Opinion
603126/06.
Decided September 17, 2008.
Plaintiff was represented by The Shapiro Firm, LLP, New York, NY, Robert J. Shapiro, Esq.
Defendants were represented by a number of firms. Nominal defendant Glenayre Technologies, Inc. was represented by Paul, Hastings, Janofsky Walker LLP, New York, NY, Barry G. Sher, Esq. The majority of the individually named defendants were represented by Fried, Frank, Harris, Shriver Jacobson LLP, One New York Plaza, New York, NY, Douglas H. Flaum, Esq. Individually named defendant Beverley W. Cox was represented by O'Shea Partners LLP, New York, NY, Sean F. O'Shea, Esq.
Plaintiff moves for Court approval of the proposed settlement of this shareholders' derivative action and of counsel's application for fees and reimbursements of expenses.
Background:
Plaintiff Vladimir Gusinsky is a shareholder of nominal defendant Glenayre Technologies, Inc. ("Glenayre" or "the company"). Glenayre is a Delaware corporation that distributes entertainment products, and provides network based messaging and communications systems. Its shares are publicly traded on the NASDAQ exchange.
Effective May 10, 2007, Glenayre changed its name to Entertainment Distribution Company, Inc. The company, however, remains referred to as Glenayre throughout to avoid any confusion.
Plaintiff brought this action against certain current and former members of Glenayre's Board of Directors.
The company had issued stock options to its officers and directors as a component of their compensation. The stock option plans at issue required that the options be issued at fair market value on the date they were granted.
The action was commenced on September 6, 2006, alleging that the individual defendants breached their fiduciary duties to Glenayre by misdating stock options and otherwise failing to properly account for these option grants. He asserted that option grants had been backdated, with hindsight used to select a grant date at which time the stock price was at a particularly low point. The exercise price for the option would be keyed to the stock's price on the open market on the date of issue. Thus, by backdating the issue date to one where the stock price was relatively low, the exercise price would also be low. If the shares then increased in value from this point, the options would be valuable. The lower the exercise price, the more valuable the options would be.
In early 2007, other Glenayre shareholders commenced actions in federal court based on the same facts. These actions were later consolidated (the "related action").
These were Stoll, Derivatively on Behalf of Nominal Defendant Glenayre Technologies, Inc. v Ardizzone, et al., No. 07-Civ-00608, and Neiswender, Derivatively on Behalf of Nominal Defendant Glenayre Technologies, Inc. v Ardizzone, et al., No. 07-Civ-00911. Both were filed in the U.S. District Court for the Southern District of New York.
The actions were consolidated under No. 07-Civ-00608.
On September 15, 2006, in response to the instant action, the Glenayre Board of Directors ("the Board") formed a special committee, comprised of two of its directors, to conduct a full review of the company's practices with regard to granting stock options. Thereafter, the committee retained the law firm of Jones Day, LLP and Deloitte Financial Advisory Services, LLP, as its financial advisor, to assist with its inquiry.
The committee produced documentation detailing its findings regarding the propriety of each grant date. After reviewing these documents, Plaintiff's counsel interviewed the committee's counsel.
Plaintiff's counsel agreed that, if there had been no backdating of option grants, and no officers or directors had otherwise engaged in willful misconduct, they would support the committee's conclusion that the individual defendants were not required to make financial reimbursement to the company.
The results of the investigation was a determination that the investigation did not reveal that the company's officers or directors had selectively backdated its option grants. Additionally, and interestingly, none of the options at issue were ever exercised. Pl Br at 8. However, it did find that, as a result of ineffective oversight and procedures regarding its stock option practice, the company would be required to restate its financial results.
Plaintiff's counsel contend that, after being convinced that monetary recovery was neither required nor appropriate, it focused its efforts on improving the company's internal controls and stock option granting procedures. In furtherance thereof, they sent a written proposal for corporate reforms to the committee on February 23, 2007.
