Opinion
X08FSTCV156025536S
04-10-2017
Shiva Y. Stein v. UIL Holdings Corp. et al
UNPUBLISHED OPINION
MEMORANDUM OF DECISION RE PLAINTIFF'S MOTION FOR FINAL APPROVAL OF PROPOSED SETTLEMENT AND NEGOTIATED ATTORNEYS FEES AND EXPENSES (#118)
Robert L. Genuario, J.
INTRODUCTION
This unopposed motion seeks the certification of a non opt out class consisting of all former stockholders of the UIL Holdings Corporation (UIL), final approval of the parties' proposed settlement and an award of attorneys fees to plaintiffs' counsel.
Though the motion is unopposed, because settlement consists of certification of the class and the settlement would bind all class members, the court may only approve the settlement if it finds " that the settlement, withdrawal or compromise is fair reasonable and adequate." Connecticut Practice Book Section 9-9(c)(1)(C).
BACKGROUND
UIL is a publically held corporation organized and existing under the laws of the State of Connecticut which provides for the transmission and delivery of electricity and other energy-related services for Connecticut's Greater New Haven and Bridgeport areas. UIL also owns two natural gas distribution companies that serve Connecticut as well as one that serves western Massachusetts. On February 25, 2015 UIL and Iberdrola USA, Inc. (Iberdrola) announced that the companies had entered into a merger agreement pursuant to which the holders of UIL common stock would receive $10.50 plus one share of common stock of a newly listed company (the merger sub) for each share of UIL common stock they owned. At the conclusion of the merger process UIL stockholders would own 18.5% of the combined company and Iberdrola stockholders would own 81.5%.
This action, begun as a putative class action two days after the announcement, was instituted by writ summons and complaint dated February 27, 2015 originally alleging two counts. The first count sounded in breach of fiduciary duties against the directors of UIL and the second count, brought against Iberdrola as well as the merger sub, alleged aiding and abetting the breach of fiduciary duties. Within a short period of time four other putative class actions were initiated alleging various breaches of duties arising out of the proposed merger. By September 11th the five actions had been consolidated and the plaintiffs had moved for an order designating a leadership structure. The leadership structure was approved by the court on September 24, 2015. On October 2, 2015 the plaintiffs filed an amended complaint which included a count for aiding and abetting breaches of fiduciary duty against Morgan Stanley & Co., LLC (Morgan Stanley), UIL's financial advisor with regard to the merger. That count had previously been included in one of the four consolidated actions. The amended complaint included allegations that the proposed transaction is the product of an " utterly flawed sales process" which resulted in inadequate consideration flowing to the UIL stockholders, that various defendant board members of UIL had significant conflicts of interest which resulted in multiple reckless and knowing breaches of fiduciary and other duties which they owed the stockholders, that Morgan Stanley had a conflict of interest as a result of work it had done and anticipated continuing to do for Iberdrola, that the merger agreement itself was improperly structured insuring that there would be no competing offers for UIL stock and that the Form S-4 Registration Statement filed by UIL failed to provide stockholders with material information necessary for them to make an informed decision on whether to vote in favor of or against the proposed merger and specifically that the S-4 omitted important details concerning the financial analysis undertaken by UIL financial advisor Morgan Stanley in support of its fairness opinion.
On November 12, 2013 UIL filed its definitive proxy statement with the United States Securities and Exchange Commission (SEC).
On November 25, 2015 the parties entered into Memorandum of Understanding (MOU) which set forth a proposed settlement agreement that included a requirement that UIL make additional disclosures by way of a further SEC filing, that those additional disclosures were the result of negotiations with plaintiffs' counsel and that plaintiffs' counsel's efforts were a substantial cause in procuring those additional disclosures. The MOU provided for a " confirmatory discovery" process to be engaged in by plaintiffs' counsel, subsequent to which (presumably if the confirmatory discovery went as anticipated) the plaintiffs, after certification of the class, would provide a broad general release that would bind all of the proposed class members and run in favor of the defendants and " released parties" as defined.
On November 30, 2015 UIL filed a form 8-K with the SEC which included the supplemental disclosures anticipated in the November 25, 2015 MOU. On December 11, 2015 the UIL stockholders approved the proposed merger by a vote of ninety-seven percent of the shares voting. Shortly thereafter, in December 2015, the merger was completed.
