First Department Adds Two New Factors to New York’s Standard of Review for Non-Monetary Settlements of Shareholder Class Actions
On February 2, 2017, the Appellate Division, First Department issued a unanimous decision in Gordon v. Verizon Communications, Inc., No. 653084/13, 2017 BL 31251 (1st Dep’t Feb. 2, 2017) that may have significant consequences for non-monetary settlements of shareholder class actions in New York. Justice Melvin L. Schweitzer, then of the Commercial Division, rejected the putative settlement due to concerns about whether shareholders could benefit from the additional disclosures that were to be made. In an opinion by Justice Marcy L. Kahn, the First Department reversed and approved the proposed settlement. Justice Kahn applied the five-factor test that the First Department adopted in Matter of Colt Indus. Shareholders Litig. (Woodrow v. Colt Indus, Inc.), 155 AD2d 154, 160 (1st Dep’t 1990), and added two new factors to that test. However, the Court’s failure to clearly define which parties these two new factors are meant to protect—i.e., the shareholders or the corporation—may lead to confusion as future courts and parties seek to apply this revised standard.
The case arose out of a 2013 transaction between Verizon and Vodafone through which Verizon agreed to acquire certain Vodafone subsidiaries that held interests in a wireless telephone partnership for approximately $130 billion, with the consideration consisting primarily of cash and Verizon shares. Plaintiff Natalie Gordon, on behalf of herself and other similarly situated Verizon shareholders, filed a class action in the Commercial Division asserting that Verizon had breached its fiduciary duties to its shareholders by agreeing to the transaction with Vodafone, which allegedly resulted in Verizon paying an excessive and dilutive price to acquire the Vodafone shares.
Following the commencement of the suit, Verizon filed a Preliminary Proxy Statement with the SEC detailing the terms and background of the transaction. After reviewing the Preliminary Proxy, Plaintiff determined that Defendants’ additional statements did not contain sufficient information for shareholders to make an informed vote on the transaction. Therefore, Plaintiff filed an Amended Complaint asserting additional claims for breach of fiduciary duty based on Verizon’s failure to disclose material information about the transaction.
In December 2013, the parties entered into settlement discussions and came to an agreement in principle under which Verizon agreed that: (1) it would make additional disclosures to allow the shareholders to make an informed vote on the Vodafone transaction, and (2) for the three years following the settlement Verizon would obtain a fairness opinion from an independent financial advisor if its Board of Directors engaged in a transaction involving the sale of more than $14.4 billion of its assets (representing approximately 5% of the company’s $288.9 billion value). The proposed settlement also provided for an award of Plaintiff’s attorney’s fees.
In October 2014, Justice Schweitzer of the Commercial Division issued a scheduling order certifying the class, preliminarily approving the settlement, and setting a date for a hearing to determine whether the settlement was fair, reasonable, adequate, and in the best interests of the class. During the hearing, “strong opposition” to the proposed settlement voiced by two objectors prompted the Commercial Division to “take a second look” at the settlement terms. In so doing, the Court reached the conclusion that the additional disclosures “fail[ed] to materially enhance the shareholder’s knowledge about the merger” and “provide[d] no legally cognizable benefit to the shareholder class” Similarly, as to the provision about fairness opinions, the Court found that requiring such opinions could inhibit the ability of the directors to “employ their collective business experience” to take actions on minor corporate dispositions. Therefore, the Court rejected the settlement as not being fair, adequate, reasonable, and in the best interests of the class.
First Department Decision
While the Commercial Division’s holding did not analyze the Colt factors, the First Department evaluated the settlement—and reversed the Commercial Division—based on those factors. As a starting point for its analysis, Justice Kahn reviewed the history of non-monetary or disclosure-only settlements noting that they came to prominence in the 1980s and 1990s in response to growing complaints regarding corporate misfeasance. However, the Appellate Division noted that these settlements had come to be regarded as a “merger tax” because shareholders would frequently bring non-meritorious complaints, the settlement of which generated significant attorney’s fees, but were of little value to either the shareholders or the corporations. More recently, this negative view of disclosure-only or other nonmonetary settlements of shareholder class actions was still the attitude of some courts, including the Delaware Chancery court in In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016). However, other Delaware and New York courts had begun to find that in some instances these settlements were beneficial to shareholders. As such, some courts and commentators, advocated for a method of evaluating these settlements that took into account the interests of the shareholders – i.e. a “balanced approach.”
With this background, Justice Kahn undertook an analysis of the proposed settlement applying the “longstanding standard” outlined in Colt: the likelihood of success of the case, the extent of support for the settlement from the parties, the judgment of counsel, the presence of good faith bargaining over the settlement terms, and the nature of the issues of law and fact. In considering the facts of the case, the Court found that these factors all weighed in favor of settlement.
Two New Factors
The Court then expanded the reviewing court’s inquiry under Colt, adding two new factors to the analysis of non-monetary settlements – i.e., whether the agreement is in the best interests of the members of the putative class of shareholders and whether the proposed settlement is in the best interests of the corporation. The Gordon Court noted that both New York and Delaware law had long favored enhanced judicial scrutiny of class action settlements. The addition of these two new factors, the Court concluded, was simply an extension of the longstanding tradition of New York and Delaware courts to conduct an enhanced review of class action settlements.
Although the Court indicated that revisiting the Colt factors was needed “in order to effect an appropriately balanced approach to judicial review,” it did not address a critical question: how to distinguish between the best interests of the shareholders and the best interests of the corporation.  This need for demarcation is particularly important in this case where the shareholder class includes all shareholders of a company (as opposed to a segment of the shareholders) and their interests are thus difficult to distinguish from those of the corporation itself. This question will likely arise as parties attempt to craft settlement agreements that satisfy the First Department’s new expanded standard.
The Gordon Court’s application of the two new factors did not shed any light on how this distinction would be made in an expanded Colt analysis. As to the new sixth factor, the Appellate Division found that the proposed disclosures provided a benefit to the shareholders (albeit in some instances a “minimal” benefit), so that they were in the best interests of the shareholders. But it was the fairness opinion requirement that the Court found to be the “most beneficial aspect of the proposed settlement.” Rejecting the Commercial Division’s concerns, the First Department concluded that this requirement provided a benefit to the shareholders without inhibiting the directors’ ability to make “pricing determination[s]” in future transactions. Thus, the Court ruled that the settlement was in the best interests of the shareholders.
Applying the new seventh factor, the Court found that the proposed settlement was in the best interests of the corporation. Apparently alluding to its analysis of the sixth factor, the Court held: “Again, the proposed settlement would resolve the issues in this case in a manner that would reflect Verizon’s direct input into the nature and breadth of the additional disclosures to be made and the corporate governance reform to be included.” In addition, the Court noted that Verizon would not have to incur additional legal fees in defending the action. The Court did not elaborate on how giving the company “direct input” into the settlement made it an agreement that was in the company’s best interests or how the best interests of the corporation were different, if at all, from the best interests of the shareholders.
In a concurring opinion, while Justice Moskowitz agreed that the Court should approve the settlement, she observed that the parties had not taken issue with the existing Colt test and thus had not had the opportunity to brief the two new factors articulated by the Court. As a result, Justice Moskowitz was of the view that the Court should approve the settlement based solely on the original five-factor Colt test because the Court should not “add a new factor to a long-established test without giving the parties the opportunity to brief the matter.”
Addressing these concerns, Justice Kahn noted that the Court was not obligated to afford parties the opportunity to brief the two new factors. Indeed, the Court concluded that to “insist” on briefing whenever the Court is “contemplating a refinement of a common-law standard” would be “inconsistent” with the Court’s duty to articulate changes to the common law as it deems it necessary. The First Department further noted that the sixth factor had already been established by prior case law as a “benchmark” for evaluating non-monetary settlements. Finally, the majority observed that the Colt standard was twenty-five years old and was in need of some enhancement in order to address the evolutions in non-monetary settlements that had occurred in the intervening years since that case was decided.
Disposition of the Case and Its Potential Impact
In light of the new enhanced Colt test for reviewing a settlement of a shareholder class action, the Appellate Division reversed the Commercial Division’s order and remanded the case for a hearing on attorneys’ fees. The Court also dismissed “as academic” an appeal from Justice Anil C. Singh’s order denying plaintiff’s motion to renew. 
The First Department’s holding in this case could usher in a new approach to reviewing non-monetary settlements of shareholder class actions. However, the lack of clarity between the best interests of the shareholders as opposed to the corporations may lead to some confusion as parties seek to craft settlement agreements that will withstand scrutiny under the First Department’s expanded Colt factors. It remains to be seen whether the Gordon decision will encourage more merger challenges to be filed in New York – as opposed to Delaware.
 Justice Karla Moskowitz wrote a concurring opinion expressing doubts about the new standard articulated by the majority.
 Gordon v. Verizon Commc’n Inc., No. 653084/13, 2014 BL 364779, at *3 (N.Y. Sup. Ct., N.Y. Cty., Dec. 19, 2014).
 Id. at *7.
 Id. at *13.
 As examples, the Court cited to City Trading Fund v. Nye, 144 AD3d 595 (1st Dep’t 2016) and In re Xoom Corp. Stockholder Litig., No. 11263-CVG, 2016 BL 252274 (Del. Ch. Aug. 4, 2016).
 At the outset, the Court decided that New York law would apply given that the proposed settlement agreement contained a New York choice-of-law clause.
 The issue of “disclosure-only” settlements has received particular attention since last year’s Delaware Chancery Court decision in In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016), declining to approve such a settlement unless the added disclosures “significantly alter the ‘total mix’ of information made available.”
 Gordon v. Verizon Commc’n, Inc., No. 653084/13, 2017 BL 31251 at *8 (1st Dep’t Feb. 2, 2017).
 Id. at *9.
 Id. at *9.
 Id. at *10 (emphasis added).
 Id. at *15.
 Id. at *12.
 Id. at *13.
Id. at *14.