Butler v. Wilkus et al
Filing
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MEMORANDUM OPINION. Signed by Judge Peter J. Messitte on 6/26/2013. Associated Cases: 8:11-cv-02424-PJM, 8:11-cv-02428-PJM, 8:11-cv-02459-PJM(rss, Deputy Clerk)
THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
IN RE AMERICAN CAPITAL
SHAREHOLDER DERIVATIVE
LITIGATION
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Civ. No. 11-2424 PJM (Lead Case)
Civ. No. 11-2428 PJM/AW
Civ. No. 11-2459 PJM
Civ. No. 11-2459 RWT
MEMORANDUM OPINION
The parties in this consolidated shareholder derivative litigation involving American
Capital, Ltd., (“American Capital”) have submitted to the Court a Notice and Motion for
Preliminary Approval of Derivative Settlement (Paper No. 38).
The Court previously
GRANTED the Motion, and preliminarily approved the Proposed Settlement Agreement (Paper
No. 45). This Opinion elaborates upon the reasons for the Court’s approval.
I.
Maria Saenz Briones and Louis Britt sued the Board of Directors of American Capital for
breach of fiduciary duty and unjust enrichment.
The Consolidated Verified Shareholder
Derivative Complaint accuses the Board of “affirmatively, expressly, and repeatedly”
misrepresenting American Capital’s ability to pay dividends, which Plaintiffs claim was the
“raison d’etre” for the company’s existence. As the Board continued to assure investors of
American Capital’s ability to pay its dividends, the company’s share price rose, which Plaintiffs
claim triggered multiple rounds of stock sales by various members of the Board. American
Capital, it turned out, could not pay some of its dividends; and when the truth came out, the share
price plummeted, causing substantial losses to the company and its shareholders.
Certain
members of the Board, however, had already made substantial sums of money by cashing in on
American Capital’s artificially inflated price. More importantly, the Complaint alleged that at
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least some members of the Board knew or should have known about American Capital’s inability
to pay its dividends.
Although Defendants filed a motion to dismiss to the Complaint, a tentative settlement
agreement was reached prior to the filing of Plaintiffs’ response. The parties represent that they
have engaged in confirmatory discovery and significant arbitration regarding the size of the
plaintiffs’ fee award.
The instant shareholder derivative litigation is related to a class action direct lawsuit
initiated by eligible shareholders against members of the Board; that suit ultimately settled in
2012 for $18 million.
II.
Factual Background
What follows are the key components of the Proposed Settlement Agreement:
Defendants receive a total release as to all claims that could have been brought against
Defendants arising out of the same events;
Plaintiffs’ counsel will be awarded $710,000 in attorneys’ fees by Defendants’ insurers;
Each of the named Plaintiffs will receive an award of $1,000;
Defendants admit no fault;
“Should the Board of Directors fail to be comprised of a majority of independent
directors, as such term is defined at the time by the rules of the NASDAQ stock
exchange,” American Capital will establish a Dividend Committee, which has the
following characteristics, among others:
o Its purpose is to “provide guidance to the Board with regard to the orderly
declaration of any then-ongoing dividends of the Company’s securities”;
o It has the authority to make recommendations to the Board regarding the payment
of dividends, modification to American Capital’s current dividend policy, and the
timing of public disclosures involving changes to the dividend policy;
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o If there is a change in control of American Capital, the new Board may exercise
its discretion and terminate the Dividend Committee; and
o In any event, the Dividend Committee may not exist longer than five years.
Non-employee directors must, within three years of joining the Board, own American
Capital common stock equal to the value of “the lesser of two times the annual cash
Board retainer . . . or 5,000 shares”; and
American Capital must provide annual training to its directors “in current best practices
in corporate governance for publicly-traded corporations, with an emphasis on issues
relevant to [American Capital’s] industry.”
The parties will publish a Notice of the Proposed Settlement in Investor’s Business Daily.
The Notice advises eligible shareholders of the existence of the case, the date of the
settlement/fairness hearing, and specifies when and how any shareholder may object to the
Proposed Settlement Agreement.
III.
