Archives: North Carolina Business Court

Business Court Warns of Enhanced Scrutiny for Disclosure-Only Merger Settlements

View David Wright's Complete Bio at robinsonbradshaw.com We have previously commented about “disclosure only” settlements in class action merger cases, and the increasing scrutiny provided to them by courts here and in Delaware. Judge Bledsoe entered the fray yesterday, approving a settlement of litigation involving the merger of Yadkin Financial Corporation and NewBridge Bancorp in a 44-page order. In a stark preamble to his findings, Judge Bledsoe gave warning that the Business Court would likely be joining their brethren in Delaware in strictly reviewing such settlements in the future. The Court characterized such a shift as a “marked departure from [the Business Court’s] past practices in connection with the consideration of such motions,” and therefore “decline[d] to apply enhanced scrutiny to its consideration of the Motions” in the case before it.

But that reprieve is likely short-lived. In the next sentence, Judge Bledsoe “expressly advises the practicing bar that judges of the North Carolina Business Court, including the undersigned, may be prepared to apply enhanced scrutiny of the sort exercised in In re Trulia Stockholder Litigation, to the approval of disclosure-based settlements and attendant motions for attorneys’ fees hereafter.” We characterized this Delaware authority as “sound[ing] a trumpet of skepticism concerning ‘disclosure only’ settlements.”

The Settlement Agreement reviewed by the Business Court in the NewBridge Bancorp case provided that the Defendants would not object to a fee petition up to $300,000, and—to a penny—that’s what Plaintiffs’ counsel sought in the case. In this space, we have observed that the entry into a disclosure-only settlement “is a ‘kumbayah’ occasion for plaintiffs’ and defense counsel,” and Judge Bledsoe reiterates this point, albeit it in a less colloquial manner, agreeing with the Delaware courts that “the trial court’s assessment typically occurs, as it does here, without the benefit of an adversarial process.”

The Court, after reviewing applicable authority, cut the requested fee award from $300,000 to about $160,000. There were two principal reasons for the reduction. First, the Court concluded that “collectively, the Supplemental Disclosures were only of marginal benefit to the Class.” Indeed, the Court found no “substantial evidence that any of the Supplemental Disclosures were significant to a reasonable shareholder’s decision in voting on the Proposed Transaction.” Second, the Court observed that the average hourly rate charged by Plaintiffs’ counsel was “above the hourly rate customarily charged in North Carolina for similar services” and that “the demands of the Consolidated Action did not require Plaintiffs to retain counsel from outside North Carolina in order to prosecute” the case.

The Court, in contrast to Delaware decisions like Trulia, did not closely scrutinize the claims released by class members as part of the settlement. Judge Bledsoe, in two footnotes, indicated that future requests for approval of disclosure-based settlements will involve such consideration. He stated that the scope of the release needs to be an express factor in the Court’s analysis in future cases, but that the Court was “reluctant to set aside the settlement in light of the approval of prior similar settlements by the Business Court.” In this regard, Judge Bledsoe’s Newbridge Bancorp decision is similar to the Chancery Court’s ruling in In re Riverbed Technology, Inc. Stockholders Litigation, where Chancellor Glasscock explained that, “given the past practice of this Court in examining settlements of this type, the parties in good faith negotiated a remedy—additional disclosures—that has been consummated, with the reasonable expectation that the very broad, but hardly unprecedented, release negotiated in return would be approved by this Court.”

In Delaware, the Chancery Court—having apparently concluded that counsel and the parties were sufficiently on notice following its warning in Riverbed—refused to approve a settlement outright in Trulia, just four months later. Merger challenges in Delaware have significantly declined in the months since that decision.

The effect of Judge Bledsoe’s decision on merger litigation in North Carolina remains to be seen, but this admonition from the Business Court must be reckoned with by shareholders considering class filings in future North Carolina merger litigation.

(Adam Doerr and Tommy Holderness of our firm represented the members of the NewBridge Bancorp Board of Directors in this litigation.)

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Merger Litigation Continues in North Carolina

View Adam Doerr's Complete Bio at robinsonbradshaw.comLast month, we previewed the challenge to a settlement of litigation involving the Reynolds-Lorillard merger. The Business Court has helpfully made available the transcript of the hearing on approval of the settlement, which took place on February 12. At the hearing, the Court made clear that it was quite familiar with recent changes in merger litigation in Delaware, including the Trulia case, and stated that it was reviewing the settlement under “strict scrutiny,” not a “rubber stamp standard.” Notwithstanding a shareholder objection supported by Professor Sean Griffith, a Fordham professor who has been involved in the recent Delaware cases, the Court approved the settlement.

