Archives: North Carolina Business Court

Business Court Approves Disclosure-Only Settlement, But Postpones Consideration of Attorneys’ Fees Request

View Mark Hiller’s Complete Bio at robinsonbradshaw.comThose who follow class action law probably will be familiar with In re Trulia (2016), the seminal decision of the Delaware Court of Chancery that put the brakes on disclosure-only settlements.  Before Trulia, these controversial settlements were ubiquitous in deal litigation, in which shareholders of a company file a class action lawsuit seeking to stop the company from engaging in a merger or acquisition on the ground the company failed to disclose sufficient information about the transaction.  Under a typical disclosure-only settlement, the company agrees to supplement its disclosures and pay the (often hefty) fees of class counsel.  In return, the company obtains a release from the shareholder class, and the deal can proceed.

That changed with Trulia.  The court lamented that disclosure-only settlements are often raw deals for shareholders, who release potentially valuable claims in exchange for no monetary compensation, but only additional disclosures that may be insignificant.  Compounding the problem is that, because both class counsel and the company are aligned in supporting the settlement, the court is on its own to determine whether the settlement is fair and reasonable to absent shareholders.  True, the Trulia court noted, courts face that task any time they evaluate a proposed class action settlement that has no objectors.  But the court said the task is especially difficult in deal litigation, because disclosure-only settlements are usually reached quickly, before there has been any significant discovery into the potential value of the shareholders’ soon-to-be-released claims.  The Trulia court drew a line in the sand, holding that Delaware law looks with “disfavor” on these settlements and would allow them only if the supplemental disclosures were “plainly material” and the shareholder releases were “narrowly circumscribed.”

Court watchers viewed Trulia as the death knell to deal litigation in Delaware and have wondered whether the plaintiffs’ bar would migrate to other jurisdictions that might be more hospitable.  That is why the Business Court’s recent approval of a disclosure-only settlement in the Krispy Kreme shareholder litigation provides a significant data point.  The litigation arose from a shareholder challenge to Krispy Kreme’s proposed acquisition by another company.  The settlement called for supplemental disclosures and payment of class counsel’s fees, in return for a shareholder release.

Chief Judge Gale analyzed Trulia and discussed the standard North Carolina law should apply to review the reasonableness of disclosure-only settlements.  Judge Gale said he is “fully in accord with Trulia’s enhanced scrutiny to determine whether the release is narrowly circumscribed.”  At the same time, however, he said that “[a]s the scope of the release narrows,” the “Court’s inquiry as to the materiality of supplemental disclosures and their adequacy to support the release tends to a more traditional settlement inquiry where the judgment of competent counsel is accorded significant weight.”  Here is how he summarized the test:

In sum, the Court must examine the materiality of any supplemental disclosures and find that they provide reasonable consideration for the class release. But where there is little or no opposition by class members, the Court is reluctant to set aside a fair arm’s length settlement negotiated between competent counsel if the disclosures are not plainly immaterial and the release is reasonable. The Court is less reluctant to exercise a more searching inquiry when deciding upon a fee request that does not depend on the validity of the settlement.

Judge Gale then applied this test and concluded that the release at issue was reasonable in view of Krispy Kreme’s supplemental disclosures. He focused mainly on the company’s disclosures about the discounted cash flow (DCF) analysis performed by its financial advisor. In a nutshell, the proxy statements had disclosed that the DCF estimate was based on certain projected free cash flows, but did not disclose the cash flows themselves. As it turned out, the cash flows described in the proxy statements differed somewhat from the cash flows the financial advisor used in its actual calculation. As Judge Gale noted, “[c]ounsel acknowledged that while the differences may be slight in any particular year, the differences over time have greater significance.” Judge Gale concluded from this that the company’s supplemental disclosures, which contained cash flow information not found in the proxy statements, were material and supported the shareholder release, which was “not significantly broader than the effect of the Shareholder Vote” approving the merger.

As to the question of attorneys’ fees, Judge Gale deferred ruling on that issue. One shareholder had filed an objection opposing the award of fees but not otherwise opposing the settlement. Judge Gale concluded that he could “uncouple” the fee request from the rest of the settlement because the settlement expressly said that its approval was not dependent on a fee award. This uncoupling would have the benefit of allowing the company to advocate on the fee question without fear of jeopardizing the settlement and release.1

Takeaway

Time will tell whether deal litigation and the accompanying disclosure-only settlements, which now are disfavored in Delaware, will find a home in North Carolina. Nominally, Judge Gale’s formulation of the standard for reviewing these settlements—which favors approval so long as the disclosures are not “plainly immaterial”—seems more deferential than Trulia’s—which requires the disclosures to be “plainly material” (my emphasis). But at least arguably, the Krispy Kreme disclosures might have satisfied the Trulia standard too. And, settlement approval was facilitated by the fact that Judge Gale was able to reserve decision on the request for fees; had he been forced to rule on the reasonableness of the fees and supplemental disclosures together, he may have shown greater skepticism of the settlement. Regardless, Judge Gale’s approval of the Krispy Kreme settlement shows that North Carolina law has, at minimum, not sworn off approval of disclosure-only settlements.

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1 Judge Gale noted that the Court of Chancery has approved of a “mootness dismissal” procedure that allows the court to evaluate the fee request independent of the substantive settlement. Under that procedure, the “selling company issues supplemental disclosures, the class representative dismisses the class action with a release that binds only the named plaintiff, and class counsel applies for a fee award based on efforts to secure the supplemental disclosures.” Judge Gale explained that North Carolina law “has not expressly adopted such a process or procedure,” and he found it unnecessary to decide whether to recognize the procedure in this case.

