Contract; Breach of Fiduciary Duty; Shareholder Derivative Claims; Class Action; Settlement Agreements; Supplemental Disclosures; Fairness Opinions; Legal Fees.
By Jennifer Branca | Editor-In-Chief
Plaintiffs, shareholders in defendants company, sought to void defendants, broadband and telecommunications company, buyout of a minority stake in a wireless carrier on the grounds the price was too high. Defendant publicly announced purchase of a 45% minority stake in a wireless carrier. After defendant’s purchase, its stock price fell nearly 10%. Consequently, plaintiffs filed a class action suit alleging that defendant’s board of directors breached its fiduciary duty to shareholders in relation to the purchase because defendants paid an excessive and dilutive price that resulted in defendant’s stock price falling.
Subsequently plaintiffs filed their complaint and defendant filed a preliminary proxy with the SEC detailing the terms and background of the purchase agreement. Plaintiffs then filed an amended complaint and asserted additional claims for breaches of fiduciary duty resulting from defendant’s failure to disclose material information to its financial advisors before they could prove the transaction was fair. In the amended complaint Plaintiffs argued that the purchase agreement was suspect because it was negotiated between the transacting parties rather than estimated by financial advisors. However, plaintiff’s skepticism was ill founded. The court reasoned that defendant’s proxy statement contained lengthy descriptions of the work performed by financial advisors, the formal fairness opinions of financial advisors, and reference to shareholders voting instructions.
The parties engaged in negotiations to resolve the class action. During settlement negotiations, plaintiffs claimed that a disclosure-only-settlement would provide additional information and enhance their knowledge of the purchase agreement. Plaintiffs also alleged that defendants agreed, pursuant to the settlement agreement, that they would disclose additional information to shareholders and obtain a fairness opinion from an independent financial advisor in the event defendants sold or spin-off any assets having a book value in excess of $14.4 billion during the following three years.
Plaintiff requested that the court grant final approval of the settlement agreement believing it to be in shareholders’ best interests. The court analyzed the proposed settlement and closely scrutinized it for fairness, adequacy, reasonableness, and whether supplemental disclosures would be in the best interest of shareholders. The court found that the supplemental disclosures negotiated by plaintiff failed to enhance their knowledge about the merger or provide for any legal benefit. The court clarified that fairness opinions are viewed favorably when evaluating actions of directors, but the decision to obtain them is up to the boards’ business judgment. The court held that defendant’s board of directors did not violate their duty of care in the absence of a fairness opinion. Therefore, the court denied plaintiff’s motion for a final approval of the settlement.
Gordon v. Verizon Communications, Inc., Index No. 653084/13, 12/19/2014 (Schweitzer, J.).