City Trading Fund v. Nye: Approval of Settlement Denied When Terms of Disclosure-Only Settlement Made Company and Its Shareholders Net Losers.
In City Trading Fund v. Nye, 2018 BL 44689, (Sup. Ct. Feb. 08, 2018), the Supreme Court of New York denied City Trading Fund’s (“Shareholder”) motion, on behalf of themselves and other similarly situated stockholders, for final approval of their settlement with Martin Marietta Materials, Inc. (“Company”), the Company’s individually named directors, and Texas Industries, Inc. (“Texas Industries”), after the Shareholder alleged the Company breached its fiduciary duties to stockholders by making material misstatements and omissions in the proxy materials provided to stockholders in preparation for a vote on the Company’s proposed merger with Texas Industries.
Shareholder originally filed suit against the Company for a preliminary injunction to enjoin the merger in 2014. Before the hearing, Shareholder and the Company reached a “disclosure-only” settlement, which did not provide any monetary relief to stockholders, but provided for payment of Shareholder’s attorneys’ fees of $500,000. The court reviewed, and denied Shareholder’s motion for preliminary approval of the settlement, finding the supplemental disclosures were immaterial. On appeal, the New York Supreme Court Appellate Division (“Appellate Division”) held the lower court’s findings were premature and remanded the cases so a fairness hearing on the settlement could be conducted. Subsequently, the Appellate Division issued its decision in Gordon v. Verizon Communications, Inc., which provides the controlling standard in New York for evaluating disclosure-only settlements. 148 A.D.3d 146, (N.Y. App. Div., 2017).
Here, the additional information provided in the disclosure-only settlement, included: (1) discussions of Texas Industries’ forecasts and value assessment; (2) the publicly available consensus estimates the Company’s financial advisors used in their analyses; (3) the involvement of three banks in the merger that also owned shares in Texas Industries; and (4) the specific addition of the Company’s CEO, as one of the executives, who may receive additional compensation under the Company’s compensation programs for additional responsibilities in connection with the merger. As part of the fairness hearing, two other Company stockholders filed objections with the court to the final settlement because they believed these additional disclosures were not necessary or helpful.
Under Gordon, to grant final approval of a disclosure-only settlement, courts should consider the following factors: (1) the likelihood of success on the merits; (2) the extent or support from the parties; (3) the judgment of counsel; (4) the presence of bargaining in good faith; (5) the nature of the issues of law and fact; (6) whether the proposed settlement is in the best interests of the putative settlement class as a whole; and (7) whether the proposed settlement is in the best interests of the corporation. Gordon does not require a plaintiff to show the supplemental disclosures are material, just that they provide “some benefit” to stockholders. Looking to Delaware law, an omission is material if there is a substantial likelihood that a reasonable investor would consider the omitted fact important in deciding how to vote.
The court determined none of the Gordon factors weighed in favor of approval. First, on the merits, summary judgment would have been appropriate for the Company as the Shareholder failed to allege any material misstatements or omissions. Second, only one of the Company’s numerous stockholders, the Shareholder, supported the settlement. Third, the approach of Shareholder’s counsel was flawed and the present case was frivolous. Fourth, the supplemental disclosures were of little to no value as they did not alter the total information available to stockholders. Finally, the court held that settlement of the present baseless claim was bad for both stockholders and Company because it provided payment for attorneys’ fees in exchange for worthless disclosures, and it would prevent stockholders from pursuing future legitimate claims.
For the reasons above, the court determined the settlement did not benefit the Company, or its other stockholders, and denied final approval of the settlement.
The primary materials for this case are available on the DU Corporate Governance website.