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new life into beleaguered disclosure-only class action settlements, and modernized what it believed had become an outdated analytical framework for approving class action settlement agreements.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.
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. It will be interesting to observe whether Gordon results in a similar migration of M&A cases to the New York State courts.