The opinion of the court was delivered by: STEWART
STEWART, DISTRICT JUDGE: Before the Court is an application pursuant to Rule 23 of the Federal Rules of Civil Procedure for approval of a proposed settlement. Counsel for both plaintiffs and defendants have submitted well documented papers in support of the proposed settlement. Objectors have presented papers in response, and have been heard at hearings before this Court on October 13 and 18, 1976. Upon a detailed review of the arguments and documents submitted by all parties, it is the Court's conclusion that the settlement is fair and reasonable and should be approved.
Indian Head is a diversified American company which in 1973 had approximately 5,425,000 shares of common stock outstanding.
The common stock was listed on the New York Stock Exchange. Warrants were issued and outstanding pursuant to a 1965 agreement, and were listed on the American Stock Exchange.
$25,000,000 of 5 1/2% convertible subordinated debentures due April 15, 1993, (in denominations of $1,000) were also issued and outstanding subject to the terms and conditions of an Indenture dated April 15, 1968, between Indian Head and Marine Midland Grace and Trust Company of New York as Trustees.
Thyssen-Bornemisza Europe, N.V. is an international industrial holding company with headquarters in the Netherlands. In September, 1973, pursuant to a Memorandum of Understanding between TBE and Indian Head,
TBE made a tender offer at $27 a share, and acquired approximately 33.9% of the common stock,
although initially it had offered to buy only between 26% and 32%.
Prior to the tender offer, the New York Stock Exchange had indicated to Indian Head and TBE that ownership by TBE of over 32% would probably result in delisting the common stock. This information was included in the statutory notice to shareholders.
In paragraph 9 of this same notice to shareholders, TBE disclaimed any present intention to acquire control of Indian Head.
Except to the extent described above, it is not the present intention of TBE to attempt to acquire control of Indian Head by means of these transactions, nor in its capacity as a major stockholder of Indian Head does TBE now have or intend to develop plans or proposals to liquidate Indian Head, to sell its assets or to merge it with any other person or to make any change in its business, management or corporate structure. TBE does intend to vote its shares in a manner which is intended to benefit all of the stockholders of Indian Head, including TBE. (Plaintiffs' Exhibit 24.)
Indian Head's management made no recommendation to its shareholders with respect to this first tender offer - though it did state in the notice that it cooperated with TBE in making the offer (it made available a list of shareholders).
No notice of this first tender offer or of the possible delisting of the common stock was sent to the debenture holders, warrant holders or preferred share holders. However, the 1973 Annual Report did refer to the tender offer and the resulting acquisition of the stock.
In July, 1974, TBE made a second tender offer to buy all remaining Indian Head common stock, (again at $27 a share), and all outstanding warrants at $2.25 per warrant. This second tender offer was financed by a $50,000,000 long-term revolving credit agreement with the Chase Manhattan Bank, N.A. and fourteen other banks located outside the United States. Plaintiffs claim that these financial arrangements were made just nine weeks after the first tender offer (although the second tender offer was not to take place for 7 more months), and thus supports an inference that TBE's statement in its first tender offer that it did not intend to liquidate Indian Head, sell it, or merge it, was false and misleading. The defendants dispute this claim.
The notice to shareholders of the second tender offer disclosed, among other things: the financing arrangements for the offer (Plaintiffs' Exhibit 45, P11); the fact that Indian Head's Board of Directors and management made no recommendation, although they had cooperated with TBG (later changed to TBE) (Id. P12); the number of shares each member of the Indian Head Board was going to tender or retain (Id.); that as a result of the 1974 tender offer the common stock might no longer meet the requirements of the New York Stock Exchange for continued listing and the Exchange might delist the shares (Id. P13); that TBG intended to acquire control of Indian Head, but did not have any present plans to sell its assets or merge. The notice also stated:
TBG expects to purchase a substantial majority of the common stock as a result of this offer and thereby acquire control of the Company. TBG believes the Company to be well managed and to present an attractive long-term investment opportunity. TBG presently does not have any plans or proposals to make any major changes in the Board of Directors, management, corporate structure, operating policies or business of the Company or to suggest its liquidation, the sale of its assets or a merger with any other person. However, it reserves the right to make changes in the future should it determine that the best interests of the Company and its stockholders are served thereby. (Id. P9).
