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Gordon v. Verizon Communications, Inc.

Supreme Court of New York, First Department

February 2, 2017

Natalie Gordon, on behalf of herself and others similarly situated, Plaintiff-Appellant,
Verizon Communications, Inc., Defendant-Respondent, Lowell C. McAdam, et al., Defendants. Jonathan M. Crist, et al., Nonparty Respondents.

         Plaintiff appeals from the order of the Supreme Court, New York County (Melvin L. Schweitzer, J.), entered December 22, 2014, which, to the extent appealed from as limited by the briefs, denied plaintiffs' motion for final approval of a proposed settlement, and from the order, same court (Anil Singh, J.), entered August 3, 2015, which, to the extent appealed from, denied plaintiff's motion to renew.

          Faruqi & Faruqi, LLP, New York (Juan E. Monteverde and Nadeem Faruqi of counsel), for appellant.

          Paul K. Rowe, New York, for Verizon Communications, Inc., respondent.

          Szenberg & Okum PLLC, New York (Avi Szenberg of counsel) and Moshe Balsam, Far Rockaway, for Jonathan M. Crist, respondent.

          Gerald Walpin, respondent pro se.

          Richard T. Andrias, J.P., David B. Saxe, Karla A. Moskowitz, Marcy L. Kahn, JJ.

          KAHN, J.

         Much has been written on the subjects of whether settlements of shareholder class action suits challenging corporate mergers and acquisitions should be rejected in the absence of monetary damage awards, and the propriety of the attorney fee awards attendant to such agreements [1]. In this case, we are asked to decide the viability of the proposed settlement of a putative shareholders' class action challenging, on the basis of alleged material omissions from proxy statements, a corporation's acquisition of all of the shares of an entity owned by its partner in a joint venture. The proposed settlement agreement included certain additional disclosures of the terms of the transaction as well as a corporate governance reform proposal, but lacked any monetary compensation to the shareholders. The proposed settlement further provided for the award of attorneys' fees. We find that under the circumstances presented, and upon application of this Court's standard in Matter of Colt Indus. Shareholders Litig. (Woodrow v Colt Indus) (155 A.D.2d 154, 160 [1st Dept 1990], mod on other grounds 77 N.Y.2d 185');">77 N.Y.2d 185');">77 N.Y.2d 185');">77 N.Y.2d 185');">77 N.Y.2d 185');">77 N.Y.2d 185');">77 N.Y.2d 185');">77 N.Y.2d 185 [1991], as further refined below, approval of that settlement is warranted. Accordingly, we now reverse the order of the Supreme Court and remand the matter for a hearing to determine the appropriate amount of attorneys' fees to be awarded to plaintiff's counsel.


         On September 2, 2013, defendant Verizon Communications, Inc. (Verizon) publicly announced that it had entered into a definitive stock purchase agreement with Vodafone Group PLC (Vodafone) to acquire Vodafone subsidiaries holding as their principal assets a 45% interest in Cellco Partnership d/b/a Verizon Wireless (Verizon Wireless) for a purchase price of approximately $130 billion, consisting primarily of cash and Verizon common stock (the transaction), thereby effectively altering the status of Verizon Wireless from that of a joint venture of Verizon and Vodafone to that of a wholly owned subsidiary of Verizon.

         On September 5, 2013, plaintiff Natalie Gordon filed the instant putative class action on behalf of herself and all of the other holders of outstanding Verizon common stock, which, at that time, exceeded 2.86 billion shares, naming Verizon and the members of its board of directors as defendants. In essence, the original complaint alleged that Verizon's board of directors had breached its fiduciary duty to Verizon's shareholders by causing Verizon to pay an excessive price for Verizon Wireless stock in the transaction.

         On October 8, 2013, Verizon filed with the Securities and Exchange Commission a preliminary proxy statement (PPS) setting forth the background and terms of the transaction and certain analyses performed by J.P. Morgan Securities LLC in connection with the transaction.