On February 27, 2007, the committee issued its report and recommendations to the Board. It concluded that no one at the company had engaged in any wrongdoing, and it was not in the company's best interests to pursue any of the claims against the individual defendants. The report addressed the need for the company to change its policies regarding stock options, corporate governance reforms, and to restate its financial information. However, the committee also found that, for the majority of option grants, there were no administrative or accounting issues and that, where there were problems, they were minor administrative issues. Clark Aff, ¶ 2 (xiii) — (xiv). On March 6, 2007 the company released certain of the committee's findings in a Form 8-K filed with the Securities and Exchange Commission.
On January 30, 2008, the parties entered into the Stipulation of Compromise and Settlement ("the proposed settlement").
On April 30, 2008, the Court entered a Preliminary Approval and Scheduling Order, in accordance with which, the Notice of Pendency and Settlement of Derivative Actions and of Settlement Hearing was mailed to 7,862 Glenayre stockholders. Pl Br at 3. A Notice of Dismissal of Shareholder Derivative Litigations was published in the Financial Times on June 10, 2008. Both the mailed and published notices advised that a hearing concerning the proposed settlement would be held on July 2, 2008.
Discussion:
The law is clear that a shareholder derivative action "shall not be discontinued, compromised or settled without the approval of the court having jurisdiction of the action." Bus Corp Law § 626(d). If an action is successfully concluded on behalf of a corporation, "in whole or in part, or if anything was received by plaintiff . . . as the result of a judgment, compromise or settlement of an action or claim, the court may award to plaintiff . . . reasonable expenses, including reasonable attorney's fees . . ." Id. § 626(e). The Court, therefore, may award Plaintiff's counsel reasonable fees and expenses, if appropriate.
The Benefits of the Settlement:
Plaintiff's counsel contend that, through their efforts in litigating these claims, and through the settlement of the federal litigation, they have caused the company to adopt significant corporate reforms. Settlement Agmt, ¶ 3.1, Exhs C-D. They contend that these reforms will improve Glenayre's practices regarding equity compensation and internal controls over financial reporting.
They argue that settlement is the best resolution at this time. They note that none of Glenayre's top officers or directors actually received backdated options. As such, they argue, it would be very difficult to recover monetary damages for the company and its shareholders. Pl Br at 2. Thus, the proposed settlement eliminates the "very real risk of no recovery." Id..
Despite this, the plaintiffs in the state and federal litigation expressly "do not admit that any of their claims lack merit." Settlement Agmt, ¶ 2.19. Similarly, "Defendants do not admit and expressly deny all of Plaintiffs' claims" in the state and federal litigations. Id. at ¶ 2.17.
They further argue that the proposed settlement is in the company's best interest, as without the it, the company would be forced to expend significant additional resources defending the state and federal litigation. Id. The Court notes that the related federal action has already been dismissed. However, the plaintiffs in that action have filed a notice of appeal. Plaintiff's counsel in this action emphasizes that if the proposed settlement is approved by the Court, the parties in the federal action have agreed not to further pursue their appeal of the dismissal of that action. Rudy Aff, ¶ 20. Plaintiff's counsel also assert that, to their knowledge, there has not been a single objection to the proposed settlement or the proposed award of fees and expenses.
The Southern district dismissed the action, not long after it was consolidated, as barred by the statute of limitations. Rudy Aff, Exh 7, 10/9/07 Decision at 3.
The Court notes that in one letter, dated August 2, 2008, a shareholder expressed an intention to submit written objections by mail, due to an inability to attend the fairness hearing. No additional correspondence has been received from the shareholder.
Plaintiff's counsel argue that the proposed settlement was the result of more than a year of negotiations among experienced counsel. Indeed, they note that they currently serves as lead counsel "in dozens of stock option backdating derivative actions pending across the country." Pl Br at 9.
The settlement includes full releases on behalf of the class members in favor of the Defendants. Certainly, these included the claims raised in the state and federal litigations. They also include full releases of Defendants' counsel and counsel for the committee, as well as releases for plaintiffs' counsel in the state and federal litigation related to their bringing and prosecuting these actions. Settlement Agmt, ¶ 3.8.
