondents breached their fiduciary duty by failing to make adequate disclosures to the shareholders in the preliminary proxy statement. This issue was more expeditiously resolved by the negotiated settlement process, in which the parties had the opportunity to identify and agree upon the areas in which further disclosure of information would be appropriate. Indeed, a settlement in principle on these issues was reached after two months of discussion. Thus, in this case, each of the five factors set forth by this Court in Colt weighs in favor of the proposed settlement.
This does not end the inquiry, however. More than two decades of mergers and acquisitions litigation following Colt have been informative as to the need to curtail excesses not only on the part of corporate management, but also on the part of overzealous litigating shareholders and their counsel. Accordingly, a revisiting of our five-factor Colt standard is warranted in order to effect an appropriately balanced approach to judicial review of proposed nonmonetary class action settlements and provide further guidance to courts reviewing such proposed settlements in the future.
An approach so informed must necessarily take into account two additional factors. First, as plaintiff argues, the agreed-upon disclosures, corporate governance reforms and any other forms of nonmonetary relief in a proposed settlement should be in the best interests of all of the members of the putative class of shareholders. And second, the proposed settlement should be in the best interest of the corporation and should not be merely a vehicle for the generation of fees for plaintiff's or class counsel. Accordingly, we now refine our Colt standard of review to add to the five established factors to be used by courts to ensure appropriate evaluation of proposed nonmonetary settlements of class action suits these two additional criteria: whether the proposed settlement is in the best interests of the putative settlement class as a whole, and whether the settlement is in the best interest of the corporation.
(Internal quotations and citations omitted). Applying the new sixth and seventh factors, the First Department held that "the proposed settlement is in the best interests of the putative settlement class as a whole," by evaluating the supplemental disclosures required by the settlement and found that the "inclusion of a fairness opinion requirement, mandating that in the event that Verizon engages in a transaction involving the sale or spin-off of assets of Verizon Wireless having a book value of in excess of $14.4 billion, Verizon would obtain a fairness opinion from an independent financial advisor, or, in the case of a spin-off, financial advice from an independent financial advisor" "provided a benefit to Verizon shareholders in mandating an independent valuation, without restricting the flexibility of directors in making a pricing determination." As to the seventh factor, the First Department held that "the lack of a monetary or quantifiable benefit to the corporation does not necessarily preclude such a finding" and that "the proposed settlement would resolve the issues in this case in a manner that would reflect Verizon's direct input into the nature and breadth of the additional disclosures to be made and the corporate governance reform to be included as part of the proposed settlement. And, by agreeing to the settlement, Verizon avoided having to incur the additional legal fees and expenses of a trial."