In City Trading Fund. v. Nye, 2018 NY Slip Op 28030 (N.Y. Sup. Feb. 8, 2018) (City Funding II), the Supreme Court (J. Kornreich) denied final approval to a proposed pre-certification settlement wherein “the parties settled for a 'peppercorn and a fee'. In other words, they entered into a 'disclosure-only' settlement that provides no monetary relief to the stockholders, but which calls for a significant payment of attorney's fees to plaintiffs' counsel (here, $500,000). The 'supplemental disclosures' are the gravamen of the settlement (which) are supposed to help the shareholders make a more informed decision on the merger by providing them with additional useful information about the deal. They do not … . The Company and its shareholders are net losers here.” This opinion is the second time Justice Kornreich has evaluated the subject proposed settlement and comes after three years of much deliberation by several Supreme Court Justices and the Appellate Division First Department regarding the factors to be considered in evaluating the merits of a disclosure-only settlement and the benefits to be derived therefrom by shareholders and the Corporation.

Criticism of Disclosure-Only Settlements

As we noted last year (Dickerson, “Disclosure-Only Settlements in State Courts,” N.Y.L.J. (Sept. 14, 2017), “Disclosure only” settlements also known as “strike suits,” “deal litigation,” and “merger tax,” have been strongly criticized. In her initial review of the subject proposed settlement (City Trading Fund v. Nye, 46 Misc.3d 1206 (N.Y. Sup. 2015) (City Trading I), rev'd 144 A.D.3d 595 (1st Dept. 2016)), Justice Kornreich noted: “In sum, when the original alleged omissions and supplemental disclosures are closely scrutinized, it is clear that they are not only immaterial, they are grossly immaterial. None of the supplemental disclosures 'significantly altered the total mix of information made available' … the ubiquity and multiplicity of merger lawsuits, colloquially known as a 'merger tax', has caused many to view such lawsuits with a certain degree of skepticism. The lawsuits are filed only a relatively short time before the shareholder vote, and all it takes is a remote threat of injunction or delay to rationally incentivize settlement, even if defendants firmly and rightfully believe the lawsuit has no merit … . The defendant corporation's cost-benefit calculus almost always leads the company to settle. Even a slight (chance) of an adverse outcome will induce a company to rationally settle given the costs … . Yet, notwithstanding the current climate of merger litigation, this case still stands out. It stands out for its downright frivolity.”

The 'Gordon' and 'Allied' Cases

In Gordon v. Verizon Communications, 2014 N.Y. Misc. LEXIS 5642 (N.Y. Sup.) (J. Schweitzer), rev'd 148 A.D. 3d 146 (1st Dept. 2017), the Supreme Court noted: “An increasing body of commentary has decried the tsunami of litigation and attendant suspect disclosure-only settlements, associated with public acquisitions today … . A body of law meant to protect shareholder interest 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 via broad releases.” And in Matter of Allied Healthcare Shareholders Litigation, 2015 WL 6499467 (N.Y. Sup. 2015) (J. Ramos), the Supreme Court noted: “In summary this proposed settlement offers nothing to the shareholders except that attorneys they did not hire will receive a $375,000 fee and the corporate officers who were accused of wrongdoing will receive general releases … . Putting aside any concerns of collusion (and there are many) … this practice of compensating class counsel no matter how meaningless the result is, creates the impression … that these actions are brought merely for the purpose of generating legal fees.”

The 'Medical Action' and 'Newbridge' Cases

While some courts may have serious doubts about the benefits of a disclosure-only settlement, they may approve them nonetheless but substantially reduce sought after legal fees. In Matter of Medical Action Industries Shareholder Litigation, 48 Misc.3d 544 (N.Y. Sup. 2015) (J. Pines), the court approved a disclosure-only settlement but reduced the proposed class counsel's legal fees of $925,000 to a combined award of fees and expenses of $250,000.

And In re Newbridge Bancorp Shareholder Litigation, 2016 WL 6885882 (N.C. Super. 2016), the court concluded that the “Supplemental Disclosures were of only marginal benefit to the Class, a finding which is supported by the lack of substantial evidence that any of the (disclosures) were significant to a reasonable shareholder's decision in voting for the Proposed Transaction.” As a consequence, the court found class counsel's fee request of $274,537.12 “excessive” and awarded $135,000 in fees.

New Enhanced Standards

In Gordon v. Verizon Communications, 148 A.D.3d 146 (1st Dept. 2017), the First Department, after noting that “more than two decades of mergers and acquisitions litigation … have been informative as to the need to curtail excesses not only on the part of corporate management, but also on the part of overzealous litigating shareholders and their counsel,” reviewed the proposed settlement before it in light of the five factors set forth in Matter of Colt Industries Shareholders Litigation, 155 A.D.2d 154, 160 (1st Dept. 1990), modified on other grounds 77 N.Y.2d 185 (1991) (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) and added two more factors (benefit to shareholders, benefit to corporation). After reviewing the benefits of the proposed disclosures, the First Department noted: “The most beneficial aspect of the proposed settlement to the shareholders … was the inclusion of a fairness opinion requirement (regarding the potential sale or spin-off of assets) … . This prospective corporate governance reform provided a benefit to Verizon shareholders in mandating an independent valuation, without restricting the flexibility of directors in making a pricing determination.” See Seinfeld v. Robinson, 246 A.D.2d 291 (1st Dept. 1998) (significance of corporate reforms in assessing a proposed settlement). As far as benefits to the corporation, the First Department noted Verizon's “direct input into the nature and breadth of the additional disclosures … and corporate governance reform … [W]e find that the proposed settlement meets the enhanced standard we announce here.”

The 'Roth' and 'Saska' Cases

In Roth v. Phoenix Cos., 2017 N.Y. Misc. LEXIS 1050 (N.Y. Sup.), the Supreme Court (J. Kornreich), applied the new enhanced standards of review to a proposed disclosure-only settlement, finding it “outstanding. It provides for expeditious beneficial relief for the class that affords them material remedial disclosures without the need for protracted costly litigation … [T]he gravamen of plaintiff's complaint is a challenge to the disclosure implications of the merger … . The terms of the settlement sufficiently remedy plaintiff's concerns.” And in Saska v. Metropolitan Museum of Art, 57 Misc.3d 218 (2017), the Supreme Court (J. Kornreich) approved an “outstanding” disclosure-only settlement “which principally requires the Museum to change its signs to more clearly and prominently inform the public that the listed admission prices are merely suggested and not mandatory … . The court does not believe a reasonable person is likely to be deceived by the new signage into thinking there is a mandatory $25 admission fee.” See City Trading II (“Neither case (Roth and Saska) was a strike suit seeking the extraction of a merger tax. Both cases involved seemingly meritorious claims that were settled in exchange for highly beneficial disclosures directly remedied the wrongs alleged by plaintiffs.”).

The Second Time Around

In evaluating the proposed settlement a second time, the Supreme Court moved from “downright frivolity” (City Trading I) to “utterly worthless” (City Trading II) and considered all seven factors set forth by the First Department in its ruling in Gordon, noting, inter alia, “there is no doubt in this court's mind that it would have granted a motion to dismiss because plaintiffs did not allege any material misstatements or omissions … . The supplemental disclosures, at best, are of the 'tell me more' sort that countless courts have recognized are of little to no value and which certainly do not substantially alter the total mix of available information.”

Thomas A. Dickerson is a retired Associate Justice of the Appellate Division, Second Department. He is also author of “Class Actions: The Law of 50 States” (Law Journal Press 2018).