On February 2, 2017, the New York Appellate Division, First Department, issued a decision in Gordon v. Verizon Communications, Inc., No. 653084/13, 2017 WL 442871 (1st Dep’t 2017), approving the settlement of litigation over an acquisition by Verizon Communications (“Verizon”) and articulating a new test to evaluate the fairness of such settlements. The Gordon decision signals that New York will remain a friendly venue to disclosure-based M&A settlements and may see increased shareholder M&A lawsuits as a result
As we have repeatedly written about (here, here and here), Delaware Chancery Courts have spent the past year attempting to curtail, or eliminate altogether, M&A litigation settlements where the sole remedy is enhanced proxy disclosures. Chancellor Bouchard’s landmark decision in In re Trulia Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016), rejected these “disclosure-only” settlements, finding that the “enhanced” disclosures produced by such settlements were not “material or even helpful” to stockholders. The Chancery Court bemoaned the proliferation of disclosure-only settlements in Delaware, and indicated that these types of settlements would be met by “continued disfavor” unless the supplemental disclosures are “plainly material,” i.e., they must “significantly alter the ‘total mix’ of information made available.”
In Trulia’s wake, the number of M&A suits filed in Delaware plummeted—declining by almost 75% in the first half of 2016—as plaintiffs’ counsel opted to file in federal court or states other than Delaware in the hope of finding more hospitable fora for “disclosure-only” resolutions.
The Gordon Case
Gordon arose out of Verizon’s 2013 purchase of Vodafone’s 45% stake in Verizon Wireless for $130 billion in cash and stock. Within three days of the announcement, Verizon shareholders filed a class action complaint in New York Supreme Court seeking to enjoin the transaction and alleging that Verizon’s directors had breached their fiduciary duties by overpaying for the interest in Verizon Wireless. Negotiations to settle the lawsuit ensued, and in December 2013, the parties agreed to a settlement whereby Verizon would amend their proxy solicitation to include additional disclosures, and, for three years, Verizon would be required to obtain an independent fairness opinion for any disposition of more than 5% of its assets. As part of the settlement, defendants agreed not to oppose a fee award to plaintiffs’ counsel up to $2 million.
On December 10, 2013, Verizon filed the definitive proxy, which contained four valuation-related supplemental disclosures negotiated by plaintiffs: (i) that the valuation of another company in which Verizon had an interest was a product of the negotiation between Verizon and Vodafone; (ii) details regarding Verizon’s financial adviser’s comparable companies analysis; (iii) details regarding Verizon’s financial adviser’s comparable transactions analysis; and (iv) a presentation of valuation ranges for Verizon assets.
At the trial court’s fairness hearing, two Verizon shareholders objected to the settlement, arguing that the supplemental disclosures and the fairness opinion requirement provided no real benefit to Verizon’s shareholders (one of the objectors retained a Fordham law professor who regularly provides expert testimony on behalf of objecting shareholders). The court agreed. Citing Delaware Chancery precedent regarding the requirement that supplemental disclosures “materially enhance” shareholder knowledge, the trial judge declined to approve the settlement, finding that the additional disclosures negotiated by plaintiffs were “unnecessary surplusage” that “individually and collectively fail[ed] to materially enhance the shareholders’ knowledge about the merger.” The trial court also found that the agreement regarding fairness opinions, far from providing a benefit to Verizon, “may actually curtail” the ability of Verizon’s directors to use their informed business judgment in effecting asset dispositions.
On appeal, however, the Appellate Division reversed and approved the settlement. As an initial matter, the Appellate Division found that because the parties included a New York choice-of-law provision in the settlement agreement, New York law would apply (an implicit rejection of the trial court’s frequent citation to Chancery precedent). Although Verizon is a Delaware corporation, it does not have a Delaware forum-selection clause in its corporate bylaws and the Appellate Division did not evaluate whether the internal affairs doctrine required application of Delaware law. Accordingly, Gordon applied the five-factor New York test for evaluating the settlement of merger litigation articulated in In re Colt Industry Shareholders Litigation, 155 A.D.2d 154, 160 (1st Dep’t 1990): (i) the likelihood of plaintiffs’ success on the merits; (ii) the extent of support from the shareholders; (iii) the judgment and competency of counsel; (iv) the presence of arms-length, good faith negotiation between the parties; and (v) “the nature of the issues of law and fact.” In short order, the Appellate Division found that all five factors weighed in favor of approval of the settlement.
However, the inquiry did not end there. Noting the “need to curtail excesses” of corporate management and “overzealous litigating shareholders and their counsel,” Gordon analyzed two new factors: whether (1) the non-monetary relief in a proposed settlement is in “the best interests of all members of the putative class of shareholders”; and (2) the proposed settlement is “in the best interest of the corporation.” In connection with the first new factor, the Appellate Division found that the supplemental disclosures provided “some . . . albeit minimal” benefits, but that the fairness opinion requirement provided sufficient corporate governance reform to warrant approval. In evaluating the best interests of Verizon, the Appellate Division noted that settlement would permit the Company to avoid “having to incur the additional legal fees and expenses of a trial.”
In connection with plaintiffs’ fee request, Gordon considered factors such as the time and labor required to bring the action, the difficulty of the questions involved, and the benefit to the class from counsel’s services. Noting the “significant number” of New York cases where courts awarded attorneys’ fees even though “the benefits of the derivative litigation [were] ‘scant,’ ‘slight,’ ‘modest’ or even ‘minimal,’” the Appellate Division remanded the matter back to the trial court for the determination of the fee award.
- Delaware corporations should reexamine the adoption of exclusive forum bylaws. Verizon’s lack of a Delaware forum selection bylaw allowed the Gordon shareholder-plaintiffs to file suit in New York and thereby evade recent Delaware precedent regarding merger settlements. In light of the precipitous decline in merger litigation filed in Delaware post-Trulia, it is fair to wonder whether the Gordon plaintiffs would have brought suit at all if the matter was required to proceed in Chancery Court. Consequently, Delaware corporations should consider whether the adoption of an exclusive forum bylaw would be beneficial to reduce frivolous merger-related suits.
- Because of its lower standard, New York may become a more frequent venue for M&A litigation. Although the Gordon majority claimed its new “enhanced” Colt standard was “comparable” to the standard laid out by the Delaware Chancery Court in Trulia, it seems clear that the bar for approving these settlements is lower in New York. The five factors lifted from Colt are fairly superficial, as evidenced by the fact that the Appellate Division required only a few short sentences apiece to find that the Gordon settlement was sufficient. And although Gordon now requires New York trial courts to consider the additional hurdle of whether the settlement is in the “best interest” of the shareholder class, this does not rise to the rigorous “give versus get” analysis set out in Trulia.
- New York’s less demanding threshold for settlement approval may be beneficial in certain circumstances. A possible downside to the recent Delaware precedent is that quick-and-easy “disclosure-only” settlements are much more difficult to obtain. This burdens companies that would otherwise prefer to quickly pay plaintiffs’ “highwayman’s tax” to end the litigation. Indeed, plaintiffs may be more likely to demand more meaningful action by corporations (in order to satisfy the “material benefit” requirement under Trulia), which could extend the litigation and interfere with the closing of the transaction. Now that New York has articulated a more relaxed standard for settlement approval, corporate defendants (even those with Delaware exclusive forum bylaws) will have the option to permit corporate litigation to proceed in New York in the hope of obtaining quick relief.