Opinion
99 Civ. 10560 (AKH)
August 30, 2001
MEMORANDUM AND ORDER DECLINING TO APPROVE SETTLEMENT IN DERIVATIVE ACTION
Plaintiff, suing derivatively on behalf of Marketing Services Group, Inc. ("MSGI") against General Electric Capital Corporation ("GECC") under Section 16(b) of the Securities Exchange Act, 15 U.S.C. § 78p(b), moves for approval of an agreement of settlement, dismissal of the lawsuit as properly compromised, and award of the fees and expenses of his counsel. For the reasons discussed in this opinion, I decline to approve the settlement or dismiss the action. The motion to regulate plaintiff's counsel's fees and allowances is, therefore, prematurely made and, on that ground, is denied.
The derivative plaintiff, having completed pre-trial proceedings, was ready to move for summary judgment. Independently, the company and the defendant, a major holder of its securities, were negotiating a reduction of defendant's capital position in order, they claimed, to improve merger potentials. Defendant insisted, however, that it be released as well from "16(b)" liability, in this suit and in the future, without paying any farther consideration, or showing that the improvement in net book values resulting from the transaction would provide any substantial economic benefit to MSGI.
The parties, extolling the benefits to shareholders arithmetically appearing from the proposed settlement, ask me to approve it, and to approve as well a fee to the derivative plaintiffs counsel of up to $350,000, of which defendant GECC will pay the first $300,000, and MSGI and GECC will share the next $50,000. For the reasons stated in this opinion, I decline to approve the settlement.
THE FACTS OF RECORD
MSGI, a public company, offers marketing services to businesses. In recent periods, it has experienced operating losses and negative cash flows which, if continuing, could have a materially adverse effect on its ability to continue as a going concern. With the help of Goldman, Sachs Co., it has been exploring strategic alternatives.
GECC had been a preferred shareholder of MSGI, reflecting a capital contribution of $15 million, for which it was given convertible preferred stock and a warrant, exercisable into common stock at a penny a share, in prescribed amounts and at prescribed times. The convertibility feature of GECC's holdings protected GECC against dilution resulting from below-market issuances of shares, from non-payment of dividends on the preferred stock, and from loss of expected values if MSGI's net worth and earnings did not satisfy prescribed levels. GECC was, by far, the largest stockholder of MSGI.
GECC sold a portion of its common stock position within a six-month period following increases of the exercise rights of its convertible preferred shares and warrant. The derivative plaintiff served notice on MSGI that short-swing profits thus resulted, and called upon the company to sue GECC to recover these pursuant to Section 16(b) of the Securities Exchange Act, 15 U.S.C. § 78p(b). The company declined to do so, and the derivative plaintiff brought this action. Discovery proceedings have been completed, and the derivative plaintiff was prepared to move for summary judgment. The recovery, if won, would recapture $2,745,167 of short-swing profits for MSGI.
The derivative plaintiff alludes to possibilities of substantially greater recoveries, presumably depending on how transactions are characterized and matched. GECC's profit from its trades amounted to $10,631,163.65 but, plaintiff suggests, this may not be relevant for Section 16(b) purposes where derivative securities are involved, that is, securities whose value is dependent on the value of common stock into which they may be converted. See Pl. Br., June 20, 2001, at p. 14; J.S. Abraham Aff., June 20, 2001, at ¶ 6; Rules 16a-1(c), 16b-6(c)(2), 17 C.F.R. § 240.16a-l(c), 16b-6(c)(2). The record and briefing for this motion to approve the settlement are not directed to this issue. Following oral argument of this motion, plaintiff filed a motion for summary judgment which explores the issue and argues for the larger recovery.
THE PLEADINGS
Plaintiff alleges that he is a shareholder of MSGI, that GECC owns beneficially more than 10 per cent of MSGI's securities, that GECC made profits from purchases and sales of MSGI's securities within a six-month period in violation of Section 16(b) of the Securities Exchange Act, that he made demand on MSGI's Board of Directors to sue GECC to obtain disgorgement of such profits, that MSGI failed to sue pursuant to the demand, and that he therefore brings this suit, derivatively on behalf of MSGI, to obtain such disgorgement, as authorized by Section 16(b).Plaintiff alleges that on December 24, 1997, MSGI issued to GECC 50,000 shares of MSGI's series D convertible preferred stock, par value $.01 per share, and warrants to purchase up to 10,670,000 shares of its common stock at $.01 per share, for $15 million contributed by GECC to MSGI's capital. The series D convertible preferred stock was convertible into 4, 415, 612 shares of common stock, and additional shares beyond that number if, according to a formula, GECC's position was diluted by subsequent issuances of stock, or failure to pay dividends on the preferred stock, or failure to satisfy prescribed levels of net worth or earnings. GECC also held at the time 4,415,612 shares of MSGI's common stock, or 24 per cent of MSGI's issued and outstanding stock.