No copy of this notice was sent to the registered convertible debenture owners.
As a result of this second tender offer, TBE's total ownership of common stock increased to approximately 90.6%. They also obtained about 8% of the outstanding warrants. Shortly after the tender offer, the New York Stock Exchange delisted Indian Head's common stock and convertible debentures, and thereafter they were traded over the counter.
The three class action lawsuits involved in this settlement were brought, as a result of these two tender offers, against TBE, Indian Head, TBI,
Marine Midland, Trustee for the Debentures, Chemical Bank, warrant agent, White, Weld & Co., Inc., Indian Head's investment advisor, and various individual defendants who are or were officers and directors of Indian Head.
The Complaints in all three actions alleged violations of the Williams Act § 14(d) and (e)
and § 10b of the Securities Act of 1934
and Rule 10b-5 promulgated thereunder. The convertible debenture owners claim that the failure to send them notice was a violation of the Act and that this prevented them from favorably exercising their conversion rights. They also claim that TBE's acquisition of control constituted a constructive merger in violation of the Indenture. The warrant owners claim the tender offers were false and misleading. Both the Brucker and Shamrock Complaints also allege a common law breach of fiduciary obligations.
The defendants moved either for dismissal of the Complaints or for summary judgment, and the plaintiffs cross-moved for summary judgment. These motions were sub judice on February 12, 1976, when TBE announced a proposed "short-form" merger
of Indian Head into a TBE affiliate which was to take place on March 19, 1976.
The Brucker plaintiffs moved to enjoin the merger through an amended class action complaint,
which was filed on behalf of all owners of warrants and common stock, as well as the debenture holders previously represented. On March 4, at the opening of the preliminary injunction hearing, the defendants announced that they were withdrawing the merger plan.
Subsequent to the announcement of the proposed merger, but prior to its withdrawal, the Court of Appeals for the Second Circuit issued opinions in Marshel v. AWF Fabric, 533 F.2d 1277, (2d Cir.), vacated, 429 U.S. 881, 97 S. Ct. 228, 50 L. Ed. 2d 162, 45 U.S.L.W. 3272 (Oct. 12, 1976), and Green v. Santa Fe Industries, Inc., 533 F.2d 1283 (2d Cir.), cert. granted, 429 U.S. 814, 97 S. Ct. 54, 50 L. Ed. 2d 74 (1976), which considerably changed the law as to short-form mergers, and left many questions for future litigation. This uncertainty in the law led defendants to withdraw their merger proposal, and to negotiate with the plaintiffs, Transcript, First Settlement Hearing on October 13, 1976, at 22 ["1st Tr."]
A Stipulation and Agreement of Settlement was reached and signed by all the parties in late July. The Court then ordered, among other things, that the three actions should be maintained as class actions for purposes of settlement only, that a settlement hearing be held on October 13, and that a notice of this hearing and of the settlement terms be sent to all the members of the various classes, so that those who wanted to be excluded could opt out, and those who wanted to object could do so.
Two objectors appeared at the settlement hearings, Morton P. and Marjorie T. Rome, trustees of a trust which owns 25 debentures, and Morris Shuldenrein,
owner of 7,500 warrants. Since most of the Romes' objections go to the scope of the settlement, and not its actual terms, we will defer discussion of their objections for the moment, and first discuss the fairness of the actual terms of the settlement.
