Wednesday, February 08, 2017

New York courts should evaluate ‘best interests of the corporation’ in settlements

By Amanda Maine, J.D.

The Appellate Division of the New York Supreme Court reversed a lower court ruling in approving a “disclosure-only” settlement with Verizon shareholders in its merger with Vodafone. In doing so, the court found that the settlement met the five factors that are evaluated when determining whether a settlement should be approved. Over the objection of one judge on the panel, the court also added two additional factors: whether the settlement is in the best interest of the class as a whole, and whether it is in the best interests of the corporation (Gordon v. Verizon Communications Inc., February 2, 2017, Kahn, M.)

Lawsuit. The plaintiff, a Verizon shareholder, alleged that Verizon had breached its fiduciary duty by failing to disclose material information in the preliminary proxy statement (PPS) outlining the merger transaction. A 2013 agreement in principle was reached to settle the action, which required Verizon to disseminate additional disclosures and, in the event of sale to another company, to obtain a fairness opinion from an independent financial advisor.

The lower court declined to approve the settlement, and cited four supplemental disclosures that could “materially enhance” the disclosures in the PPS. The lower court also found that the corporate governance aspect of the proposed settlement could curtail Verizon’s directors’ flexibility in managing minimal asset dispositions. As such, the motion court denied not only approval of the settlement, but also any award of attorney fees to the plaintiff’s counsel.

Settlement review. The appellate division outlined factors under In the Matter of Colt Industry, which under New York law, provide a framework under which a settlement should be approved. The first factor of likelihood to succeed on the merits weighed in favor of approving the settlement because the negotiation process revealed that the plaintiff would have obtained additional corporate disclosures in addition to corporate governance reform.

The second Colt factor, support from the parties for the proposed settlement, also weighed in favor of the settlement, the court said, noting that only three out of 2.25 million Verizon shareholders had objected. Judgment of counsel, the third factor, also swung towards approval, because the lawyers involved were competent and experienced in complex class actions involving fiduciary duties. The court also found that, consistent with Colt’s fourth factor, the negotiations were conducted in good faith and at arm’s length. As for the fifth Colt factor, the court noted that, under the “disclosure-only” settlement, the plaintiff had abandoned her claims for monetary relief.

Revisiting Colt. In addition to meeting the five-factor Colt test, the court proclaimed that, because of decades of mergers and acquisitions litigation and “overzealous litigating shareholders and their counsel,” further guidance is warranted. Under the court’s “enhanced standard,” the sixth factor, an evaluation of whether the proposed settlement is in the best interests of the class, which included four categories of supplemental disclosures made by Verizon to its shareholders (and especially the requirement of future fairness opinions), was met.

A seventh factor the court decided to add to the established Colt five-factor test requires the examination of whether the proposed settlement is in the best interest of the corporation. The court determined that, by agreeing to the settlement and avoiding additional legal fees and expenses of a trial, the settlement also survived scrutiny under this new seventh factor.

Delaware departure. The court’s decision departs from the Delaware Trulia standard by adding the additional considerations of whether a settlement is in the best interests of the settlement class as a whole and whether it is in the best interests of the corporation.

Having met the five Colt factors, in addition to its newly enshrined duo of best interests of class and corporation, the court reversed the lower court’s decision that disapproved the settlement.

Concurrence. Judge Moskowitz concurred in the decision reversing the lower court and approving the settlement. However, she felt the majority went too far in setting forth a new seven-part test to “enhance” the Colt factors. She noted that no party involved in the case had argued for this new standard or had suggested that the existing five-part test under Colt was inadequate for evaluating a class action settlement.

The case is No. 653084/13.