Plaintiff alleges that, according to the convertibility provisions mentioned above, GECC's right to convert its convertible preferred stock grew, period to period, from 4,415,612 on December 24, 1997, to 4,811,320 on April 21, 1999, when GECC converted its series D convertible preferred stock into 4,811,320 shares of common stock. Plaintiff alleges that, pursuant to Exchange Act regulations, gaining rights to additional shares is considered the equivalent of purchases of common stock for purposes of Section 16(b). See Rules 16a-1, 16b-6(a), 17 C.F.R. § 240.16a-1, 240.16b-6(a). Further, plaintiff alleges, the warrant issued to GECC was amended on May 17, 1999 to provide for an additional 300,000 shares, and the amendment is also to be considered the equivalent of a purchase against which GECC's sales are to be matched.
MSGI's SEC disclosures state that it borrowed $10,000,000 from GECC and, in consideration, issued a warrant granting GECC the right to purchase 300, 000 shares of MSGI's common stock at $.01 per share.
Plaintiff next alleges that GECC, between April 26, 1999 and June 16, 1999, sold 500,000 shares of its common stock for a total consideration of $13,995,749 and a profit of $10,631,163.65, at prices per share generally declining from $33 to $35 per share to $17 to $18 per share, but mostly at the higher prices. Plaintiff alleges that the sales are matchable against the purchases for purposes of Section 16(b) liability.
Pl. Br., June 20, 2001, at p. 14; see n. 1.
Defendant GECC denies liability, contending that the additions to its conversion rights inexorably flowed from its original December 1997 contract with MSGI, and that sales are not properly matchable against those rights.
The parties have concluded pre-trial discovery, and were prepared to move for summary judgment. However, the negotiations between MSGI and GECC, described below, overtook the motion practice, leading to an agreement of settlement between them, subject to agreement also by the plaintiff The plaintiff agreed, and presents this motion for the court's approval.
THE RELEVANT STATUE
Section 16(b) of the Securities Exchange Act, 15 U.S.C. § 78p(b), is intended to prevent the unfair use of information which may have been obtained" by owners often per cent or more of the stock of companies that are issuers of equity securities registered pursuant to the provisions of the Exchange Act, or by officers or directors of such company, by reason of their relationships with such companies. Accordingly:
. . . any profit realized by [such person] from any purchase and sale, or any sale and purchase, of any equity security of such issuer. . . within any period of less than six months
is to "inure to and be recoverable by the issuer, irrespective of any intention. . . of holding the security purchased or of not repurchasing the security sold for a period exceeding six months." The statute excepts transactions of purchase or sale where the security "was acquired in good faith in connection with a debt previously contracted."
The law recognizes that issuers may not be anxious to sue their large stockholders, or officers or directors, often for good business reason. Nevertheless, pursuant to Section 16(b), such suits may be brought, if not by the issuer itself, by "any owner of the issuer," who was such at the time of both the purchase and sale (or the sale and purchase), "in the name and in behalf of the issuer." The condition is that the suitor have made written demand on the issuer, and that the issuer have failed or refused to bring or diligently to prosecute the suit.
Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter; but no such suit shall be brought more than two years after the date such profit was realized.
Congress has thus expressed a strong policy in favor of recapturing profits made by corporate insiders from short-swing sales, that is, purchases and sales made within a six-month period, regardless of collateral business considerations and regardless of motivations or intent. As a leading case observed, "Section 16(b) operates mechanically, and makes no moral distinctions, penalizing technical violators of pure heart, and bypassing corrupt insiders who skirt the letter of the prohibition." Magma Power Co. v. Dow Chem. Co., 136 F.3d 316, 320 (2d Cir. 1998).