Procedural Background
Having received the parties’ written submission, the Court determined to hold a hearing
at which it could question both parties’ counsel about the specifics of the Proposed Settlement
Agreement. At the hearing, which was held on 28 March 2013, the Court ordered the parties to
file a written supplement to the Proposed Settlement Agreement, setting forth: (1) information
about the expertise and qualifications of counsel; (2) clarification regarding the Proposed
Settlement Agreement’s changes to American Capital’s corporate governance structure; (3) a
definition of what constitutes an “independent” director for purposes of creation of the Dividend
Committee; (4) revision of the Notice so that shareholders can more easily determine the terms
of the Proposed Settlement Agreement and the relationship between the shareholder derivative
action and the direct action; and (5) a transcript of the Court’s hearing that shareholders will be
able to access and view.
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The parties have submitted the requested information in their Joint Submission on Behalf
of All Parties in Further Support of Motion for Preliminary Approval of Settlement (Paper No.
43). The Court has reviewed the parties’ supplement and is satisfied that the parties have
addressed its concerns.
IV.
“Review of a proposed class action settlement generally involves two hearings.” Manual
for Complex Litigation (Fourth) § 21.632 (2004) (footnote omitted). The first is a “preliminary
fairness” hearing, where the court makes “a preliminary determination on the fairness,
reasonableness, and adequacy of the settlement terms” and “direct[s] the preparation of notice of
the certification, proposed settlement, and date of the final fairness hearing.” Id. The second is
the “fairness” hearing, where the court assesses whether the proposed settlement is “fair,
reasonable, and adequate” for all class members. Id. § 21.634. In the present case, the Court is
concerned with the first hearing.
Although the court’s “essential inquiry” for both hearings is the same, i.e., “whether the
proposed settlement is fair, adequate, and reasonable,” In re Mid-Atlantic Toyota Antitrust
Litigation, 564 F. Supp. 1379 (D. Md. 1983), the court’s goal at the preliminary fairness hearing
is to assess whether there is “‘probable cause’ to submit the proposal to members of the class and
to hold a full-scale hearing on its fairness.” Id. (quoting Manual for Complex Litigation § 1.46
(5th ed. 1982)). Put differently, the court’s inquiry is whether there has been a basic showing
that the Proposed Settlement Agreement “is sufficiently within the range of reasonableness so
that notice . . . should be given.” In re Lupron Marketing and Sales Practices Litigation, 345 F.
Supp. 2d 135, 139 (D. Mass. 2004).
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The preliminary fairness review considers (1) the “fairness” of the settlement, and (2) the
“adequacy” of the settlement. See In re Mid-Atlantic Toyota Antitrust Litigation, 564 F. Supp. at
1385.
The “fairness” prong is concerned with the procedural propriety of the proposed
settlement agreement, while the “adequacy” prong focuses on the agreement’s substantive
propriety.
With regard to the “fairness” element, the purpose of the inquiry is to protect against the
danger of counsel – who are commonly repeat players in larger-scale litigation – from
“compromising a suit for an inadequate amount for the sake of insuring a fee.” Id. at 1383
(quoting In re Montgomery County Real Estate Antitrust Litigation, 83 F.R.D. 305, 315 (D. Md.
1979)). The court thus considers the following factors: whether the proposed settlement is the
product of good faith bargaining at arm’s length; the posture of the case at settlement; the extent
and sufficiency of discovery conducted; counsel’s experience with similar litigation and their
relevant qualifications; and any pertinent circumstances surrounding the negotiations. See id. at
1383–85 (internal citations and quotations omitted); In re Lupron Marketing and Sales
Litigation, 345 F. Supp. 2d at 137.
As to the “adequacy” prong, the court “weigh[s] the likelihood of the plaintiff’s recovery
on the merits against the amount offered in settlement.” In re Mid-Atlantic Toyota Antitrust
Litigation, 564 F. Supp. at 1384 (quoting In re Montgomery County Real Estate Antitrust
Litigation, 83 F.R.D. at 315–16). Although the court endeavors not to try the case on its own, it
remains tasked with carefully assessing the facts and applicable law to ensure that the settlement
is proportionate to the strength (and weakness) of the plaintiff’s case. Id. The court considers
the following factors: “the relative strength of the plaintiffs’ case on the merits,” id. (quoting In
re Montgomery County Real Estate Antitrust Litigation, 83 F.R.D. at 315–16); weaknesses in the
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plaintiffs’ case, including proof-related obstacles or particularly strong defenses; the cost of
additional litigation; defendants’ ability to pay a judgment; and any opposition to the settlement.