         On October 22, 2013, plaintiff filed an amended class action complaint, in which additional claims were asserted alleging breaches of fiduciary duty resulting from defendants' failure to disclose material information in the PPS concerning the transaction.

         In November and December 2013, the parties engaged in negotiations in an effort to resolve this litigation. On December 6, 2013, counsel for the parties reached an agreement in principle to settle this action, with defendants agreeing to disseminate to Verizon's shareholders certain additional disclosures and agreeing that for a period of three years thereafter, in the event that Verizon were to engage in a transaction involving the sale to a third party purchaser or spin-off of assets of Verizon Wireless having a book value in excess of $14.4 billion, Verizon would obtain a fairness opinion from an independent financial advisor. This agreement in principle was memorialized in a memorandum of understanding (MOU), subject to additional confirmatory discovery.

         On December 10, 2013, pursuant to the MOU, Verizon filed a definitive proxy statement (DPS) with the SEC to solicit shareholders to vote in favor of the transaction and scheduled a shareholder vote for January 28, 2014. The DPS included a number of supplemental disclosures not contained in the preliminary proxy materials. Some 99.8% of Verizon's shareholders voted to approve the issuance of shares for the Company to acquire Vodafone's 45% interest in Verizon Wireless on January 28, 2014.

         Counsel for the parties then proceeded to negotiate the terms of a stipulation of settlement, which terms included a requirement that for the following three years, any disposition of greater than five percent of Verizon's assets would require the fairness opinion of an independent financial advisor. The stipulation of settlement also included an agreement that defendants would not oppose any fee and expense application of plaintiffs' counsel not exceeding $2 million. On July 21, 2014, the parties filed a written stipulation of settlement with Supreme Court.

         On October 6, 2014, the motion court issued a scheduling order which (1) preliminarily certified this action as a class action, (2) preliminarily approved the settlement and (3) scheduled a hearing to determine whether the settlement should receive the final approval of the court as being "fair, adequate and in the best interests of the class" (Rosenfeld v Bear Stearns & Co., 237 A.D.2d 199, 199 [1st Dept 1997], lv dismissed 90 N.Y.2d 888 [1997] lv denied 90 N.Y.2d 811');">90 N.Y.2d 811');">90 N.Y.2d 811');">90 N.Y.2d 811 [1997]). [2]

         At the fairness hearing held before the motion court on December 2, 2014, of Verizon's approximately 2.25 million shareholders at the time, only two objectors offered argument and testimony in opposition to the settlement: Jonathan M. Crist, Esq., whose attorney appeared on his behalf, and Gerald Walpin, Esq., who testified on his own behalf. Also testifying was Professor Sean Griffith of Fordham University School of Law, an expert proffered by counsel for objector Crist. Professor Griffith's expert opinion was that fairness opinions involving small asset sales, although not required to be publicly disclosed, are routine and that the requirement of a fairness opinion in this case would not provide any real benefit to Verizon's shareholders.

         Following the hearing, on December 22, 2014, the motion court issued an order in which it reversed its preliminary order by declining to approve the settlement. In doing so, the motion court stated that it was moved by the "strong opposition to the proposed settlement voiced by the objectors at the fairness hearing and in their submissions... to take a second look at the terms of the proposed settlement and more closely scrutinize it" in order to determine "whether it truly is fair, adequate, reasonable and in the best interest of class members." The motion court examined four of the supplemental disclosures which pertained to valuation and, the motion court reasoned, could potentially materially enhance the disclosure contained in the preliminary proxy statement. These supplemental disclosures included: (1) a disclosure that the valuation of Omnitel, another telecommunications company in which Verizon had an interest, was the product of a negotiation between Verizon and Vodafone, (2) the disclosure of details concerning the financial advisor's comparable companies analysis, (3) further detail of the financial advisor's comparable transactions analysis, and (4) the tabular presentation of valuation ranges for Verizon corporate and wireline [3] assets based on FV/EBITDA multiples. As to these supplemental disclosures, the motion court concluded that they "individually and collectively fail[ed] to materially enhance the shareholders' knowledge about the merger" and that "[t]hey provide[d] no legally cognizable benefit to the shareholder class, and cannot support a determination that the Settlement is fair, adequate, reasonable and in the best interests of the class members." (Gordon v Verizon Communications, Inc., 2014 NY Slip Op 33367[U] [Sup Ct, NY County, Dec. 19, 2014], at **11-12).