Can a Class Action Proceed when the Named Plaintiff’s Claim Becomes Moot? A Recent View from the North Carolina Business Court

View Mark Hiller’s Complete Bio at robinsonbradshaw.comIn this post we talk about two of our favorite things (relatively speaking): class actions and mootness.  We last looked at these issues when covering the U.S. Supreme Court’s decision in Campbell-Ewald Company v. Gomez, 136 S. Ct. 663 (2016).  There, the Court rejected the defendant’s attempt to “pick off” the named plaintiff in a class action case.  The defendant had made a Rule 68 offer to settle the case for the full value of the plaintiff’s claim.  The plaintiff declined, but the defendant argued that its offer nonetheless mooted the claim.  The Supreme Court rejected that argument, holding that an unaccepted Rule 68 offer does not moot a claim—at least if the defendant does not deposit the Rule 68 money with the court.

But what if the named plaintiff’s claim does become moot?  Can the case stay alive based on the claims of the class?  The Supreme Court has been wrestling with that question for decades, and the answer turns in large part on timing—when did the named plaintiff’s claim become moot?  If it became moot after the class was certified, then the class action is not rendered moot because, at that point, the class has acquired a legal status independent of the plaintiff’s.  See Sosna v. Iowa, 419 U.S. 393 (1975).  The same rule applies if the named plaintiff’s claim became moot after the trial court denied class certification.  If the denial is later reversed, the reversal will relate back to the time of the trial court’s erroneous certification decision.  See U.S. Parole Comm’n v. Geraghty, 445 U.S. 388 (1980).  In both of these situations, the named plaintiff had a live claim at the time the trial court ruled on certification.

That leaves open a third scenario: a named plaintiff whose claim becomes moot before the trial court makes any certification ruling.  What then?  Chief Judge Gale of the North Carolina Business Court faced this question in the recent case of Chambers v. Moses H. Cone Memorial Hospital.  To simplify the facts and procedural history, the plaintiff received emergency treatment at a hospital and then objected to the amount of the bill he received.  The plaintiff claimed that the hospital charged uninsured patients, like himself, more for emergency services than the hospital charged its insured patients.  He brought a class action complaint on behalf of himself and other uninsured patients who received emergency services at the hospital.  His initial complaint alleged common law claims and sought damages.  But he later amended the complaint to seek only a declaratory judgment that the hospital may collect only “reasonable payments” for its emergency services, rather than the “regular rates” the hospital charged in its form contract.

Judge Gale first held that the plaintiff’s declaratory judgment claim was moot because the hospital was not seeking to recover the unpaid amount of the plaintiff’s bill.  (The hospital had been seeking to do so earlier in the case, but the hospital dismissed its counterclaims with prejudice after the plaintiff dropped his damages claims.)

That left the more difficult question: Even though the plaintiff no longer had a live claim, could the case continue based on the claim of the putative class?  Judge Gale began by noting that the case did not come within the holdings of Sosna or Geraghty because the court had not ruled on certification at the time the plaintiff’s claim became moot.  (It appears the plaintiff had not yet filed a certification motion.)

Judge Gale then addressed whether the putative class claim could proceed based on an exception to the mootness doctrine for claims that are “so inherently transitory that the trial court will not have even enough time to rule on a motion for class certification before the proposed representative’s individual interest expires.”  Judge Gale explained that the classic example of an “inherently transitory” claim was one that inevitably becomes moot with the passage of time, such as a challenge to pretrial detention.  In those cases, dismissing a case as moot would mean that no plaintiff could challenge the defendant’s conduct, because any plaintiff’s individual claim would become moot before the case could be fully litigated.  Judge Gale said that the plaintiff’s claim—challenging the hospital’s emergency-services rates for uninsured patients—doesn’t fit into that passage-of-time category for “inherently transitory” claims.

But that left another possibility—one that circles us back to Campbell-Ewald: Can a claim be “inherently transitory” when the claim becomes moot, not because it is time-sensitive, but because the defendant has “picked off” the claim by offering to pay its full amount before the trial court makes a decision on certification?  Judge Gale noted that the Ninth Circuit has applied the “inherently transitory” exception in this scenario (as have several other federal circuit courts).  But ultimately, Judge Gale did not have to decide whether to follow this interpretation of the “inherently transitory” exception, because he concluded that there was no evidence showing that the hospital tried to pick off the plaintiff’s claim.  To the contrary, Judge Gale stated, the plaintiff’s claim became moot only when the plaintiff decided to dismiss his claims seeking damages.  Judge Gale agreed with the hospital that, had the plaintiff maintained those claims, then the hospital’s dismissal of its counterclaims “would not have mooted [plaintiff’s] declaratory claim.”

Conclusions

So, what to take away from all this?

First, class action law is complicated, especially when mootness is thrown into the mix.

Second, the law is pretty clear that a class action is not rendered moot when the named plaintiff has a live claim at the time the trial court decides whether to certify the class.

Third, the law is less clear whether the class action is rendered moot when the named plaintiff’s claim becomes moot before the trial court makes a certification decision.  In that scenario, the issues will likely focus on whether the case fits into exceptions to the mootness doctrine, such as the “inherently transitory” exception discussed above.

Fourth, there will likely be continued developments in the law as to whether a defendant’s effort to pick off a named plaintiff succeeds in mooting the plaintiff’s claim, and if so, whether that effort satisfies the “inherently transitory” exception such that a live case or controversy still exists.

We’ll keep you updated as the law develops.

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.)

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.

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.