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approving settlement of claims and noting in discussion of attorney's fee award that "remedial disclosures and other therapeutic benefits [were] directly related to the efforts of the plaintiffs' counsel"
Summary of this case from Brigham Exploration Co. v. BoytimOpinion
C.A. No. 19113
Submitted: May 21, 2002
Decided: July 26, 2002
Joseph A. Rosenthal, Esquire, ROSENTHAL, MONHAIT, GROSS GODDESS, Wilmington, Delaware; Gregory Castaldo, Esquire, SCHIFFRIN BARROWAY, Bala Cynwd, Pennsylvania; Peter Bull, Esquire, BULL LIFSHITZ, LLP, New York, New York; Pamela S. Tikellis, Esquire, CHIMICLES TIKELLIS, Wilmington, Delaware Attorneys for Plaintiff.
James L. Holzman, Esquire, PRICKETT, JONES ELLIOTT, Wilmington, Delaware; Charles W. Schwartz, Esquire, VINSON ELKINS, Houston, Texas, Attorneys for Defendants Prodigy Communications Corp., Adams, Brill, McClane, McKenney, and Prado.
J. Travis Laster, Esquire, RICHARDS, LAYTON FINGER, Wilmington, Delaware; John L. Hardiman, Esequire, SULLIVAN CROMWELL, New York, New York, Attorneys for Defendant SBC.
Milton Jones, Objector, pro se.
MEMORANDUM OPINION
I.
On May 21, 2002, the court heard the parties' application pursuant to Court of Chancery Rule 23(a) for an Order approving a proposed settlement in accordance with the Stipulation and Agreement of Compromise and Settlement entered into by them and dated February 25, 2002. In accordance with the court's Scheduling Order dated February 26, 2002, notice of the hearing and the proposed settlement was given to members of the provisionally certified class. Several class members filed written objections, all but one of which were based on misunderstandings of applicable law. One person, Milton R. Jones, appearing pro se, filed an 8-page typewritten objection to the proposed settlement that listed a series of objections to the fairness of the settlement and to the manner in which SBC had dealt with Prodigy and Prodigy assets. Jones also attended the hearing for the purpose of presenting his objections in person.
At the conclusion of the hearing, the court gave the parties and the objector the opportunity to submit additional written materials relating to the circumstances and substance of the objection. The plaintiffs and certain other parties did so, but Jones did not. Having reviewed the additional materials filed and considered the merits of the settlement and the objection, the court has concluded that the proposed settlement is fair and reasonable and should be approved. The reasons for this decision and the determination to overrule the objections follow.
II.
This consolidated action ("Action") relates to the September 21, 2001 announcement of a proposed acquisition of the publicly owned Class A shares of Prodigy Communications Corp. by SBC Communications Inc. for $5.45 per share in cash (the "Proposed Transaction"). At the time, SBC held Prodigy Class B common stock that gave it approximately 42 % of the voting power of all Prodigy common shares. SBC exercised additional control over Prodigy resulting from contractual arrangements relating to a joint Operating Partnership between the two corporations. For example, SBC had the right to appoint three of Prodigy's nine directors and also to appoint certain of Prodigy's officers. At the time of the proposal, Prodigy's sole business was to act as the General Partner of the Operating Partnership. Prodigy owned a majority of the partnership interest in the Operating Partnership.
There were approximately 70,500,000 Class A common shares outstanding. Two entities controlled by Telefonos de Mexico ("Telmex Affiliates") owned or controlled 42,000,000 of those shares and the public stockholders about 28,500,000. SBC's Class B shareholding entitled it to the equivalent of 51,000,000 votes, or 41.9% of the total voting power of the Class A and Class B combined.
The Proposed Transaction was to be conditioned on the tender of at least a majority of the Class A common stock owned by persons other than SBC. Because the Telmex Affilates owned more than 50 % of the Class A common stock, this condition could not be satisfied unless the Telmex Affiliates tendered a substantial portion of their shares.
See note 1, supra.
The Action was filed shortly thereafter seeking injunctive and other relief against SBC and the directors of Prodigy on grounds that the Proposed Transaction was unfair to Prodigy's public shareholders in certain respects, including price. The complaints charged that the price was inadequate and unfair and did not reflect improvements in Prodigy's projected 2001 EBITDA.
