Is New York Now a More Favorable Disclosure-Only Settlement Jurisdiction? Time Will Tell
By Kevin C. Logue, Kevin P. Broughel & Christopher H. McGrath
In Gordon v. Verizon Communications, Inc.,
In Gordon, parties to a shareholder class action, which challenged the purchase by defendant of an entity owned by its joint venture partner, reached a settlement in principle that required defendants to make certain supplemental disclosures related to valuation and financial advisor analysis. The non-monetary consideration was not limited to disclosures, as the parties also agreed that, for a period of three years, the defendant would obtain a fairness opinion from an independent financial advisor if there were a disposition of greater than five percent of the defendant’s assets.
The trial court, after hearing from two objectors, rejected the settlement, concluding that the supplemental disclosures “individually and collectively fail[ed] to materially enhance the shareholders’ knowledge about the merger” and that “[t]hey provide[d] no legally cognizable benefit to the shareholder class, and cannot support a determination that the Settlement is fair, adequate, reasonable and in the best interests of the class members.” The trial court also “found that the corporate governance aspect of the terms of the proposed settlement could curtail [the defendant’s] directors’ flexibility in managing minimal asset dispositions.”
The Appellate Decision
The Appellate Division reversed. Citing the Delaware Court of Chancery decision in In re Trulia, Inc. Stockholder Litig.,
After determining New York law would govern the analysis even though the acquiring defendant was a Delaware corporation, the Appellate Division applied New York’s five-factor class action settlement fairness test articulated in Matter of Colt Indus. Shareholders Litig.: the likelihood of success on the merits, the extent of support from the parties for the proposed settlement, the judgment of counsel, the presence of bargaining in good faith, and the nature of the issues of law and fact.
Regarding the sixth factor, the Appellate Division went through each of the supplemental disclosures and determined that they provided “some benefit” to the shareholders, although the fourth disclosure the Appellate Division characterized as “minimal in nature.” Separately, however, the Appellate Division characterized the fairness opinion requirement as “the most beneficial aspect” because it “safeguard[ed] the valuation of corporate assets” and therefore was a “sufficient benefit to the putative class of shareholders as a whole to warrant approval of the proposed settlement in this case.”
It remains too early to discern the full impact the Gordon decision may have on future M&A shareholder class action settlements that lack a monetary consideration component, but there are some preliminary takeaways. First, differences in language aside, the Appellate Division characterized the Colt enhanced factors as “comparable” to Delaware law for determining whether a class action settlement merits approval. Although not binding, New York courts may potentially continue to look to Delaware holdings in this area for guidance, which could influence Gordon’s reach. Of particular interest will be how other New York courts address settlement releases, an issue that was a focal point of the Trulia decision in Delaware but not discussed extensively in Gordon. Second, the “most beneficial” aspect of the settlement from the Appellate Division’s perspective was not the supplemental disclosures, but rather the fairness opinion requirement. Indeed, the decision suggests that this corporate governance reform was a “sufficient benefit” in and of itself to warrant settlement approval. As such, it is not clear that absent the fairness opinion requirement the Appellate Division would have approved the settlement. Finally, it is important to note that on appeal neither of the two objectors opposed the settlement, but only the fee award, a point the Appellate Division noted several times in its opinion, leaving open the question of whether the outcome would have been different had the objectors continued to challenge the substance of the settlement on appeal. Still, the decision is an important reminder that class action settlements lacking monetary consideration may still pass muster in New York.