New York Appellate Division Refines The Colt Standard For Nonmonetary Settlements Of Merger-Related Class Action Suits
On February 2, 2017, in Gordon v. Verizon Communications, Inc., No. 653084/13 (N.Y. App. Div. Feb. 2, 2017) (“Gordon”), the New York Supreme Court, Appellate Division, First Department reversed the decision of the trial court and approved a proposed nonmonetary settlement of a putative shareholders’ class action challenging the acquisition by Verizon Communications, Inc. (“Verizon”) of the 45% interest in Verizon Wireless held by subsidiaries of Vodafone Group PLC. In doing so, the Appellate Division added to the five-factor Colt standard of review—and focused on—two additional factors for the evaluation of proposed nonmonetary class action settlements: “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.” Id. at *21; see also In re Colt Indus. S’holder Litig., 155 A.D.2d 154 (N.Y. App. Div. 1990), aff’d as modified sub nom. Colt Indus. S’holder Litig. v. Colt Indus. Inc., 77 N.Y.2d 185 (1991).
Shortly after Verizon announced it had entered into an agreement to acquire the Verizon Wireless stock that Verizon did not yet own, plaintiff filed a putative class action on behalf of Verizon’s shareholders alleging that its directors breached their fiduciary duties by agreeing to pay an “excessive price” and by omitting material information from the preliminary proxy statement disseminated by Verizon. Gordon, No. 653084/13, at *5. The parties later reached an agreement in principle to settle the action—memorialized in a memorandum of understanding—under which defendants would provide supplemental disclosures in advance of a vote on the deal and adopt a corporate governance reform imposing a fairness opinion requirement for certain transactions for a three-year period. After Verizon made the agreed-upon supplemental disclosures, on January 28, 2014, shareholders holding 99.8% of Verizon’s stock voted to approve the issuance of shares that was necessary to consummate the Verizon Wireless transaction.
Subsequently, the parties finalized their settlement, which also provided that defendants would not oppose a fee application by plaintiffs’ counsel if it did not exceed $2 million. The proposed final settlement “release[d] . . . Verizon’s corporate officers and directors from all monetary claims from the entire class of Verizon’s shareholders,” id. at *29, but provided no monetary compensation to the shareholders. The trial court held a fairness hearing during which only two of Verizon’s approximately 2.25 million shareholders objected to the settlement. Nevertheless, the trial court declined to approve the settlement.
The Appellate Division reversed, emphasizing that courts have 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.” Id. at *17. A review of such settlements should begin with the five Colt factors: “[i] the likelihood of success, [ii] the extent of support from the parties, [iii] the judgment of counsel, [iv] the presence of bargaining in good faith, and [v] the nature of the issues of law and fact.” Id. Here, according to the Court, all five factors weighed in favor of the proposed settlement because, among other things: (i) it would have been “speculative, at best,” to assume plaintiff could have obtained better disclosures; (ii) the settlement had “the overwhelming support” of shareholders; (iii) the parties were represented by “competent and experienced” counsel; (iv) there was no evidence to suggest the negotiations were anything other than in good faith; and (v) the issue of the adequacy of the disclosure was “more expeditiously resolved by the negotiated settlement process.” Id. at *17-19.
According to the Court, however, these findings “do not end the inquiry.” Id. at *19. Instead, two additional factors must be considered: (vi) “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 (vii) “the proposed settlement should be in the best interest of the corporation.” Id. at *20. As to the new sixth factor, the Court found that the supplemental disclosures were each of “some benefit to the shareholders.” Id. at *21-22. The Court highlighted, however, that the “most beneficial aspect” of the settlement was the corporate governance reform requiring a fairness opinion for certain transactions because it would “safeguard the valuation of corporate assets.” Id. at *23-25. As to the seventh factor, the Court found that the settlement “reflect[ed] Verizon’s direct input into the nature and breadth of the additional disclosures . . . and the corporate governance reform,” and enabled Verizon to avoid having to incur the additional legal fees and expenses of a trial. Id. at *25-26.
The Appellate Division thus approved the proposed settlement and also concluded that “the benefits to Verizon’s shareholders achieved by plaintiff’s counsel were sufficient to warrant an award of attorneys’ fees.” Id. at *31-32.