See id.; In re Lupron Marketing and Sales Litigation, 345 F. Supp. 2d at 137–38.
V.
With the foregoing principles in mind, the Court preliminarily approves the Proposed
Settlement Agreement for the following reasons.
First, the Court at this stage is satisfied with the fairness of the Proposed Settlement
Agreement. Most significantly, this derivative action is collateral to what was a more rigorously
litigated direct action that resulted in an $18 million settlement for eligible shareholders; thus,
although there was limited litigation in the present derivative action, much of the discovery and
bargaining occurred in the direct action.
The Court is also satisfied with Plaintiffs’ counsel. They are affiliated with well-regarded
law firms with strong experience in corporate and shareholder litigation. The negotiations
appear to have been appropriately adverse and at arm’s length: for example, one of the key deal
points – plaintiffs’ attorneys’ fees – was litigated before a private arbitrator, a former federal
district judge, who arrived at the fee proposed in the Settlement Agreement. Taken together,
these factors indicate that the Proposed Settlement Agreement is not the product of procedural
impropriety.
The Court is also preliminarily satisfied with the adequacy of the Proposed Settlement
Agreement.
Because there was no additional discovery submitted to the Court, the only
information the Court has to assess the relative merits of Plaintiffs’ case and the value of
continued litigation is the 60-page Consolidated Verified Shareholder Derivative Complaint and
Defendants’ Motion to Dismiss. The Court’s review of the Complaint and the Motion to Dismiss
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leads to the conclusion that, while Plaintiffs’ case appeared strong, it faced a serious hurdle
because Plaintiffs apparently failed to make a demand to the Board prior to filing suit or
demonstrate demand futility consistent with Rule 23.1 of the Federal Rules of Civil Procedure.1
Moreover, reliance on Defendants’ representations regarding American Capital’s dividend policy
ultimately may not have been actionable because the representations may simply have been
nothing more than projections. The Court concludes that the Proposed Settlement Agreement
tracks an adequate middle path that balances the strengths and weaknesses of Plaintiffs’ case,
prevents further costly litigation on ambiguous legal issues, and protects shareholders from
future similar conduct.
Plaintiffs’ counsel maintain that they have not pursued a monetary settlement in this
action because any such monies would come from the company’s coffers (and effectively the
shareholders’ pockets), not from the Board members accused of wrongdoing. Accordingly, the
settlement’s primary contribution to shareholders is the creation of a Dividend Committee tasked
with reviewing American Capital’s dividend policy and its policy on publicizing information
about its dividend policy. Although arguably Plaintiffs’ counsel might have been able to secure
terms with somewhat more bite, the Court, at this point, is satisfied that the Dividend Committee
is at least within the range of what can be deemed reasonable and adequate. See In re MidAtlantic Toyota Antitrust Litigation, 564 F. Supp. at 1385.
The settlement does provide
additional information and oversight of American Capital’s dividend practices, which is a topical
response to the allegations in the Complaint.
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Rule 23.1(b)(3) requires that the complaint state with particularity “any effort by the plaintiff to obtain the desired
action from the directors or comparable authority and, if necessary, from the shareholders or members” and “the
reasons for not obtaining the action or not making the effort.” The pleading standard “for excusing demand is
defined in a federal derivative action by the law of the State of incorporation,” Weinberg v. Gold, 838 F. Supp. 2d,
355, 357 (D. Md. 2012), which, in this case, is Delaware. Plaintiffs were, therefore, required to have plead with
sufficient particularity facts that (1) the directors were disinterested and independent, or (2) that the challenged
transaction was not the product of a valid exercise of business judgment. Brehm v. Eisner, 746 A.2d 244, 253 (Del.
2000) (quoting Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984)).
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Because the Court finds the Proposed Settlement Agreement to be within the range of
reasonableness and appears to be adequate, the Motion for Preliminary Approval of Derivative
Settlement (Paper No. 38) is GRANTED.
/s/
PETER J. MESSITTE
UNITED STATES DISTRICT JUDGE
June 26, 2013
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