Soon after SBC's announcement, an earlier formed Special Committee of the Prodigy board of directors was given the responsibility of responding to the Proposed Transaction. To assist in its work, the Special Committee retained Deutsche Bank Alex. Brown Inc. ("Deutsche Bank") and Fulbright Jaworski L.L.P. to act as its financial and legal advisors, respectively. SBS commenced it tender offer on October 2, 2001.
The plaintiffs' counsel, together with their own financial advisors, reviewed available public information relating to Prodigy, its industry, competitors and comparable transactions. In addition, the plaintiffs' financial advisor was given access to valuation materials prepared by Deutsche Bank, which contained non-public forecasts and projections prepared by Prodigy management. With this information in hand, the plaintiffs' counsel and their financial advisor sought to develop an appropriate valuation for Prodigy's public shares.
Ultimately, the plaintiffs' counsel entered into a negotiation with SBC's lawyers and bankers concerning the offer. Those negotiations led to an agreement in principle to settle the litigation in exchange for the following:
• an increase in the price to be paid in the Proposed Transaction from $5.45 to $6.60, in cash, per share; and
• the opportunity for plaintiffs' counsel to review and comment on the disclosures in the tender offer materials, which eventually resulted in SBC filing a supplement to its Offer to Purchase.
While these negotiations were ongoing, SBC also engaged in discussions with the Special Committee, resulting in an agreement to proceed with the Proposed Transaction on these same modified terms. On October 17, 2001, Deutsche Bank presented its fairness opinion to the Special Committee that recommended acceptance of these revised terms. The Proposed Transaction, as modified, was then approved by the Special Committee and the full Prodigy board of directors. On the same day, SBC and Prodigy entered into an agreement and plan of merger contemplating a two-step acquisition of Prodigy.
The plaintiffs' counsel subsequently engaged in limited discovery, including the depositions of the Chairman of the Special Committee and a representative of Deutsche Bank, that confirmed their view as to the fairness of the settlement. The settlement was later incorporated into the Stipulation and Agreement of Compromise, Settlement and Release that is now before the court.
III.
Before turning to the objections lodged against the Settlement, the court first notes that, apart from the issues raised in the objections, the court would have no difficulty concluding that this matter readily satisfies the requirements of Court of Chancery Rule 23(a), (b)(1) and (b)(2) and should be certified as a class action in accordance with those rules. The action plainly meets the requirements of numerosity, commonality and typicality. Moreover, the court is satisfied that the plaintiffs and their counsel have adequately represented the interests of the class in bringing this action and pursuing a settlement in conjunction with the activities of the Prodigy Special Committee.
Similarly, apart from the matters raised by the objectors, the court is satisfied that the terms of the settlement reflect a fair and reasonable disposition of the claims asserted and provide fair and adequate consideration for the Settlement and the release. This court's function is not to decide the merits of the case, but, rather, to consider the nature of the claims asserted, the possible defenses and the legal and factual circumstances of the case, and then make its own business judgment to determine whether the proposed settlement is fair. of particular importance is the balance of the strengths of the claims being compromised against the benefits secured by the settlement for class members.
Barkan v. Amsted Indus., Inc., 567 A.2d 1279 (Del. 1989).
It is doubtless true that the plaintiffs' case faced substantial legal hurdles. To begin with, it is not clear that SBC was a controlling person of Prodigy or that it owed fiduciary duties to the other Prodigy holders in making its tender offer or its merger proposal. Moreover, even a controlling stockholder may make a tender offer without a duty to pay a fair price. And, unless the plaintiffs succeeded in proving that SBC was a controlling person, there would also be no duty of entire fairness in connection with either the tender offer or the follow-up merger. The issue of control is not easily resolved on this record. For instance, on the one hand, SBC owned substantially less than a majority of the voting power and had the right to designate only three of the nine directors while, on the other hand, SBC had the right to designate certain important officers of the Operating Partnership.
Solomon v. Pathe Communications Corp., 672 A.2d 35, 40 (Del. 1996).