         Additionally, the motion court found that the corporate governance aspect of the terms of the proposed settlement could curtail Verizon's directors' flexibility in managing minimal asset dispositions. The motion court then denied approval of the settlement and any award of attorney's fees to plaintiff's counsel (id. at **13-15). [4]

         On February 3, 2015, plaintiff filed a motion to renew and/or reargue her motion for final approval of the settlement of the class action, in support of which she proffered, for the first time, the affidavit of her own expert, Professor Stephen J. Lubben, Harvey Wiley Chair in Corporate Governance & Business Ethics at Seton Hall University School of Law. Plaintiff claimed that Professor Lubben's affidavit refuted Professor Griffith's opinion by stating that the fairness opinion requirement provided a substantial benefit to the shareholders by requiring a valuation analysis that would determine the fairness of the transaction price. Additionally, Professor Lubben dismissed as speculative Professor's Griffith's view that the Verizon board of directors would get a fairness opinion regardless of whether a requirement for one is imposed. On February 13, 2015, one of the two objectors, Gerald Walpin, filed an affirmation in opposition to the motion and a cross-motion for an award of attorney's fees and/or sanctions. On February 19, 2015, plaintiff filed her reply and objection to the cross motion. On March 10, 2015, objector Walpin filed a motion for leave to file a belated reply in further support of his cross motion. On July 31, 2015, the renewal court denied both plaintiff's motion and objector Walpin's motion for leave to file a reply.


         The Role of Nonmonetary Settlements of Shareholder Class Action Litigation in Promoting Sound Corporate Governance in Mergers and Acquisitions

         The rise of nonmonetary class action settlements began in the 1980s and continued into the 1990s, when complaints of corporate misconduct in the context of mergers and acquisitions prompted calls for corporate governance reforms. Often, the perceived need for reform led to the commencement of litigation as a means to address the misfeasance, which would result in settlements with provisions for corporate governance reform or other forms of equitable relief, such as additional disclosures to shareholders in proxy statements, and would be accompanied by an award of reasonable attorneys' fees to shareholders' counsel. During this period, appellate courts, including this Court, often approved such settlements, viewing them as a useful tool in remedying corporate misfeasance (see e.g. Seinfeld v Robinson, 246 A.D.2d 291');">246 A.D.2d 291');">246 A.D.2d 291');">246 A.D.2d 291 [1st Dept 1998] [two related derivative actions alleging corporate misconduct consolidated and resolved by settlement involving adoption of two corporate governance reforms and an award of attorneys' fees]; Rosenfeld, 237 A.D.2d at 199 [motion court properly approved "disclosure-only" nonmonetary settlement and awarded attorney's fees where class action complaint sought primarily equitable relief]; Colt, 155 A.D.2d at 160-163 [class action brought on grounds that defendants had breached their fiduciary duty by seeking to benefit themselves financially as result of a merger; settlement approved but out-of-state shareholder permitted to opt out of class action settlement], mod 77 N.Y.2d 185 [1991] [out-of-state shareholder corporation may not opt out of class but is not bound by terms of settlement to extent that corporation pursues its own action for money damages]).

         In the ensuing decades, however, the use of nonmonetary settlements became increasingly disfavored. Complaints arose that the remedies of "disclosure-only" and other forms of non-monetary settlements themselves proved problematic because they provided minimal benefits either to shareholders or to their corporations. Both courts and commentators came to view the shareholder class action in this context as a "merger tax" and as a cottage industry for the plaintiffs' class action bar, used to force settlements of ...

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