THE PROPOSED SETTLEMENT, ITS ORIGIN, AND PROCEEDINGS FOLLOWING
Independently of the proceedings in this case, MSGI opened negotiations with GECC, hoping to reduce GECC's exercise rights under the still outstanding warrant, and thereby the size of GECC's capital overhang. It appears that MSGI had experienced a decline in business fortunes, and had retained an investment banker, Goldman, Sachs Co., to assist it in finding a company interested to merge with, or acquire, MSGI. The investment banker advised MSGI that GECC's warrant presented "a significant impediment" to finding such a candidate, because of its size relative to other shareholder positions and because of uncertainties regarding its exercise. See Stephan Feldgoise Aff., June 29, 2001, ¶¶ 2-3; Alan I. Annex Aff, June 19, 2001. Accordingly, MSGI suggested to GECC that it reduce the size of its warrant. GECC, after first rejecting the suggestion, changed its mind and agreed to reduce its exercise rights from up to 10,670,000 shares to 7,500,000 shares (that is, by 3,170,000 shares), on condition that the claim filed by the derivative plaintiff would be released at the same time Accordingly, MSGI "decided to use" the pending derivative action "as a vehicle" to accomplish its corporate objective. (Annex Aff. ¶ 6) MSGI then approached counsel for the derivative plaintiff, informed him of the discussions, represented to him that a reduction of GECC's capital overhang would provide larger benefit than would a full "16(b)" recovery, and that GECC and MSGI would not object to a award of fee to derivative plaintiffs counsel by the court of up to $350,000 of which GECC would pay the first $300,000 and GECC and MSGI would share the next $50,000.
MSGI has 33,723,606 shares of common stock issued and outstanding. Giving effect to its full exercise rights under its warrant, GECC would own 14,981,220 shares of common stock, or 34 per cent of MSGI's issued and outstanding common stock.
In April 1999, MSGI's stock reached a high of $60 per share. On May 15, 2001, the date of the agreement of settlement, the stock traded at $1.30 per share, and continued to decline since then so that it now sells at less than $1 per share. As of March 31, 2001, for the nine months then ended, MSGI experienced an operating loss of $7,383,941, more than $.60 per share, and a total net loss of over $20 million. For the 12 months trailing March 31, 2001, its losses allocable to holders of common stock were $532.5 million.
The number of shares that GECC could purchase for a penny-a-share depends, according to the terms of the warrant, on MSGI's earnings for the fiscal year ended June 30, 2001. Since MSGI's earnings for the year will probably be less than $.13 per share, indeed, considerably less, to the point of a substantial loss, see note 5 determinable when its audited financials for its fiscal year are reported, GECC will probably have exercise rights to 10,760,000 shares. The variable about which Mr. Feldgoise speaks is thus largely known.
Mr. Feldgoise also observed in his affidavit that the size of the warrant and its "potential for substantial dilution to the other shareholders of MSGI . . . could substantially increase the cost to a third-party of any transaction." Id. More likely, however, the insiders of MSGI, who hold approximately 15 per cent of its stock and who undoubtedly had engaged the investment banker, would receive less of the consideration than a third party would be willing to pay.
MSGI has also advised that, as of August 1, 2001, it sold its largest and most profitable division for $25 million cash, and that it does not presently intend to engage in any other material restructuring transaction or continue the engagement of its investment banker. See letter, Ronald D. Lefton, Aug. 2, 2001.
Presumably to the extent a reduction of GECC's capital overhang would facilitate a merger and, thereby, an opportunity for GECC to liquidate its position, the reduction to which GECC agreed was in its corporate interest as well. GECC insists, however, that it would not have agreed to reduce its exercise rights unless it was released from this lawsuit. See John Flannery Aff., June 29, 2001, ¶ 8.
The derivative plaintiff agreed, and the agreement of May 15, 2001 was then executed. It provides that GECC's warrant would be exercisable into 7,500,000 shares of MSGI's common stock, instead of up to 10,670,000 shares, at $0.01 per share; that the derivative plaintiff could apply to the court for allowances of fees and disbursements of not more than $350,000, without opposition by MSGI or GECC, and that GECC would pay the first $300,000 and share with MSGI any balance of an added award up to $350,000; and that, should MSGI merge with another company or enter into a transaction effecting a change in control and requiring GECC to sell its common stock and common stock rights, the transaction would be considered "involuntary" and "forced," that is, presumptively exempt from disgorgement under Section 16(b).
At oral argument, I asked about the propriety of such a clause: was it proper for a court, in possibly approving one settlement, to create immunity for a future transaction? The parties answered that the clause could not bind a future court. The effort, nevertheless, over-reaches. The parties failed to bring this clause to my attention in the papers and briefs that they filed.
MSGI's declining stock price was at $1.30 per share on the date of the agreement. The parties represented that the reduction of GECC's warrant, inconsequence, conferred value to the shareholders of $1.29 per share (market price less exercise price), or $4,089,300 for the aggregate reduction in convertible shares. The parties represented that the value substantially exceeded the maximum potential recovery in the derivative suit, said to be approximately $2,750,000.