Similarly, even if a duty of entire fairness could be shown to exist, the record reflects that there was a vigorous, independent Special Committee of disinterested directors, with the power to say "no," who were fully and adequately advised by competent and experienced professionals. That committee was faced with a worsening prospect for the company and reasonably concluded that a sale of the company was a strategic imperative. Additionally, SBC made it clear that it was not interested in selling its own interest or the Company as a whole to a third party, even if such a sale would have been possible, given Prodigy's substantial dependence on SBC. Additionally, it was clear to all involved that the best outcome for the Prodigy shareholders was to engage in a transaction with SBC at a fair price.
The settlement obviated the need to litigate these, and other, issues in exchange for a very substantial increase in the consideration offered by SBC. Both the plaintiffs' and the Special Committee's financial advisors opined that the transaction was fair at the price level achieved.
Considering these factors, the court is satisfied, exercising its own business judgment, that the terms of the proposed settlement are fair and should be approved.
IV.
The objections raised do not change the court's conclusions about the fairness of the settlement. Before turning to Jones's objection, the court will quickly review the others that were lodged.
Julie-Ann Syrstad and Mary Jo V. Todaro complain that they were forced to sell their shares for cash at a price that produced a loss on their investment. These objections are both premised on a misunderstanding of the legal consequences of a merger, i.e. that, when such a transaction is duly authorized and approved and becomes effective in accordance with the law, shares of stock are automatically converted into the right to receive the form and amount of consideration specified in the agreement. In this case, the shares of Prodigy common stock held by Syrstad and Todaro were converted into the right to receive $6.60 per share in cash. Merely objecting to the fact that the merger happened is not a valid objection to the terms of the proposed settlement.
Otis E. Rounds filed an objection stating that the terms of the settlement were not fair or in the best interests of Prodigy stockholders. His objection suggests either "full restoration" of all Prodigy shares, "conversion of [Prodigy] stock to shares of SBC common stock," or a court determined valuation. The court is unable to agree that the terms of the proposed settlement are inadequate or unfair merely because the Prodigy common shares were cashed out in the merger, as was required by the terms of the merger agreement and is permitted by law. Thus, Rounds's first two bases for objection must be rejected. To the extent that Rounds seeks a judicial determination of the fair value of Prodigy shares as of the effective date of the merger, the court notes that all Prodigy stockholders had the right to demand appraisal. Presumably, Rounds chose not to do so.
The objection of Ervin V. Beoshanz is also contrary to established law. He complains that he is entitled to $6.60 per share even though he voluntarily sold his shares for $5.51 on September 28, 2001, after this litigation started and before the announcement of the agreement to increase the consideration to $6.60. As this court stated in In re Resorts International Shareholders Litig., such an objection falls short because persons who sell their shares during the pendency of a challenged transaction, such as this:
. . . ma[k]e a conscious business decision to sell their shares into a market that implicitly reflect[s] the value of the pending and any prospective lawsuits.
1988 WL 92749 at *10 (Del.Ch.).
Similarly, the law recognizes that when a claim is asserted on behalf of a class of stockholders challenging the fairness of the terms of a proposed transaction under Delaware law, the class will ordinarily consist of those persons who held shares as of the date the transaction was announced and their transferees, successors and assigns. Nonetheless, as observed in Triarc, "it is unavoidable that persons who sever their economic relationship with the corporation during the litigation will not benefit from a settlement or a judgment in favor of the class." In this case, when Beoshanz sold his shares in the marketplace, the claim relating to the fairness of the then-proposed transaction passed to his purchaser, who enjoyed the benefits of the settlement. Beoshanz severed his economic relationship with Prodigy and was, thus, no longer in a position to benefit from any increase in the consideration offered for Prodigy shares in the settlement.
In re Triarc Companies, Inc. Class and Derivative Litig., 791 A.2d 872, 878-9 (Del.Ch. 2001).
Id. at 879.
The court will now turn to Jones's objection.
