Opinion ID: 1560325
Heading Depth: 1
Heading Rank: 2

Heading: analysis and disposition of the objections to the settlement

Text: A. Overview of The Objections In this Court the Objectors advance a plethora of substantive and procedural objections to the settlement that total fourteen separate (although in some cases interrelated) claims of error. Except for three contentions that were not fairly presented at the settlement hearing, the claims of error may be grouped into four analytical categories: (1) objections related to bifurcating the approval of the settlement from the determination of how the settlement proceeds should properly be allocated; (2) objections related to the procedural and economic fairness of the settlement (excluding issues relating to class certification and the release); (3) objections relating to certification of the class; and (4) objections related to the scope of the settlement release. We address each of these sets of claims in the order enumerated. B. Objections That Were Not Fairly Presented At The Settlement Hearing The Certification Appellants advance on appeal two objections to the settlement that were not fairly presented to the Court of Chancery. The first is the argument that the settlement was fatally flawed because it would compromise the plaintiffs' claim that the PHLX Board members breached their fiduciary duty to the initial Class A shareholders by approving the transfer of control of PHLX to the Strategic Investors, in violation of Article IV of the PHLX Certificate. [9] Because conduct in violation of the corporate charter is void as a matter of law, Certification Appellants urge, this claim cannot lawfully be settled absent unanimous approval of all PHLX stockholders, which is absent here. This argument was never fairly presented to the Court of Chancery, as Supreme Court Rule 8 requires. Indeed, this claim was not presented at all until it first surfaced in the Certification Appellants' reply brief on this appeal. Rule 14(b)(vi)(2) of this Court provides that [t]he merits of any argument that is not raised in the body of the opening brief shall be deemed waived and will not be considered by the Court on appeal. Accordingly, we decline to address the merits of this claim. [10] The Certification Appellants also claim that the Chancellor erroneously certified a class whose definition is overbroad because it includes persons and entities that purchased their shares after August 16, 2005. This objection was not fairly presented to the trial court as Rule 8 of this Court requires. [11] Issues relating to class certification and the class definition were briefed by the parties to the lawsuit, and were carefully considered by the Chancellor, on three separate occasions: (i) at the entry of the provisional certification order on May 11, 2007; (ii) as part of that Court's consideration of whether entities owned by the individual defendants were properly excluded from the class on August 29, 2007; and (iii) at the entry of the final class determination order following the settlement hearing on October 22, 2007. Class members received two noticesone in May 2007 and the other in September 2007regarding the class determination, the appointment of Chuck Ginsburg as class representative and the selection of class counsel. No Objector ever objected to the class definition or its inclusion of transferees before this appeal. [12] The Settlement Appellants also advance two claims that were not fairly presented to the Court of Chancery. First, these Objectors contend that the Notice of Pendency of Class Action was inadequate, but they do not identify any specific omissions. Second, they contend that the Settlement Notice was defective because it did not inform the class of (i) the magnitude, or the impact on the settlement, of the awards of restricted stock units (RSUs) to certain members of the PHLX senior management under the Exchange's management equity plan; and (ii) the magnitude of the severance payments (including golden parachutes and pension payments) that PHLX management will receive upon the sale of PHLX to Nasdaq. Because they are raised for the first time on appeal, we decline to consider these claims as well. [13] C. Objections Related To Bifurcation Of The Settlement Approval Process We turn next to the claims relating to the bifurcation of the settlement approval process. The Objectors claim that the Chancellor's adoption of a bifurcated settlement approval process abridged their rights of due process, because the Court's fail[ure] to address the intraclass conflict and lack of cohesiveness . . . until the hearing on allocation of the award to the class in the hope that class counsel could resolve those issues . . . was error [since] the [Court of Chancery] had an independent duty to the absent class members to ensure that they received due process. The Objectors further argue that bifurcation constituted an abuse of discretion because it prevented them from knowing what their individual recovery from the settlement would be. We address the bifurcation issues first, because the Objectors contend that the Chancellor could not properly assess the fairness of the settlement, irrespective of its economic merits, without also determining how the