The parties tendered the proposed settlement to me for review and approval, but did not request an order of publication or other form of notice pursuant to Federal Rule of Civil Procedure 23.1. The parties summarized the proposed settlement in MSGI's "10-Q" for the quarter ended March 31, 2001, filed with the SEC on May 15, 2001 and reflected in a press release issued May 16, 2001. The summary did not adequately describe all material terms relevant to the settlement, and did not advise stockholders of their right to object to the settlement, although it did state that the district court would be asked to approve it at a hearing on June 26, 2001. MSGI represented that its "extremely poor" cash position did not justify a mailing to stockholders costing, it said, approximately $20,000 in mailing costs.
Rule 23.1 provides that in a derivative suit, brought by one or more shareholders to enforce a right of a corporation, "[t]he action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the court directs."
There are cases that dispense with mailing or newspaper advertising of settlements of derivative "16(b)" cases. MSGI brought to my attention Rosen v. Price, 1998 WL 337896 (S.D.N Y 1998), and Schaffer v. SC Fundamental 98 Civ. 1127 (S.D.N.Y. Sep. 22, 1999). Such dispensation, although perhaps appropriate as an exception, should not be made into a general rule, and is not appropriate where, as here, a settlement is more a restructuring of shareholder positions inter se than a compromise of Section 16(b) liability.
DISCUSSION
Settlements and compromises in derivative and class actions require a district judge's approval before they are effective. Yet the parties, who before their compromise were vigorous adversaries, checking each exaggeration and contention by corrective reaction and counter-contention, are now joined in harmony, complementing each other's representations that the compromise submitted for the court's approval is the best that human effort and ingenuity could feasibly have produced. At a time that the district judge most needs an adversary's comments, all adversaries have left the field. See John C. Coffee, Jr., Understanding the Plaintiffs Attorney: The Implications of Economic Theory of Private Enforcement of Law Throunh Class and Derivative Actions, 86 Colum.L.Rev. 669, 714 (1986) ("The principal-agent problem that is endemic to class and derivative actions implies that there are three sets of interests involved in these actions: those of the defendants, the plaintiffs, and the plaintiff's attorneys. Often the plaintiffs attorneys and the defendants can settle on a basis that is adverse to the interests of the plaintiffs. At its worst, the settlement process may amount to a covert exchange of a cheap settlement for a high award of attorney's fees.")The absence of adversary comment is one reason why adequate and proper notice to all those potentially affected is so important. Yet, no such notice was sent in this case. MSGI's explanation, that it did not wish to incur a $20,000 expense, is not a sufficient excuse in the circumstances at hand and, indeed, raises serious question as to any appreciable real value to the settlement presented to me, especially from the perspective of MSGI, the party on whose behalf this suit was brought and which, under the statute, is supposed to receive the recovery.
The parties nevertheless defend the settlement as creating greater value than from a disgorgement of GECC's profits. They ascribe a value of $4,089,300 to the reduced number of convertible shares, based on the difference between the $.01 exercise price and the $1.30 market price at the date of the agreement, amounting to $.22 per share. In comparison, the parties claim that the derivative lawsuit could produce only $2,745,167.07, if the plaintiff is successful. The Board of Directors of MSGI has approved the settlement.
But see n. 1, suggesting a possibly larger recovery, and n. 5, relating the substantial decline in MSGI's price per share.
The directors and officers of the company as a group own 5,614,834 shares of MSGI, or 15.8 per cent of its issued and outstanding stock. The settlement is claimed to add seven to eight per cent to their holdings, whatever the dollar value of that addition might be. See n. 13. The Board seems to have acted without a fairness opinion, or analysis of the merits of the lawsuit, or of the benefit to be derived by MSGI itself.
Generally, courts favor compromises of disputed claims. Williams v. First Nat'l Bank, 216 U.S. 582, 585 (1910); Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir. 1982) (noting the "general policy favoring the settlement of litigation"); City of Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir. 1974). This is as true for Section 16(b) cases as for other class and representative actions. Schimmel v. Goldman, 57 F.R.D. 481 (S.D.N.Y. 1973). The district courts, however, have an independent role to review settlements for fairness and consistency with statutory purposes. The task of the district courts is not easy, for plaintiffs and defendants have submerged their adversary relationship in order, together, to propose the settlement which they have negotiated, including the fee to be awarded to derivative counsel. See, e.g., Polar Int'l Brokerage Corp. v. Reeve, 187 F.R.D. 108 (S.D.N.Y. 1999).