In August 2016 the plaintiff filed an unopposed motion for preliminary approval of a settlement which the court granted. Notice was provided to the putative class members and on January 13, 2017 the plaintiffs filed this motion for final approval of proposed settlement, negotiated attorneys fees and expenses. The court held a hearing on January 30, 2017. At the hearing no former UIL stockholders appeared to object and no objections to the proposed settlement have been filed or otherwise made. The defendants themselves do not object to the proposed settlement and, acting through their counsel, have signed the stipulation and agreement of compromise.
Notwithstanding the fact that there is no objection to the settlement the court must make an independent determination as to whether or not the proposed settlement is " fair, reasonable and adequate."
III. DISCUSSION
The proposed settlement that the court is being asked to approve consists of the following. In consideration for additional disclosures made by UIL to its shareholders prior to the time of the shareholders vote approving the plan of merger, the defendants will obtain for themselves a broad general release of virtually all claims the UIL former stockholders may have had against them or the " released parties." Additionally, as a part of this settlement the defendants agree not to object to the plaintiffs' counsel's request for attorneys fees so long as that request did not exceed $425,000. In order to determine whether the settlement is fair, reasonable and adequate the court must consider the nature of the additional disclosures obtained and whether or not they are sufficient under Connecticut law to provide consideration for the release of claims which the defendants and others would obtain as a part of the settlement. In applying the applicable standard under Connecticut law it is the court's job to determine whether or not the settlement, with due regard to what the shareholders have received as compared to what they are giving up, is fair, reasonable and adequate.
In recent years these types of " disclosure settlements" ending shareholder litigation have come under increasing scrutiny by Delaware courts, courts throughout the nation and various commentators. See e.g. In re Trulia, Inc., 129 A.3d 884 (2016); In re Walgreen Co. Stockholder Litigation, 832 F.3d 718 (7th Cir. 2016); see generally Fisch, Griffith and Soloman, Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and Proposal for Reform, 93 Tex.L.Rev. 557 (2015). The term " disclosure settlement" is generally used to refer to settlements in which the primary, if not sole, benefit to stockholders is the provision of additional disclosures as a supplement to previously filed proxy statements in exchange for a release of claims.
The Trulia court set forth in significant detail the basis of the concerns including the explosion of so called deal litigation and disclosure settlements of marginal value providing the basis for broad general releases to the defendants and six figure fees to plaintiffs' counsel in the process. The Trulia court express concern that settlements that are based upon supplemental disclosures " rarely yield genuine benefit for stockholders" but result in a " risk of stockholders losing potentially valuable claims that have not been investigated with rigor." Trulia at 896. The Trulia court and others that have considered the value of the disclosure settlements have stopped well short of suggesting the disclosure settlements should not be approved by the court but focused rather on the " give" and the " get" of the proposed settlement in the particular case. See e.g. Crawford v. Equifax Payment Services, Inc., 201 F.3d 877 (7th Cir. 2000); Robert F. Booth Trust v. Crowley, 687 F.3d 314 (7th Cir 2012).
Of course this case requires the court to apply Connecticut law rather than Delaware law; moreover, the court observes that the original MOU reached between plaintiffs and the defendants was agreed upon prior to the release of the Trulia decision. Nonetheless it has long been the law of Connecticut that the settlement of class action litigation must be approved by the court and may only be approved upon a finding that the settlement is fair reasonable and adequate. See e.g. Gray v. Foundation Health Systems, Inc., 2004 WL 945137 (2004, Alander, J.); Connecticut Practice Book Section 9-9(c)(1)(C).
In determining what is fair reasonable and adequate this court is persuaded by the logic contained in Trulia and Walgreen Co. that disclosure settlements must be scrutinized carefully.
To be more specific, practitioners should expect that disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission, and the subject matter of the proposed release is narrowly circumscribed to encompass nothing more than disclosure claims and fiduciary duty claims concerning the sales process, if the record shows that such claims have been investigated sufficiently.Trulia at 898-99 (Emphasis added.); see also Walgreen Co. at 725.