During the hearing, the Court also raised an interesting issue regarding the risk that plaintiffs’ counsel face in bringing merger cases in North Carolina. As we have previously discussed,  North Carolina does not recognize the common benefit doctrine, meaning that plaintiffs’ counsel in a class action can only receive attorneys’ fees by obtaining a monetary award for the class or entering into a settlement agreement. The Court indicated that this distinction from Delaware law might create a higher contingent risk in bringing such cases in North Carolina. The Court did not rely on this point because the negotiated fee in Reynolds was equivalent to an hourly rate of $325, well within the range the Court has previously approved, but it will be interesting to see whether the Business Court takes an approach similar to the Delaware Chancery Court, which appears inclined to award significant fees for meritorious claims while cutting down or eliminating fees for routine merger challenges.

Merger cases continue to be filed in North Carolina. Just last week, a shareholder sued PowerSecure, an electric and utility technology company incorporated in Delaware and headquartered in Wake Forest, over its proposed merger with Southern Company. See Michael Morris v. PowerSecure International Inc. et al. We will continue to keep you posted on new developments in this interesting and rapidly changing area.

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Disclosure-Only Settlements Face Scrutiny in Business Court

View David Wright's Complete Bio at robinsonbradshaw.comWhen two public companies announce an intention to merge, class litigation follows like the night the day. These complaints usually request some sort of preliminary injunctive relief which, if successful, can derail the merger. Rarely, however, do plaintiffs press for this relief. Instead, they opt to resolve the claims, which requires court approval under Rule 23. The resolution can involve the payment of money to shareholders, but many times it does not and instead takes the form of “programmatic relief,” consisting principally of additional disclosures to the class members regarding information related to the merger. Accompanying that resolution, inevitably, is a request for attorney’s fees on behalf of plaintiffs’ counsel and – on the defendants’ side – a release of claims.

The entry into such a settlement frequently is a “kumbayah” occasion for plaintiffs’ and defense counsel: the plaintiffs’ counsel gets a pay day and defense counsel is able to validate the merger and obtain a release against future claims. That’s not to say that such settlements are necessarily collusive: disclosure of material information is the life-blood of the securities laws and can represent real value to shareholders. But it can be hard to distinguish sometimes between information that is truly valuable and minutiae that is simply redundant. A recent case from Delaware’s Chancery Court,  involving the Trulia and Zillow merger, sounds a trumpet of skepticism concerning “disclosure only” settlements.

By design, one person sits betwixt and between these opposing forces: the trial judge. Judge Gale will soon confront this issue at a hearing in the Business Court. James Snyder, the former General Counsel for Family Dollar, submitted an objection to a proposed disclosure-only settlement in the Reynolds-Lorillard merger litigation. Citing the Trulia decision, Snyder asks the Court to eliminate or reduce the fee award proposed by Plaintiffs and not to approve the form of the release. A law professor at Fordham Law School, Sean J. Griffith – who has actively opposed many of these settlements — has supported Snyder’s objection with his own affidavit.

Judge Gale declined Snyder’s request to postpone the fairness hearing, so we should get the benefits of his views on the subject soon. He recently touched on the subject, noting that “the value of such disclosure-only settlements . . . has generated substantial debate.” Stay tuned.

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NC Court of Appeals Approves Payments of Attorneys’ Fees in Class Action Settlements

View Mark Hiller’s Complete Bio at RBH.comCan a class action settlement agreement contain a fee-shifting provision that provides for a payment of attorneys’ fees? In a question of first impression, the North Carolina Court of Appeals said yes, subject to a trial court’s approval of the settlement at a fairness hearing.

In the long-running Ehrenhaus v. Baker case, the Plaintiff brought a class action challenging the merger of Wells Fargo and Wachovia. The parties ultimately entered into a settlement agreement that also provided for a payment of attorneys’ fees to Plaintiff’s counsel. The trial court approved the settlement, but two shareholders objected.

In Ehrenhaus I, the Court of Appeals affirmed the approval of the settlement but remanded the case for additional findings regarding the attorneys’ fees. The Court’s remand implicitly indicated that a defendant could agree to pay fees to plaintiffs’ counsel in settling a class action, subject to court approval. But some of the language in Ehrenhaus I had raised questions about the trial court’s authority regarding fees and how the American Rule—which generally requires litigants to bear their own expenses—applies (or does not apply) in class actions. On remand, after receiving additional evidence, the trial court issued an order approving the payment of attorneys’ fees to plaintiffs’ counsel, and the two objecting shareholders appealed again.

