(Article from Securities Law Alert, February 2017)
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In considering whether to approve proposed class action settlements, New York courts have long applied the five Colt factors: “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.” Matter of Colt Indus. Shareholders Litig., 155 A.D.2d 154 (N.Y. App. Div. 1st Dep’t 1990), modified on other grounds 77 N.Y.2d 185 (1991).
On February 2, 2017, the First Department of the New York Appellate Division expanded the Colt test to require consideration of two additional factors when evaluating proposed nonmonetary settlements of class action litigation: “whether the proposed settlement is in the best interests of the putative class as a whole, and whether the settlement is in the best interest of the corporation.” Gordon v. Verizon Commc’ns, 2017 WL 442871 (N.Y. App. Div. 1st Dep’t, 2017) (Kahn, J.). The First Department applied this enhanced test to find that court approval was warranted for a proposed nonmonetary settlement of shareholder class action arising out of the acquisition of Vodafone Group’s stake in Verizon Wireless by Verizon Communications.
Courts Must Consider the Best Interests of the Shareholders and the Corporation When Evaluating a Proposed Nonmonetary Settlement
At the outset of its analysis, the First Department observed that settlements of shareholder class action litigation without monetary awards to class members have become “increasingly disfavored” because they often “provide[] minimal benefits either to shareholders or to their corporations.” The court noted that both Delaware and New York courts have “call[ed] for the drastic curtailment of such class action [settlements].” While “some commentators have opined that recent decisions . . . may signal the extinction of ‘disclosure-only’ settlements,” the First Department stated that other commentators have suggested that courts “take a more balanced approach in evaluating nonmonetary class action settlements.”
The First Department explained that “a court conducting a settlement review in a putative shareholders’ class action has a responsibility to preserve the viability of those nonmonetary settlements that prove to be beneficial to both shareholders and corporations, while protecting against the problems with such settlements recognized since Colt, in order to promote fairness to all parties.” The court found that in light of the “changing circumstances and concerns surrounding nonmonetary settlements of class actions” in the 25 years since the Colt decision, “a revisiting of [the] five-factor Colt standard [was] warranted in order to effect an appropriately balanced approach to judicial review of proposed nonmonetary class action settlements.”
The First Department “refine[d]” the Colt standard to require consideration of two additional factors. First, “the agreed-upon disclosures, corporate governance reforms and any other forms of nonmonetary relief in a proposed settlement should be in the best interests of all of the members of the putative class of shareholders.” Second, “the proposed settlement should be in the best interest of the corporation.” The court made it clear that “the lack of a monetary or quantifiable benefit to the corporation does not necessarily preclude such a finding.”
Proposed Nonmonetary Settlement of the Verizon Shareholder Class Action Meets the First Department’s Enhanced Standard
“Viewing in totality the five established Colt factors and the two [new] factors,” the First Department held that the proposed nonmonetary settlement of the Verizon shareholder class action “meets the enhanced standard” for court approval. The court found that “each of the five factors set forth . . . in Colt weighs in favor of the proposed settlement.”[1]
The court then considered “whether the key aspects of the proposed settlement would benefit the Verizon shareholders.” The court determined that the additional disclosures “provided some benefit to the shareholders.”[2] However, the court found the “most beneficial aspect of the proposed settlement to the shareholders . . . was its inclusion of a fairness opinion requirement, mandating that in the event that Verizon engages in a transaction involving the sale or spin-off of assets of Verizon Wireless having a book value of in excess of $14.4 billion, Verizon would obtain a fairness opinion from an independent financial advisor, or, in the case of a spin-off, financial advice from an independent financial advisor.” The court found that “having such a corporate governance reform in place to safeguard the valuation of corporate assets in the event of such a sale constitutes a sufficient benefit to the putative class of shareholders as a whole to warrant approval of the proposed settlement in this case, under the circumstances presented.”
Finally, the court addressed the question of whether the proposed settlement was in Verizon’s best interests. The court found the “proposed settlement would resolve the issues in this case in a manner that would reflect Verizon’s direct input into the nature and breadth of the additional disclosures to be made and the corporate governance reform to be included as part of the proposed settlement.” Moreover, “by agreeing to the settlement, Verizon avoided having to incur the additional legal fees and expenses of a trial.”
The First Department concluded that “approval of the proposed settlement [was] warranted” and further found that “the benefits to Verizon’s shareholders achieved by plaintiff’s counsel were sufficient to warrant an award of attorneys’ fees.” The court remanded the action to the trial court for consideration of an appropriate fee award.
Justice Moskowitz, Concurring, Expresses Her View That the Majority Should Not Have Expanded the Colt Test
In a concurring opinion, Justice Moskowitz observed that “no party to this appeal . . . argued that the existing five-favor Colt test is inadequate to the task of evaluating a class action settlement,” and therefore “neither party . . . had a chance to address” the court’s new standard. Judge Moskowitz expressed her view that the First Department “should not [have] add[ed] a new factor to a long-established test without giving the parties the opportunity to brief the matter.” Instead, she stated that the court should have “approve[d] the proposed class settlement under the rubric of the existing five-factor Colt test.”
[1] With respect to plaintiffs’ likelihood of success on the merits, the court noted that “plaintiff withdrew her claims for monetary damages upon recognizing that they would be difficult to prove at trial.” As to “the extent of support from the parties for the proposed settlement,” the court noted that only 3 of Verizon’s 2.25 million shareholders filed objections to the settlement, and fewer than 250 shareholders opted out. With respect to the third and fourth factors, the court found that the parties were represented by competent and experienced counsel, and that good faith bargaining between the parties was presumed. Finally, as to the fifth Colt factor (“the nature of the issues of law and fact”), the court explained that the only remaining issue in dispute was “whether respondents breached their fiduciary duty by failing to make adequate disclosures to the shareholders in the preliminary proxy statement.” The court found “[t]his issue was more expeditiously resolved by the negotiated settlement process, in which the parties had the opportunity to identify and agree upon the areas in which further disclosure of information would be appropriate.”
[2] The First Department expressly disagreed with the trial court’s determination that “additional information provided to shareholders in a disclosure must contradict what has been previously disclosed in order for the disclosure to be material.”