United States: New York Appellate Division Revives Non-Monetary Class Action Settlement In M&A Class Action With Revised Standard Of Review

In Gordon v. Verizon Communications, Inc., No. 653084/13, 2017 WL 442871 (N.Y. App. Div. Feb. 2, 2017), the Appellate Division of the Supreme Court of the State of New York, First Judicial Department (the "First Department"), reversed an order denying plaintiffs' motion for final approval of a proposed non-monetary settlement in a shareholder class action litigation related to Verizon Communication Inc.'s ("Verizon") acquisition of Vodafone Group PLC's ("Vodafone") stake in Verizon Wireless ("VZW").  With its decision, the New York Appellate Division breathed new life into beleaguered disclosure-only class action settlements, and modernized what it believed had become an outdated analytical framework for approving class action settlement agreements.  It also appeared to accord special weight to provisions in such agreements whereby corporations promise to obtain fairness opinions in connection with future transactions in determining the overall fairness of the agreements.  Thus, while non-monetary class action settlements are increasingly disfavored in other courts — most notably, in the Delaware Court of Chancery — New York courts remain receptive to their utility.

Facts of the Case

On September 2, 2013, Verizon announced it had entered into an agreement to acquire Vodafone's subsidiaries, holding as their principal assets a 45% interest in VZW, for $130 billion in cash and Verizon stock.  Three days later, plaintiff Natalie Gordon filed a putative shareholder class action alleging Verizon's board of directors breached its fiduciary duty by overpaying in the deal.  Following negotiations, the parties reached an agreement whereby the suit would be dropped if Verizon disseminated additional disclosures and agreed to obtain a fairness opinion if it sold or spun-off assets in a certain manner in the following three years.  Notably, Verizon shareholders would receive no settlement payment in the exchange, but their attorneys would be paid up to $2 million for their services.  After Verizon's filing of additional disclosures with the SEC, on January 28, 2014, 99.8% of Verizon shareholders voted to approve the issuance of shares to acquire Vodafone's interest in VZW.  The parties to the litigation filed a written stipulation of settlement in the Supreme Court of the State of New York, County of New York, Commercial Division (the "Commercial Division"), on July 21, 2014.

In New York, courts must approve class action settlements following a "fairness hearing."  At the fairness hearing held on December 2, 2014, two objectors opposed the settlement.  On December 22, 2014, the Commercial Division declined to approve the settlement, finding it insufficiently beneficial to the shareholders.  Plaintiffs appealed to the First Department.

Court Approval of Non-Monetary Class Action Settlement Agreements

Historically, non-monetary class action settlement agreements have waxed and waned in their popularity with the courts.  In the 1980s and 1990s, shareholder classes began accepting agreements to drop their class action suits against companies in exchange for equitable relief from the company, such as governance reform or additional disclosures, and attorneys' fees.  Courts approved these settlements, viewing them as a means to remedy the corporate misconduct scandals at the time.  However, courts and commentators subsequently grew suspicious of non-monetary settlements, claiming that they provided minimal benefits to shareholders and companies, but proved fruitful for the plaintiffs' class action bar in their receipt of large attorneys' fees.  In recent decisions and debate, some courts and commentators have pushed back against the notion that non-monetary settlements are categorically unfair.

In approving a class action settlement, the court must determine whether the proposed settlement is fair, adequate, reasonable, and in the best interest of class members.  See Klein v. Robert's American Gourmet Food, Inc., 28 A.D.3d 63, 73 (2d Dep't 2006).  To this end, New York courts have applied a test developed in In re Colt Industries Shareholders Litigation, 155 A.D.2d 154 (1st Dep't 1990), mod. on other grounds, 77 N.Y.2d 185 (1991).  The five-factor "Colt Test" considers: (1) the likelihood of success on the merits, (2) the extent of support from the parties, (3) the judgment of counsel, (4) the presence of bargaining in good faith, and (5) the nature of the issues of law and fact.

The Court's Decision

In this case, the First Department reviewed the proposed settlement pursuant to each of the Colt Test factors, finding that all five weighed in favor of approval.  However, the Court did not stop there.  In a move that Justice Moskowitz in a separate concurrence criticized as going farther than necessary to decide the case, the Court added two new factors to the Colt Test:  that the settlement be in the best interests of both (1) the putative shareholder class, and (2) the corporation.

Applying the first additional factor, the First Department held each of the agreed-upon disclosures and Verizon's commitment to obtain a fairness opinion regarding a future transaction meeting certain conditions to be beneficial to shareholders.  The Court found the fairness opinion agreement to be the most beneficial feature, serving as a safeguard to the valuation of corporate assets despite its contingent nature.  The Court even seemed to imply that this promise alone constituted a benefit sufficient to warrant approval of the settlement agreement.

However, the First Department did not appear to address directly the criticism presented in the Commercial Division by Professor Sean Griffith of the Fordham University School of Law, who testified that fairness opinions can be routine and thus the requirement that a company obtain one would not provide any real benefit to shareholders.  The First Department did, however, indicate that Professor Griffith's position on this point was in reference to small asset sales, and the Court later concluded that the fairness opinion promise was a sufficient benefit "under the circumstances presented" without clearly explaining what those circumstances were.  Therefore, it could be that there are instances in which the Court would find fairness opinions are so routinely obtained that the benefit conferred upon shareholders is insufficient.

The First Department also held the settlement was in the best interest of the corporation as it reflected Verizon's direct input into the nature and breadth of additional disclosures and allowed the corporation to avoid litigation.

Finally, the First Department upheld the settlement agreement's award of attorneys' fees, remanding the issue for the Commercial Division to determine an appropriate amount.

Conclusion

The decision in Gordon appears to reflect a view of non-monetary settlements in M&A litigation more salutary than that currently expressed by the Delaware Court of Chancery.  Commentators have noted that the Chancery Court's current disfavor of such settlements appears to have pushed an increasing number M&A class action lawsuits out of Delaware and into the federal courts.  See Cornerstone Research, Securities Class Action Filings–2016 Year in Review.  It will be interesting to observe whether Gordon results in a similar migration of M&A cases to the New York State courts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
14 Aug 2018, Seminar, Los Angeles, United States

August 14, 2018 - Orange County
Embassy Suites Anaheim Hotel - Garden Grove

August 21, 2018 - Pasadena Area
DoubleTree by Hilton Hotel - Monrovia

September 20, 2018 - Los Angeles
Sheraton Gateway Hotel - LAX

15 Aug 2018, Seminar, Los Angeles, United States

August 15, 2018 - Orange County Embassy Suites Anaheim Hotel - Garden Grove

August 22, 2018 - Pasadena Area DoubleTree by Hilton Hotel – Monrovia

21 Aug 2018, Seminar, Pasadena, United States

The annual seminar addressing changes and developments in state and federal wage and hour laws is a unique one-day program and hundreds of California employers, personnel managers, controllers, attorneys, payroll managers, and supervisors attend each year.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions