Opinion
No. 03 Civ. 8494 (WHP).
April 25, 2005
Brian M. Felgoise, Esq., Law Offices of Brian M. Felgoise, Jenkintown, PA, Attorney for Plaintiff.
Marc S. Henzel, Esq., Law Offices of Marc S. Henzel, Bala Cynwyd, PA, Attorney for Plaintiff.
William B. Federman, Esq., Federman Sherwood, Oklahoma City, OK, Attorney for Plaintiff.
Joel W. Sternman, Esq., Katten Muchin Zavis Rosenman, New York, NY, Attorney for Nominal Defendant Alloy, Inc.
Howard G. Sloane, Esq., Cahill Gordon Reindel LLP, New York, NY, Attorney for the Individual Defendants.
ORDER
Plaintiff Yeung Chan moves for Court approval of the settlement of this shareholder derivative action pursuant to Fed.R.Civ.P. 23.1. Plaintiff's counsel also apply for an award of attorneys' fees and expenses. For the reasons set forth below, this Court approves the settlement and awards plaintiff's counsel $198,000 in attorneys' fees and expenses.
BACKGROUND
Plaintiff, a shareholder of Alloy, Inc. ("Alloy"), commenced this derivative action against directors of Alloy, a Delaware corporation. Plaintiff alleges that defendants breached their fiduciary duties to Alloy and its shareholders by allowing the company to improperly account for certain items on its financial statements and by making material public misrepresentations and omissions. Plaintiff claims that these actions caused Alloy stock to trade at an artificially high price, endangered the company's credibility and reputation and ultimately exposed Alloy to liability under the securities laws. This action was consolidated with another derivative suit and assigned to this Court as related to In re Alloy, Inc. Securities Litigation, No. 03 Civ. 1597 (WHP), a securities fraud class action involving essentially the same allegations.
Prior to the commencement of formal discovery, the parties in both the derivative and securities actions engaged in a coordinated informal discovery process. (Letter to the Court from Roy L. Regozin, dated Apr. 2, 2004.) This exchange of information stimulated settlement discussions and, following months of negotiation, culminated in a June 2004 memorandum of understanding to settle this action. (Affidavit of William B. Federman, dated Feb. 1, 2005 ("Federman Aff.") ¶¶ 6-8; Letter to the Court from William B. Federman, dated July 2, 2004.) The parties agreed to the terms of a settlement in September 2004 except for the recovery of attorneys' fees. (Letter to the Court from Joel W. Sternman, dated Oct. 8, 2004; Letter to the Court from Joel W. Sternman, dated Sept. 2, 2004.) This Court referred the action to Magistrate Judge Ronald L. Ellis for mediation on that issue. (Order, dated Sept. 9, 2004.)
On October 10, 2004, the parties entered into a Stipulation and Agreement of Settlement of Derivative Action (the "Settlement"), through which defendants agreed to implement a number of remedial corporate governance measures at Alloy. Most significantly, in plaintiff's counsel's estimation, the General Counsel would report to a non-executive independent director who would be responsible for all employment decisions concerning the General Counsel, including the determination of a compensation package. (Federman Aff. ¶ 10(c); Settlement ¶ 4(c), (k).) By Order dated December 7, 2004, this Court preliminarily approved the Settlement, scheduled a fairness hearing and directed that notice of the Settlement and the hearing be sent to Alloy shareholders and published on the company's website. On December 27, 2004, Alloy mailed a Court-approved notice to all registered owners of Alloy shares and published that notice on its website. (Affidavit of Gina Digioia, dated Feb. 22, 2005 ("Digioia Aff.") ¶ 2 Ex. A.) On that same date, Alloy issued and published on its website a press release describing the Settlement. (Digioia Aff. ¶ 3 Ex. B.)
This Court received one objection to the Settlement from an individual identifying himself as a "Small Investor." (Letter from Benjamin P. Lenda, dated Jan. 6, 2005.) In his letter to the Court, the objector expresses concern that the Settlement does not adequately compensate or protect small investors and questions why the defendants have not been made to pay restitution or been terminated. On February 25, 2005, this Court conducted a hearing on the proposed Settlement and fee award and heard from counsel for all parties. No individuals or entities objected to the Settlement at the hearing.
The objector also questions why the United States Securities and Exchange Commission has not been involved in this action and states his impression that the Settlement is "a shallow attempt to whitewash financial abuses and possibly criminal acts" that fails to include sufficient measures to prevent future criminal conduct.
