The New York Appellate Division, First Department, reversed a lower court’s rejection of the settlement for equitable relief in Gordon v. Verizon, 2017 NY Slip Op 00742 (1st Dep’t February 2, 2017) holding that settlements for additional internal corporate information and governance reforms continue to serve as “a useful tool in remedying corporate misfeasance.” The First Department bucked a trend emanating from Delaware Chancery Court and, promoted by self-interested serial objectors, to view such settlements harshly, admonishing that “a more balanced approach in evaluating non-monetary class action settlements” is necessary. Gordon, 2017 NY Slip Op 00742 at *5. The First Department expanded on the five-factor test established in Matter of Colt Indus. Shareholders Litig. (Woodrow v Colt Indus) (155 AD2d 154, 160 (1st Dep’t 1990), mod on other grounds 77 NY2d 185 (1991) (“Colt Factors” discussed below) for reviewing settlements and adopted a more holistic approach advocated by plaintiff that considered the benefit to shareholders and the corporation. In a well-reasoned opinion, the First Department reaffirmed decades’ worth of jurisprudence built on the view espoused by the U.S. Supreme Court that disclosure-based settlements enhance “the congressional belief that fair corporate suffrage is an important right that should attach to every equity security bought on a public exchange.” J. I. Case Co. v. Borak, 377 U.S. 426, 431 (1964)(examining disclosure requirements under Section 14(a) of the Securities Exchange Act of 1934).
Plaintiff had challenged Verizon Communications, Inc.’s (“Verizon”) 2013 agreement to acquire the 45% interest in Cellco Partnership (d/b/a Verizon Wireless) held by Vodafone Group, P.L.C. (“Vodafone”) in a cash and stock transaction. The total value of the deal was approximately $130 billion. Plaintiff’s complaint alleged that the Verizon Board breached their fiduciary duties in part by filing a misleading Proxy Statement that recommended the transaction and solicited shareholder to vote in favor of the transaction. After negotiations, defendants agreed to plaintiff’s demand for the disclosure of additional material information concerning the banker’s valuations in support of its opinion that the transaction was fair for shareholders, and the requirement that for a period of three years, Verizon obtain a fairness opinion from an independent financial adviser in the event of a sale to a third party purchaser or spin-off of Verizon assets having a book value exceeding $14.4 billion. Gordon, 2017 NY Slip Op 00742 at *2. The supreme court, apparently swayed in part by speculation proffered by Professor Sean Griffith – a regular objector to many equitable settlement proceedings – that the governance reforms obtained no real benefit, failed to apply the Colt Factors and instead ruled that the additional information disseminated to shareholders was not “material” and that to require the Verizon Board to obtain a fairness opinion on future transactions could “curtail” the Board’s “flexibility.” Gordon, 2017 NY Slip Op 00742 at *2.
The First Department agreed that courts must act as a “gatekeeper” when reviewing settlements of putative shareholder class actions and affirmed that in New York, that function is served by reviewing the non-monetary settlement terms under the Colt Factors, something the supreme court failed to do. As applied to the Verizon settlement, those factors, including “the likelihood of success, the extent of support from the parties, the judgment of counsel, the presence of bargaining in good faith, and the nature of the issues of law and fact” were clearly met. Gordon, 2017 NY Slip Op 00742, at *4.
But the First Department went further, as advocated by plaintiff, and examined whether the equitable relief obtained in the settlement was in the best interest of the settlement class as a whole and the corporation. In support of its opinion, the court reviewed each of the four categories of supplemental disclosures provided to Verizon shareholders before they had to vote on the transaction, holding that shareholders benefitted from the additional information under standards applied by both New York and Delaware precedent. Gordon, 2017 NY Slip Op 00742 at *5. Verizon shareholders also benefitted from the governance reform obtained in the settlement requiring that the Board obtain an independent fairness opinion on future transactions, which acted to “safeguard the valuation of corporate assets in the event of such a sale…” Gordon, 2017 NY Slip Op 00742 at *5. The benefit to the corporation was reflected in the fact that Verizon had “direct input” into the additional information provided to shareholders, the governance reforms, and the avoidance of additional attorney’s fees to defend the case. Gordon, 2017 NY Slip Op 00742 at *6.
The First Department addressed the Delaware Chancery Court’s decision in Matter of Trulia, Inc. Stockholder Litig., 129 A3d 884 (Del Ch 2016) head on, noting that New York courts applying the Colt Factors and the new “enhanced” standard articulated in Gordon v. Verizon, independently examine class action settlements based on standards comparable to those applied by the Delaware Court of Chancery. The opinion by commentators that “disclosure only” settlements may be “extinct” may be “premature.” Gordon, 2017 NY Slip Op 00742 at *3.
The case was remanded to supreme court to make a determination on an appropriate fee award.