In the case at bar the court observes that the supplemental disclosures obtained by the plaintiffs consists primarily of additional detail and supporting evidence used by UIL's financial consultant, Morgan Stanley, in providing its opinion to UIL concerning the fairness of the merger. The court need not determine in this setting whether such disclosures are sufficient consideration to support the issuance of a narrowly drawn release (see Bushansky v. The Phoenix Companies, judicial district of Stamford/Norwalk, docket #CV-156027891, February 23, 2017) because the parties have proposed as a part of the settlement that the plaintiffs provide a remarkably broad general release which contrary to the dictates and sound reasoning of Trulia and Walgreen Co. cannot be considered a release which is " narrowly circumscribed to encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process . . ." While it is Connecticut law and not Delaware law that must control this court's determination as to what is fair reasonable and adequate, the parties have not cited any Connecticut appellate cases which discuss what is fair reasonable and adequate within the context of this type of stockholder litigation in which the primary benefit to the stockholders are additional disclosures before the vote on a proposed merger. This court, however, does not believe that Connecticut would or should embrace a lesser standard than that suggested by the Delaware courts and the federal courts which have recently considered these types of settlements.
The proposed settlement provides a release for the " released parties" which includes a defined group significantly broader than the named defendants including " any person or entity which is or was related to or affiliated with any or all of the foregoing or which any or all of them has or had a controlling interests . . ." More importantly, the released claims include in the broadest terms any claim
of any kind nature or description whatsoever, whether known or unknown, disclosed or undisclosed, accrued or unaccrued, apparent or not apparent, foreseen or unforeseen, matured or not matured, suspected or unsuspected, liquidated or not liquidated, fixed or contingent, including unknown claims that the plaintiffs or any other members of the class ever had now have or may have whether direct, derivative individual class, representative, legal, equitable or of any type or in any other capacity against any of the released parties . . . which now or hereafter are based upon, arise out of relating anyway to, or involve, directly or indirectly, any of the actions, transactions occurrences, statements representations, misrepresentations, omissions, allegations, facts practices, events, claims or any other matters things or causes whatsoever or any series thereof, that were, could have been, or in the future can or might be alleged asserted set forth, claimed, embraced, involved, or referred to in, or related to, directly or indirectly, the consolidated action of the subject matters of the complaints . . .
The court determines that the breath of the release is such that it is not narrowly circumscribed to encompass nothing more than the disclosure claims and fiduciary duty claim concerning the sales process but rather includes virtually any claim that any former shareholder might have regarding any breach of any duty that any of the released parties might have committed. Even if the court were to determine that the disclosures made were material they are certainly not sufficient to support the broad general release proposed as a part of the settlement of this case.
The court observes that it was the then proposed merger and the participation of the defendants in that merger process that were the primary allegations in the complaint. It was the sales process and the merger that was the subject of the plaintiffs' counsel's preliminary discovery and the subject of the plaintiffs' counsel's confirmatory discovery. There is nothing in the record which convinces the court that plaintiffs' counsel has investigated potential breaches of duty of such a broad nature, nor could they realistically have diligently performed such investigation.
Thus, the court is being asked to approve a release that would bind the entire non opt out class, including virtually all prior shareholders of UIL, for any claims that might arise out of breaches of duty that not only are unknown at this time but were not a significant part of the preliminary and confirmatory discovery process and therefore could not have been diligently investigated.
In this regard the settlement provides the defendants with too much by way of a release and the plaintiffs with too little by way of additional disclosure.
The court does not suggest that there actually arc meritorious claims that could be brought by any of the plaintiffs, or former stockholders of UIL, against any of the released parties. The record is simply insufficient to so conclude one way or the other.
The discovery engaged in by plaintiffs' counsel was limited to the obtaining of significant nonpublic documents and two depositions; one of a director intimately involved in the merger and one of a representative of Morgan Stanley with regard to the merger. Such discovery may have been adequate to determine whether or not the supplemental disclosures, if material, were sufficient to support a narrowly drawn release limited to claims arising out of the alleged inadequacy of disclosures or breaches of fiduciary duty concerning the sales process; but such discovery could not reasonably address the likelihood of meritorious claims that would be included within the protections afforded to the defendants and " released parties" by the proposed broadly drafted general release.
The court determines that the broad general release suggested as a part of the settlement which goes well beyond the allegations of the complaint and beyond the confirmatory discovery is not adequately supported by the additional disclosures that were made.
Accordingly, for all these reasons the plaintiffs' motion for final approval of proposed settlement and negotiated attorneys fees and expenses is denied.