DISCUSSION
I. The Settlement
A derivative action settlement must be "fair to all and . . . not favor the named plaintiff-shareholders or their counsel."Blatt v. Dean Witter Reynolds Intercapital, Inc., 732 F.2d 304, 307 n. 1 (2d Cir. 1984). The court's task in reviewing a proposed derivative settlement is to determine whether it "is so unfair on its face as to preclude judicial approval." Blatt, 732 F.2d at 307 n. 1 (quoting Glicken v. Bradford, 35 F.R.D. 144, 151 (S.D.N.Y. 1964)). In assessing the settlement, the court should look at: (1) "the complexity, expense and likely duration of the litigation"; (2) the reaction of other shareholders; (3) how far the action has progressed procedurally and the stage of discovery; (4) the difficulty of establishing liability; (5) the difficulty of proving damages; (6) the ability of defendants to withstand a greater judgment; (7) reasonableness in terms of the maximum possible discovery; and (8) reasonableness in light of litigation risks. City of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir. 1974);see In re Metro. Life Derivative Litig., 935 F. Supp. 286, 292 (S.D.N.Y. 1996). Remedial measures, such as those to which the parties have agreed here, are permissible settlement terms in derivative suits, even in the absence of a pecuniary exchange.See Bell Atl. Corp. v. Bolger, 2 F.3d 1304, 1311 (3d Cir. 1993) (citing decisions from the 4th, 5th and 6th Circuits); In re Interpublic Sec. Litig., Nos. 02 Civ. 6527 (DLC), 03 Civ. 1194 (DLC), 2004 WL 2397190, at *9-10 (S.D.N.Y. Oct. 26, 2004). In fact, the Court of Appeals has held that "an award of counsel fees is only justified where the derivative action results in a substantial non-monetary benefit to a corporation." Kaplan v. Rand, 192 F.3d 60, 69 (2d Cir. 1999).
Weighing the Grinnell factors, this Court holds that the settlement is fair, reasonable and adequate in all respects. In bringing this action, plaintiff faced the hurdles attendant to any derivative suit alleging a director's breach of fiduciary duty. First, because plaintiff did not make a demand on the Alloy board prior to commencing this action, plaintiff would have to establish the futility of such a demand. See Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984). Second, to prevail on the merits of his claims, plaintiff would have to "overcome the powerful presumptions of the business judgment rule." Rales v. Blasband, 634 A.2d 927, 933 (Del. 1993). This presents a "heavy burden" of establishing that (1) the directors were not disinterested and independent and that (2) the challenged transaction was not the product of a valid exercise of business judgment. White v. Panic, 783 A.2d 543, 551 (Del. 2001); see Aronson, 473 A.2d at 814. Moreover, the defendants could be held personally liable only if there is evidence of their "bad faith, intentional misconduct, [or] knowing violation of the law." In re Baxter Int'l, Inc. S'holders Litig., 654 A.2d 1268, 1270 (Del.Ch. 1995); see Del. Code Ann. tit. 8, § 102(b)(7). Specific to this action, plaintiff would have to grapple with "dueling interpretations of established accounting standards, and proving that defendants' reliance on the advice of two accounting firms was unreasonable."Alloy, Inc., 2004 WL 2750089, at *2. In sum, any monetary recovery from defendants was far from assured, and this could have been a lengthy and costly litigation for all parties.
The parties settlement negotiations spanned several months. Before embarking on formal discovery, the parties investigated plaintiff's claims and determined that a settlement mandating corporate governance reforms would be beneficial to all. (Letter to the Court from Roy L. Regozin, dated Apr. 2, 2004.) The settlement discussions appear to have taken place at arms-length and in good faith, as evidenced by the parties' inability to agree on attorneys' fees without court intervention. Moreover, the agreed-to remedial measures, including making the General Counsel responsible to a non-executive director, represent sensible reforms that Alloy was unlikely to implement on its own. Taken together, these reforms provide a substantial nonmonetary benefit to the company. While the Settlement does not call for the defendants to make restitution or require their resignations, the settlement does not benefit any sub-class of shareholders, the named plaintiff or plaintiff's counsel at the expense of Alloy shareholders as a whole. See Blatt, 732 F.2d at 307 n. 1. Other than the one objector, no shareholders have challenged the Settlement. Accordingly, this Court cannot conclude that the Settlement is unfair on its face, see Blatt, 732 F.2d at 307 n. 1, and hereby approves it.
II. Attorneys' Fees and Expenses
Since this action raises claims under Delaware law, that state's law governs the question of attorneys' fees and expenses.See Kaplan, 192 F.3d at 70. Delaware permits courts to "order the payment of counsel fees and related expenses to a plaintiff whose efforts result in . . . the conferring of a corporate benefit." Tandycrafts, Inc. v. Initio Partners, 562 A.2d 1162, 1164 (Del. 1989); Seinfeld v. Coker, 847 A.2d 330, 339 n. 33 (Del.Ch. 2000).
As discussed above, this Court holds that the Settlement provides "substantial non-monetary benefit[s]" to Alloy, which justifies an award of attorneys' fees to plaintiff's counsel.Kaplan, 192 F.3d at 69. Although their fee lodestar is $266,068.25 and they incurred legal expenses of $7,734.55, plaintiff's counsel seek $198,000 in attorneys' fees and legal expenses. (Federman Aff. ¶ 19.) In view of the fact that the requested fee is significantly less than the lodestar amount and conforms with the Magistrate Judge's recommendation, this Court approves the fee request as fair and reasonable in light of the Settlement obtained.
CONCLUSION
Accordingly, this Court approves the Settlement in all respects. Pursuant to paragraph 15(c) of the Settlement and adopting the definitions used therein, this Court deems Derivative Plaintiff, Alloy Shareholders and Alloy, on their own behalf and on behalf of their respective predecessors, affiliates, heirs, executors, administrators, successors and assigns, and any persons or Entities they represent, to have, by operation of this Order, fully, finally, and forever released, relinquished and discharged all Derivative Claims against each and all of the Released Parties. This Court hereby retains jurisdiction over the parties for all matters relating to the implementation and enforcement of the Settlement. Additionally, this Court awards plaintiff's counsel $198,000 in attorneys' fees and expenses.The Clerk of the Court is directed to mark this case closed.
SO ORDERED.