Jones's objection is not made in good faith. Instead, Jones made his objection as part of a campaign to force Prodigy/SBC to pay him sums on account of his prior employment by Prodigy. Jones was employed by Prodigy, as Chief Marketing Officer, for less than four months, between November 4, 2000 and February 28, 2001. When he left, Jones signed an agreement, titled the General Release and Waiver Agreement, under which he received a substantial severance package. Evidently, the tender offer materials disseminated in connection with the SBC/Prodigy transaction revealed information about compensation arrangements between Prodigy and others of its employees that caused Jones to conclude that he should have been paid a higher level of severance compensation.
Beginning in November 2001, Jones has contacted Prodigy demanding an increase in the stock options and compensation. Prodigy denied those requests. Jones renewed his demand on May 8, 2002, when he sent a letter to SBC threatening to "intervene in the Class Action Settlement" (i.e., this action) and also to initiate a separate employment-based litigation. In part, that letter states "I believe that I have an increasingly compelling claim to compensation, perhaps even including punitive damages." After discussing steps he had taken unsuccessfully to resolve his "claim," Jones's letter lists two pages of questions which "may indicate a pattern of activities" that relate, in general, to the conduct of business relations between SBC and Prodigy. Jones's letter concludes, as follows:
There's more, but this should suffice. I am attaching all relevant documents. Although I am sending copies of this letter to the relevant former Prodigy executives and the SBC, Prodigy, and Board attorneys, you will note that the "carbon copy" list does not include the plaintiffs' attorneys — this letter is one last attempt to keep this "within the family."
Rest assured, I want nothing that is not due me . . . but this is your last chance for private resolution.
Counsel for SBC responded the next day, advising Jones that he was "entitled to take whatever action you deem appropriate in the class action litigation. However, our client will not accede to your efforts to extort money from them by making such threats."
In addition to the obvious bad faith with which they were made, Jones's objections also fail to raise any substantial issues going to the fairness of the terms of the proposed settlement. The court will not engage in a detailed examination of the dozens of issues and objections raised by Jones. Rather, the court is satisfied from its review of the Affidavit of Gregory M. Castaldo, submitted May 30, 2002, and other affidavits and exhibits of record, that the plaintiffs' counsel have carefully and thoroughly investigated the allegations raised by Jones and have reasonably concluded that they are not meritorious. Jones was afforded the opportunity to respond to this evidence of counsels' diligence but chose not to do so.
For all these reasons, the court determines that none of the objections raises any substantial issues going to the fairness and reasonableness of the proposed settlement.
V.
The plaintiffs' counsel have applied for an award of fees and expenses totaling $650,000. In the Stipulation of Settlement, Prodigy or its successor agrees that it will pay the amount of fees and expenses awarded by the court, up to that amount, and agrees not to oppose any application for fees and expenses within that framework.
In awarding fees in class action litigation, Delaware courts typically consider a number of factors, including the following: the results achieved in the litigation, the contingent nature of the fee arrangement, the amount of time and effort applied, the complexities of the engagement, the quality of the work performed, and the standing and ability of the lawyers involved. Where, as here, the fee is negotiated after the parties have reached an agreement in principle on settlement terms and is paid in addition to the benefit to be realized by the class, this court will also give weight to the agreement reached by the parties in relation to fees. Necessarily, the weight given derives from and depends on the court's sense of confidence that the negotiations over the fee agreement were conducted in good faith and had no effect on the other terms of the settlement.
Sugarland Indus., Inc. v. Thomas, 420 A.2d 142, 149 (Del. 1980).
In re AXA Financial, Inc. Shareholders Litig., C.A. No. 18268, mem op. at 18, Lamb, V.C. (Del.Ch. May 16, 2002).
In this case, the benefit created, at least in part, by the settlement is approximately $32,775,000. While the plaintiffs do not claim sole credit for creating this benefit, the defendants have acknowledged that the pendency of the litigation played some role in contributing to the benefit achieved for the class. The fee requested is less than 2 % of the incremental value and is to be paid apart from and in addition to the benefit received by the class. There were also remedial disclosures and other therapeutic benefits directly related to the efforts of the plaintiffs' counsel. Thus, the nature and amount of the settlement support the level of the fee application.
