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

Heading: Objections Relating To The Fairness Of The Settlement (Apart From Allocation)

Text: 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.