settlement proceeds should properly be allocated among the persons found entitled thereto. To the extent this argument raises a due process question, that is an issue of law which this Court reviews de novo. [14] Objectors' remaining objections to bifurcation are reviewed for an abuse of discretion. [15] The Objectors cite no authority that would prohibit a trial court, on constitutional or any other grounds, from approving a settlement without simultaneously approving the propriety of a plan of allocation. Nor have we located any authority for that proposition. That comes as no surprise, since bifurcated class action settlements have been approved by the Delaware and the federal courts. [16] As the Second Circuit stated in In re Agent Orange Product Liability Litigation, there is: no absolute requirement that . . . a plan [of allocation] be formulated prior to notification of the class. . . . [T]he prime function of the district court in holding a hearing on the fairness of the settlement is to determine that the amount paid is commensurate with the value of the case [which] can be done before a distribution scheme has been adopted so long as the distribution scheme does not affect the obligations of the defendants under the settlement agreement. [17] At bottom, the Objectors' due process argument rests upon the proposition that it was constitutionally improper to certify the settlement class as defined, because certain members of the class had potentially antagonistic interests. That claim lacks merit. Elsewhere in this Opinion, we conclude that in certifying the class as defined, the Chancellor did not abuse his discretion, because ( inter alia ) he explicitly held that should any intra-class conflict issues arise during the allocation process, those issues can and will be addressed at that stage. Lastly, the Objectors contend that the Chancellor's decision to bifurcate was an abuse of discretion because it prevented the class members from ascertaining from the settlement notice what the amount of their individual recovery will be. Since the amount of any class member's individual recovery has yet to be formulated, that argument is a truism that misses the point. A decision that a settlement will not include a plan of allocation is a matter of judicial discretion. [18] Here, bifurcating the complex allocation issues from the issues relating to the fairness of the aggregate settlement will afford the parties sufficient time to develop a workable allocation plan, while also enabling the Exchange to close its agreement to be purchased by Nasdaq under a tight transaction closing deadline. That transaction would benefit (at the very least) all current holders, which apparently represent over 50% of the class. In these particular circumstances, the Chancellor's decision to bifurcate was not an abuseand indeed was a properexercise of his discretion. Having rejected the Objectors' challenges to bifurcation of the settlement approval process, we turn to the fairness of the settlement itself.
The Objectors next challenge the fairness of the settlement itself (excluding issues relating to class certification and the scope of the release) on both procedural and economic grounds. The Objectors argue that their procedural due process rights were violated because: (i) they were not afforded a right to opt out of the class, and (ii) the settlement was economically unfair. Because the settlement class was certified under Court of Chancery Rules 23(b)(1) and (b)(2), any opt-out right was entirely a matter of judicial discretion. A challenge to a trial court decision to grant or deny an opt-out right under these rules is reviewed for abuse of discretion. [19] A challenge to the intrinsic fairness of a settlement is also reviewed for abuse of discretion. [20] The Objectors' procedural due process argument would have merit if this were a class action primarily for money damages or other relief at law under Rule 23(b)(3). [21] Here, however, the primary relief sought in the initial and amended complaints was equitable, specifically, the rescission of the Strategic Investor Transactions or, alternatively, rescissory damages. The relief afforded in the settlement is also primarily equitablethe return of 14% of the Class A shares acquired in those Transactions, the cancellation of 14% of Mr. Fruchter's restricted share units awarded under the PHLX management compensation plan; and the grant of certain assurances against future dilution. That equitable relief is valued at $82 million (or approximately 83%) of the $99 million total estimated value of the settlement. The remaining settlement consideration (which would constitute legal relief) is the $17.1 million to be contributed to a settlement fund primarily for payment of attorneys' fees. In these circumstances, it cannot be fairly argued that the trial court's declination to grant an opt-out right to the class was unconstitutional. Nor can it fairly be argued that the Chancellor abused his discretion by not granting an opt-out right under Rule 23(b)(2). Importantly, any settlement of this litigation would have to afford the defendants complete peace, that would include a release to the broadest extent possible under law. Granting an opt-out right would leave