The settlement agreement provides for the merger of Indian Head into a subsidiary of Thyssen-Bornemisza, Inc., Under the terms of the 32 million dollar settlement, the common stockholders will receive $32 a share upon the merger. The owners of the 5 1/2% convertible subordinated debentures due in 1993,
have a number of options: 1) hold on to the debentures and collect the interest until 1993, at which time they can collect the $1000, 2) convert now at $32.50 a share, and receive $844.16 per $1000 debenture,
or 3) convert any time between the merger and 1993 and receive $32 per share (or $831.17 per $1000 debenture), a fixed cash sum.
In addition, former owners of Indian Head convertible debentures who held them on September 27, 1973,
and sold on or before July 1, 1974,
will receive up to $50 per debenture. Former owners of debentures who held them on July 2, 1974 and sold between July 12, 1974
and August 2, 1976,
will receive up to $100 per debenture, the exact amount determined by the sales price.
As to the warrant holders, those who have owned warrants continuously from July 12, 1974 to the date of the merger will receive $4.00 per warrant. As to the warrant holders who have not owned their warrants continuously: owners on August 2, 1976, who still own on the date of the merger will receive $2.50 per warrant; owners of warrants on July 2, 1974, who sold their warrants between July 12, 1974, and August 2, 1976, will receive $1.50 per warrant. There will be no payment for any warrant sold between August 1, 1973, and July 1, 1974. In addition to the above amounts, TBI will pay all the expenses of administering the settlement and will pay up to $600,000 for counsel fees and expenses as awarded by the Court. Plaintiffs' attorneys agree to accept an award not to exceed $600,000.
The general principles which guide the Court in assessing the fairness, reasonableness and adequacy of a class action settlement are clear.
... the role of a court in passing upon the propriety of the settlement of a... class action is a delicate one... since '[the] very purpose of a compromise is to avoid the trial of sharply disputed issues and to dispense with wasteful litigation,' the court must not turn the settlement hearing 'into a trial or a rehearsal of the trial.' Rather... it must reach 'an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated' and 'form an educated estimate of the complexity, expense, and likely duration of such litigation... and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise.' Newman v. Stein, 464 F.2d 689, 691-92 (2d Cir.), cert. den., 409 U.S. 1039, 93 S. Ct. 521, 34 L. Ed. 2d 488 (1972); (citations omitted).
Levin v. Mississippi River Corp., 59 F.R.D. 353, 361 (S.D.N.Y. 1973). Some of the factors considered "relevant to a full and fair assessment" of the proposed settlement by the District Court, and approved by the Court of Appeals in City of Detroit v. Grinnell Corporation, 495 F.2d 448, 463 (2d Cir. 1972), were: 1) the complexity, expense and likely duration of the litigation; 2) the reaction of the class to the settlement; 3) the stage of the proceedings and the amount of the discovery completed; 4) the risks of establishing liability; 5) the risks of establishing damages; 6) the risks of maintaining the class action through the trial; 7) the ability of the defendants to withstand a greater judgment; 8) the range of reasonableness of the settlement fund in light of the best possible recovery; 9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation. At the heart of the analysis the Court must evaluate the strength of the plaintiffs' case, considering both the likelihood of establishing liability and the consequent probable reward in damages. It must consider these factors in light of the terms of the settlement.
In the instant case, there are complicated questions of law on both the issues of liability and damages. While the role of a Court in determining the fairness of a settlement is not to decide these issues, the Court should, and here does, take note of the fact that these complex questions of law are unresolved, thus making this case an appropriate one for settlement. One of the primary unresolved legal questions involves the interpretation and application of Marshel, supra, Green, supra, and Merrit v. Libby, McNeill and Libby, 533 F.2d 1310 (2d Cir. 1976) to the attempted short-form merger in this case, particularly in light of the fact that the Indian Head merger is distinguishable on its facts from each of the above cases. Thus the Court does not agree with the objectors' assertion that liability is clear with respect to issues arising from the short-form merger. This case also presents complex legal and factual questions on a variety of other issues, among them: whether or not the 1973 and 1974 tender offers were false and misleading in failing to disclose that TBE would merge Indian Head into an affiliate; whether or not under Van Gemert v. Boeing, 520 F.2d 1373 (2d Cir.), cert. den., 423 U.S. 947, 46 L. Ed. 2d 282, 96 S. Ct. 364 (1975), Indian Head was obligated to send notice of the tender offers to the registered debenture owners.