This Tuesday, in Ehrenhaus II, the Court of Appeals rejected this challenge to the trial court’s decision on fees. The Court began by laying out the law related to fee-shifting. Under the “American Rule,” the Court explained, “a successful litigant may not recover attorneys’ fees . . . unless such a recovery is expressly authorized by statute,” and here it was not. The Court then identified two exceptions to the American Rule in the class action context, but concluded that neither applied. First, under the “common fund doctrine,” a “litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorneys’ fee from the fund as a whole.” The Court said that this doctrine did not apply here because Plaintiff’s lawsuit did not result in the establishment of a common fund. Second, under the “common benefit” doctrine, even if no common fund is created, “an award of attorneys’ fees to a litigant’s counsel is permissible when that litigant confers a common monetary benefit upon an ascertainable stockholder class in a shareholder action.” North Carolina, however, has declined to adopt the common fund doctrine.

Although neither the common fund nor common benefit exceptions to the American Rule applied, the Court of Appeals held that the award of attorneys’ fees was permissible. That is because, the Court held, “the award of attorneys’ fees in this case did not trigger the operation of the American Rule” because the fee award “was provided for in a voluntary settlement between the parties.” The Court explained that “our caselaw expressly recognizes the enforceability of settlement agreements providing for the payment of one party’s attorneys’ fees by the other party to the lawsuit.” That rule furthers the “well-established policy of encouraging the settlement of disputes between litigants and is therefore permissible despite a lack of explicit statutory authorization for such an award.”

The Court acknowledged that this was the first time the Court has addressed whether this rule applies in the class action context, which presents “unique” concerns because not all class members will participate in negotiating the settlement or be before the court. Hence, the Court noted, “the settlement of class actions—unlike settlements in ordinary civil actions—must be judicially approved” pursuant to North Carolina Rule of Civil Procedure 23(c), which requires the court to hold a hearing to determine whether the proposed settlement is fair, reasonable, and adequate. But the Court found no “persuasive argument as to why a trial court’s ability to evaluate the fairness and reasonableness of a class action settlement does not include the concomitant ability to determine whether a provision in such a settlement authorizing the payment of attorneys’ fees is likewise fair and reasonable.”

Accordingly, the Court held that “the parties to a class action may agree to a fee-shifting provision in a negotiated settlement that is—like all other aspects of the settlement—subject to the trial court’s approval in a fairness hearing. During the fairness hearing, the trial court must carefully assess the award of attorneys’ fees to ensure that it is fair and reasonable.”

The Ehrenhaus II decision also addresses an important appellate procedure question regarding Business Court appeals. For more on this issue, see Ehrenhaus Is Here To Stay from the N.C. Appellate Practice Blog.

(Robert Fuller and Adam Doerr of our firm represented the Defendants in this litigation.)

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Trends in Shareholder Class Actions Challenging Corporate Mergers

View Adam Doerr's Complete Bio at RBH.com In two recent studies of shareholder class actions over corporate mergers, the authors reached conclusions consistent with our experience with such cases in North Carolina: that nearly every acquisition of a public company results in shareholder litigation. The Cornerstone Research report found that 93% of public company acquisitions were challenged. Takeover Litigation in 2014, a separate study by Matthew Cain of the SEC and Steven Solomon of UC Berkeley, found that 94.9 of deals were challenged. (The two studies used slightly different cutoffs for their samples.)

Both reports found that the number of cases filed in multiple jurisdictions is on the decline, and they speculate that this may result from an increase in companies with forum selection clauses in their bylaws. Both reports also found that the average number of suits challenging each transaction had declined slightly, from over 5 to 4.3 (Cain & Solomon) or 4.5 (Cornerstone).

The vast majority of these shareholder class actions, over eighty percent, settled for additional disclosures of information to shareholders. Most of the remaining cases were resolved for changes to deal protection provisions or reductions in termination fees. Few cases involved monetary payments to shareholders.

The reports do not provide information on specific states apart from Delaware. Although our experience in North Carolina is generally consistent with these findings, North Carolina law differs from Delaware law in important respects, and our sample size is not large enough to confirm national trends.

(Robinson Bradshaw has represented companies, boards of directors, and private equity purchasers in numerous shareholder class actions challenging corporate mergers, including the defense of suits against the Duke Energy/Progress Energy merger, the Wells Fargo/Wachovia merger, and multiple going private transactions between public companies and private equity firms.)

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