Approval of Settlement:
In view of the facts related above, including specifically the investigation and conclusion of the Board's Special Committee, the settlement is approved as fair. It seems that there are no reasonable or legal causes of action against the director and officer defendants, and it would be to no one's advantage to continue this action.
Attorneys' Fees and Expenses:
Plaintiff's counsel seek an aggregate sum of $775,000 in fees and expenses in both the state and federal litigation, and would serve as receiving agent for themselves and the federal plaintiffs' counsel. They assert that this amount is "eminently fair and reasonable" and should be approved by the Court. Pl Br at 3. They further argue that it compares favorably with fees awarded in other recent derivative action cases. Id. at 22.
They further emphasize that, subject to the Court's approval, the company's insurers shall pay the fees and expenses for Plaintiff's counsel in both the state and federal litigation, thus not burdening the company with these expenses.
Certainly, attorneys' fees may be appropriately awarded for non-monitary benefits, if they are "substantial benefits." Seinfeld v Robinson, 246 AD 291, 294 (1st Dep't 1998). Here, however, there are insufficient benefits obtained for the corporation or its shareholders to warrant an award of attorneys fees.
The sole benefits obtained by the class appear to be some minor changes in corporate governance. In fact, the Board's Special Committee conducted an investigation the results of which were concurred in by class counsel. The Special Committee apparently reported that there had been no wrongdoing.
The ability for a class to bring an action as one body is beneficial and of great value. The attorneys' fees and expenses are set by the Court, and are often set by the Court taking into account the total class recovery, and not only the recovery of the named plaintiff. It is in the nature of such actions that counsel can not rely on receiving any specific fee, or even any fee. Where there is no benefit recovered by the class, no fee is warranted.
The fact that the Defendants supported the proposed settlement is only one factor to take into account in considering the application for fees. It does not change the basic conclusion that neither the company nor the Plaintiff class obtained benefits from the action. "It is no secret that in seeking court approval of their settlement proposal, plaintiffs' attorneys' and defendants' interest coalesce and mutual interest may result in mutual indulgence.'" Kaplan, et al. v Rand, et al., (applying New York law, quoting Bell Atl. Corp. v Bolger, 2 F3d 1304, 1310 (3d Cir 1993), and citing John C. Coffee, Jr., Understanding the Plaintiff's Attorney: The Implications of Economic Theory for Private Enforecement of Law Through Class and Derivative Action, 86 Colum L Rev 669, 714-720 (1986)). Although "as a general matter the courts do not monitor the contractual arrangements made by consenting adults or entities, courts do have a responsibility to monitor carefully fee agreements between plaintiff's counsel and defendants in class and derivative actions." Steiner v Williams, et al., 2001 US Dist LEXIS 7097, at *10 (SDNY May 31, 2001).
The plaintiff and plaintiff's counsel in a derivative action have an obligation to the corporation and all its other shareholders, one that is sometimes difficult to meet. "That was an evil against which [the requirement for court approval of settlements] was directed — — private settlements under which the plaintiff stockholder and his attorney got the sum paid in settlement, and the corporation got nothing — — although it was the corporation's claim that was being settled." Craftsman Fin. Mortgage Co. Inc. V Brown, et al., 64 F. Supp 168, 178 (SDNY 1945).
Plaintiff's counsel emphasizes that the fees and expenses would be paid by the company's insurance carrier. This, however, is of no moment. Either the benefits obtained for a company in a derivative action warrant an award of fees and expenses, or they do not. Additionally the Court is not unmindful of the fact that insurance payments are ultimately paid for by the premiums of the insured, and other insureds.
Notwithstanding the above, the Court would have allowed recovery by class counsel of the counsel's disbursements and expenses. However, they were not broken out separately from the amount sought for counsel fees. Therefore, the Court does not know the amount of counsel's disbursements.
The Court has considered the parties' remaining contentions and finds them to be without merit.
Accordingly, it is
ORDERED that the motion be granted with regard to approval of the proposed settlement, except as to attorneys' fees and expenses as to which it is denied; and it is further
ORDERED that the Clerk shall enter judgment accordingly.