(Article from Securities Law Alert, January 2015)
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In two recent decisions, New York courts have rejected disclosure-only settlements of merger-related suits based on the immateriality of the additional disclosures. Gordon v. Verizon Communications, Inc., 2014 WL 7250212 (N.Y. Sup. Ct. Dec. 19, 2014) (Schweitzer, J.); City Trading Fund v. Nye, 46 Misc. 3d 1206(A) (N.Y. Sup. Ct. 2015) (Kornreich, J.).
On December 19, 2014, in an action arising from Verizon Communication’s $130 billion purchase of Vodaphone Group’s interest in Verizon Wireless, the court denied approval of a disclosure-only settlement based on its finding that the additional disclosures “individually and collectively fail[ed] to materially enhance the shareholders’ knowledge about the merger” and “provide[d] no legally cognizable benefit to the shareholder class.” Verizon Communications, 2014 WL 7250212. The court explained that “[e]nhanced or corrected disclosure, to be adequate to support a settlement, must be a material improvement over what had previously been disclosed.” For example, a material disclosure might “uncover conflicts” or “correct material misstatements.” On the other hand, “[m]erely providing additional information — unless the additional information offers a contrary perspective on what has previously been disclosed —does not constitute material disclosure.” The court underscored that “divest[ing] [the class] of valuable rights in the form of a broad release of claims … cannot be justified by trivial disclosure adjustments.” In so holding, the court observed that “[a] body of law meant to protect shareholder interests from the absence of due care by the corporation’s managers has been turned on its head to diminish shareholder value by divesting them of valuable rights and imposing additional gratuitous costs, i.e. attorneys’ legal fees on the corporation.”
Several weeks later, in an action arising in connection with Martin Marietta Materials’ $2.7 billion acquisition of Texas Industries, the court once again rejected a disclosure-only settlement based on its finding that the supplemental disclosures were “grossly immaterial.” City Trading Fund, 46 Misc. 3d 1206(A). The court explained that it “would have approved the settlement” if “plaintiffs [had] alleged material omissions or settled for material supplemental disclosures.” Given the “utterly immaterial” nature of the supplemental disclosures, however, the court determined that “[a]pproving the settlement would both undermine the public interest and the interests of [Martin Marietta Materials’] shareholders.” The court reasoned that allowing the settlement to go forward “would incentivize plaintiffs to file frivolous disclosure lawsuits shortly before a [shareholder vote on a] merger, knowing they will always procure a settlement and attorneys’ fees under conditions of duress —that is, where it is rational to settle obviously frivolous claims.”
Notably, the court emphasized that “extra scrutiny is warranted when it appears that the incentives of the proposed class representatives diverge from those of the shareholders.” In the case before it, the court found that the plaintiff was “essentially a fictitious entity” that held a trivial number of shares of Martin Marietta Materials as part of a strategy pursuant to which a general partnership affiliated with a plaintiffs’ firm would “purchase nominal amounts of shares in publicly traded companies” and then bring suit whenever one of those companies announced a merger. Because the plaintiff had “no purposes for existing and no economic interests apart from the generation of attorneys’ fees,” the court found that plaintiff’s counsel had every incentive “to adopt inequitable litigation tactics and to advance meritless claims directed not at vindicating the rights of real shareholders but at maximizing the chance [the] litigation will settle, resulting in awards of attorneys’ fees wholly out of proportion to any real benefit conferred on shareholders.” The court observed that “[w]hen a proposed class representative appears to be a fiction, there is the concern that it has no accountability, either to the class or to the court.”
For more information please visit the Securities Law Alert Resource Center.