In determining the reasonableness of the amount of the settlement in relation to the amount of a possible recovery after trial, the Court has considered the expert opinions submitted to the Court by Martin Whitman of M. J. Whitman & Co., and Robert Winston, of Winston Perry Financial Corporation, the evaluation by counsel, and the cost of litigating the aforementioned legal issues. The Court has also noted the favorable reaction of the classes to the settlement.
In light of these factors, we find the settlement fair and reasonable.
The Romes raise a number of objections to the proposed settlement; most of them going to the scope of the settlement, and not the fairness of its terms. First they object to the designation of the suits as class actions for purposes of settlement only, on the grounds that this is unauthorized by Rule 23 and is violative of the provisions of the Manual for Complex Litigation, which advises against "a tentative determination of a class action request for the purpose of settlement."
The Second Circuit has stated in Grinnell, supra, that the Manual recommendations "were not meant to be intractable rules," and that the major concern of the Manual may be satisfied where, as here, the settlement provides "for notice of a hearing and an opportunity to challenge the fairness or any other aspect of the proposed settlement," Grinnell, 495 F.2d at 466. In addition, Grinnell stated that the Manual's objectives may be satisfied where, as here, the settlement was not negotiated in the early stages of the dispute, but rather after the parties had engaged in considerable litigation and were able to assess the risks of success, and where, as here, there acceptance, the owners of $27,000 opted out (not including were not different counsel vying to be class representatives before the settlement agreement was reached and publicized, thus not presenting a situation such as in Ace Heating and Plumbing Co. v. Crane Co., 453 F.2d 30 (3d Cir. 1971). Therefore, the designation of these actions as class actions for purposes of settlement only was proper in this case.
The objectors also claim that there is an abuse of the use of Rule 23 as it is applied in this case to the convertible debenture holders. They note that the Rules Enabling Act
under which the Federal Rules of Civil Procedure were promulgated, specifically provided that the Rules should not abridge or modify any substantive rights. The abuse to which the objectors point is the proposed settlement, which they contend will abridge the substantive conversion rights of the debenture holders. We do not agree that the settlement abridges any substantive rights of the debenture holders (see pp. 16-18 infra). Further, we find that the Rule 23 procedures were properly followed. Full notice was given to all members of the classes, and their rights to appear and object, or to opt out, were fully explained. Thus the Rule 23 procedures have protected the substantive rights of the individual debenture holders.
The Romes also challenge the adequacy of the notice of the proposed settlement. The notice complied with 23(c)(2) and clearly advised the class members of the nature of the pending action and the general terms of the settlement, and indicated where more detailed information was obtainable and where objections could be heard. All material facts were included.
Many of the Romes' objections arise out of an assertion that the Indenture prevents any class action settlement involving debenture owners, as the Court can in no way alter "... the creditors [debenture holders]... separate and several contract rights..."
without the individual written consent of each holder. They claim that the settlement can only bind those holders who affirmatively opt in and cannot bind those who do not respond. They also claim that the Indenture agreement prevents a forced conversion into money in the event of a merger, and requires either that Indian Head redeem the debentures
or that Indian Head respect the absolute right to convert into common stock.
An analysis of these arguments requires an interpretation of the Indenture agreement, particularly Section 5.06, 12.02, 13.01, and 13.02 (Articles 5, 12 and 13 of the Indenture are set out in Appendix A). Objectors argue that § 12.02, which provides for approval by two-thirds of the outstanding debentures when the issuer wishes to change or modify the Indenture itself, and requires consent of each debenture holder when the right to convert is altered or impaired, should be interpreted in this case to require the ...