The plaintiffs' counsel were all retained on a contingent fee basis. Thus, they stood to gain nothing for their efforts unless they were successful in the litigation. Working on that basis, they devoted over 835 hours to the matter, including more than 490 hours before the agreement to settle the action was struck. They also incurred expenses of $25,107.96, the recovery of which is included in the lump sum for which they apply. These factors both provide reasonable support for the application that is made. Similarly, counsel involved are experienced in litigation of this type. Finally, the court notes that, while the litigation presented several difficult factual issues, there was nothing novel or especially complex about the case.
Weighing all of these factors, the court is satisfied that an award of fees and expenses totaling $650,000, while generous, is both fair and reasonable and within the parameters of other fees that have been awarded by this court in the past in similar cases.
VI.
For all the foregoing reasons, the court approves the proposed settlement, overrules the objections made, and approves the application for fees and expenses. The court has entered the final order presented by the parties, a copy of which is attached.
ORDER AND FINAL JUDGMENT
A hearing having been held before this Court (the "Court") on May 21, 2002, pursuant to the Court's Order of February 26, 2002 (the "Scheduling Order"), upon a Stipulation of Settlement, dated February 25, 2002 (the "Stipulation" or "Settlement"), of the above-captioned action (the "Action"), it appearing that due notice of said hearing has been given in accordance with the aforesaid Scheduling Order; the respective parties having appeared by their attorneys of record; the attorneys for the respective parties having been heard; an opportunity to be heard having been given to all other persons entitled to be heard in accordance with the Scheduling Order; the Court having determined that notice to the Class (as defined below) preliminarily certified, pursuant to the aforesaid Scheduling Order, was adequate and sufficient; and the entire matter of the proposed Settlement having been heard and considered by the Court;
IT IS HEREBY ORDERED, ADJUDGED AND DECREED this 26th day of July, 2002, that:
1. Unless otherwise defined herein, all defined terms shall have the meaning set forth in the Stipulation.
2. The form and manner of notice given to the members of the Class (as defined below) is hereby determined to have been the best notice practicable under the circumstances and to have been given in full compliance with the requirements of due process and of Court of Chancery Rule 23.
3. Based on the record of the Action, each of the provisions of Court of Chancery Rule 23(a) has been satisfied and the Action has been properly maintained according to the provisions of Court of Chancery Rules 23(a), (b)(1) and (b)(2). Specifically, this Court finds that (1) the Class (as defined below) contemplated in the Action is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the Class (as defined below), (3) the claims of the representative plaintiffs are typical of the claims of the Class (as defined below), and (4) the representative Plaintiffs have fairly and adequately protected the interests of the Class (as defined below). In addition, the Court finds that the requirements of Rules 23(a), (b)(1) and (b)(2) are satisfied. The Action is certified as a class action, pursuant to Court of Chancery Rules 23(a), (b)(1) and (b)(2), on behalf of a class composed of all record and beneficial owners of common stock of Prodigy from and including September 21, 2001, through and including November 6, 2001, including their successors in interest, representatives, trustees, executors, administrators, heirs, assigns or transferees, immediate and remote, and any person acting for or on behalf of, or claiming under any of them, and each of them, excluding the Defendants and all persons related to or affiliated with them (the "Class"). Plaintiffs are appointed as the representatives of the Class and their counsel as Class Counsel.
4. The Stipulation and the Settlement are approved as fair, reasonable, adequate and in the best interests of the Class.
5. Upon Final Court Approval and payment of the amounts described in paragraph 5 hereof, and subject to the contingencies contained herein, each of the Defendants and each of the other Released Persons shall be deemed to be released and forever discharged from all of the Settled Claims.
6. The Plaintiffs, Class Counsel and all members of the Class, either directly, individually, derivatively, representatively or in any other capacity, are permanently barred and enjoined from instigating, instituting, commencing, asserting, prosecuting, continuing or participating in any way in the maintenance of any of the Settled Claims in any court or tribunal of this or any other jurisdiction.
7. The attorneys for the Plaintiffs and the Class are awarded attorneys' fees and reimbursement of expenses in the aggregate amount of $ 650,000, which sum the Court finds to be fair and reasonable, to be paid in accordance with the provisions of the Stipulation.
8. Without affecting the finality of this Order and Final Judgment in any way, the Court reserves jurisdiction over all matters relating to the administration and consummation of the Settlement.