the Objectors, who appear to hold over 40% of the Exchange's Class A shares, free to assert, against the defendants, the identical claims being settled in a different forum. That almost certain outcome would utterly defeat the purpose of the settlement, and was a risk that the defendants were not willing to take. Thus, the settlement must either be as broad in scope as the law would allow and bind all class members, or there would be no settlement. Given the economic benefits afforded by the settlement in relation to the perceived minimal value of the claims being surrendered, the Chancellor determined not to grant opt-out rights. The Objectors have not shown that decision to be other than a sound exercise of judicial discretion. We reach the same conclusion about the economic fairness of the settlement, the challenge to which has little or no support in the record. On a motion to approve a settlement, the trial court is not required to try the case or decide the issues on the merits. Rather, the court's function is to consider the nature of the claim, the possible defenses thereto, the legal and factual circumstances of the case, and then to apply its own business judgment in deciding whether the settlement is reasonable in light of these factors. [22] The Chancellor's special role in approving a class action settlement contrasts sharply with this Court's more limited role in reviewing such an approval. [23] It is not our function to determine the intrinsic fairness of the settlement or to exercise our own business judgment respecting its merits. We limit ourselves solely to the question of an abuse of discretion by the trial court in exercising its business judgment. [24] Measured by this standard, the Chancellor committed no abuse of discretion in finding that the settlement was intrinsically fair. The Chancellor correctly identified the applicable standards and articulated in detail the bases for his conclusion that the settlement provided a substantial benefit for the class. The Chancellor, who was highly familiar with the merits of the case from his intensive consideration of the issues, motions and pretrial briefs over an 18 month period, explicitly balanced the strength of the class claims against the overall value of the settlement ($99 million plus non-quantifiable benefits). Based on that analysis, the Court concluded, in its business judgment, that it was ineluctably clear on the record . . . [that the] . . . settlement is fair because it achieves a significant and substantial monetary benefit for the class. Specifically, the Chancellor found that: The plaintiffs were this close. . . . They survived the motion to dismiss by the skin of their teeth, as we would say in Sussex County. And then they survived the motion for summary judgment right on the eve of trial, very close call again. . . . That's what I can tell you about your case, having only lived with it for about a year-and-a-half.    It seems to me undisputable that this settlement achieved a significant monetary benefit for the class of shareholders of [PHLX]. . . . Those determinations in the market, such as it is, are the only real guidance that the Court can rely on. But coupled with what the expert testimony would have been at the trial and the experts' reports, it seems to me undeniably clear that there was a significant benefit with respect to the turning back of . . . these [55,257] shares . . . from the [S]trategic [I]nvestors, the cancellation of Mr. Frucher's interest of 14 percent, as well as the contribution of roughly $17 million in cash. [The settlement] fairly surrenders potential claims in return for a compromise that the defendants won't assert defenses that I think were extremely strong. . . . At the end of the day, we would have had a very difficult trial in this courtroom, with dozens of witnesses sitting at my elbow, telling me there was no collusion. . . . They all had independent counsel; they all had independent experts; and they all went about this in their own self-interested manner. That would have been part of the testimony offered here. . . . Then I would have heard the testimony of half a dozen or more experts . . .  and with resumes yards longopining as to exactly why [PHLX] was worth more as a result of all these transactions, rather than less; and I would have had to sort out whether the plaintiffs really had any injury or damage here to complain about, which would have been another time consuming and difficult process. And I am not at all confident that in the end I would have been willing to rule in favor of the plaintiffs. [F]or this Court to set aside a settlement which has been found by the Court of Chancery to be fair and reasonable, the evidence in the record must be so strongly to the contrary that the approval of the settlement constituted an abuse of discretion. [25] The Objectors here cite no evidence strongly to the contrary. Indeed, they cite no evidence at all which contravenes the finding that the settlement would confer substantial economic benefit upon the class, in exchange for surrendering claims of considerably doubtful merit and, thus, of minimal value. We uphold the Chancellor's determination that the settlement is intrinsically fair from an economic standpoint.