City of Detroit v. Grinnell Corp., 495 F.2d at 463, sets out the criteria: (1) risks of establishing liability; (2) risks of proving damages; (3) complexity, expense and likely duration of the litigation; (4) stage of proceeding and the amount of discovery completed; (5) ability of defendants to withstand a greater judgment; (6) range of reasonableness in light of the maximum possible recovery and range of reasonableness in light of all the attendant risks of the litigation; and (7) reaction of other shareholders to the settlement. To this list, an eighth factor is of considerable importance in relation to Section 16(b) litigation: the congressional purpose to cause disgorgement of short-swing trading profits by corporate insiders in favor of the corporation of which they are fiduciaries, even when the corporation is unwilling to prosecute such a suit and a derivative plaintiff brings suit instead. As Section 16(b) provides:
. . . . Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter....15 U.S.C. § 78p(b); Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 424 (1972).
At the time MSGI and GECC agreed to the settlement, the derivative plaintiff was ready to move for summary judgment and, indeed, such a motion has now been filed. The issue of liability is not entirely free from doubt. Although GECC's sales were voluntarily placed and followed within six months of its acquisition of greater exercise rights for its convertible debenture and warrant, and thus resembles a typical and actionable short-swing transaction as the derivative plaintiff argues, GECC's acquisition of a greater number of share rights may well be considered sufficiently "unorthodox" to exonerate GECC from liability as GECC argues. See Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582 (1973); Colan v. Mesa Petrol. Co., 951 F.2d 1512 (9th Cir. 1991).
I consider from this, and from the record of the case before me, in relation to the factors of City of Detroit v. Grinnell Corp., supra, that there is (1) a risk of establishing liability, a proper understanding of which will have to await briefing and argument of the filed motion for summary judgment. There is, however, (2) little or no risk of proving damages at $2,745,167 and, if plaintiffs argument has merit, some prospect of a recovery considerably more than that. There is also, (5), little or no risk that the defendant will not be able to withstand judgment. I consider that (3) and (4), the complexity of the case and its continued expense, is moderate, that the case is close to its end in the district court, and that it will not present any undue element of delay or complexity in relation to possible appeals. In sum, as to these considerations, there is little about the stage of the case, or its complexity, cost or duration that should justify a substantial discount from the value of an anticipated recovery. However, there is a question relating to the factor of the risk of a recovery which, at the present stage, is hard for a district judge to understand in relation to his duty to evaluate the fairness of a settlement. And the parties, having all been co-opted by the arrangements of a lucrative cash fee and satisfactory reshufflings of capital positions, have not given the court much help in understanding those risks.
The parties argue that the case has not been discounted, but that a different form of value has been achieved that outweighs a recovery that "inure[s] to and [is] recoverable by the issuer." Securities Exchange Act, section 16(b), 15 U.S.C. § 78p(b). MSGI tendered the opinion of an appraiser to the effect that the reduction in GECC's conversion rights had values of $4,111,490 as of the date of the agreement of settlement and $2,656,460 as of June 26, 2001, the date of the hearing. (The reduced value is said to reflect the decline in MSGI's shares on those dates, from $1.30 to $.84, per share.) See Aff. Thomas F. Giordano, July 2, 2001, ¶ 6. The expert offers his opinion that "the proposed settlement reflects a value of what GECC is giving up which is equivalent to or exceeds the alleged short swing profit" of approximately $2.745 million. Id. at ¶ 11.
The values ascribed are questionable. A block of the size indicated, if liquidated, in a company suffering large losses and limited liquidity, might have considerably lower value and, hence, there is question that GECC is really disgorging the short-swing profit it allegedly made. Furthermore, in a Section 16(b) settlement, I have to focus on the benefit to MSGI, the party that is supposed to benefit from the Section 16(b) lawsuit.
The issue that I have to consider is not only what GECC might be giving up, or even what might be an appraised value of a reduced number of GECC's warrant-rights, but what is the benefit to MSGI — what "inures to", and is "recoverable by" MSGI from the settlement. And, as to this paramount issue, I have not been persuaded that the proposed settlement provides any quantifiable benefit to MSGI, and I have been less persuaded that the Congressional purpose of a Section 16(b) lawsuit has been satisfied.
A reduction of GECC's capital overhang would, as MSGI argues, benefit other shareholders, including MSGI's other insiders who, together, own approximately 15 per cent of MSGI's common stock. Possibly, a reduction might also increase the possibility of attracting a merger candidate, but that proposition is also speculative. These considerations are not directly relevant to the issue that I have to decide — whether, and to what degree, the value to MSGI of the proposed settlement outweighs the prospect of benefit from continuing with the law suit.
See n. 12. The proposed reduction of GECC's warrant, it has been asserted, would provide a seven-to-eight per cent benefit to shareholders other than GECC. See Thomas F. Giordano Aff., July 2, 2001, ¶ 10. But a dollar quantification of such a benefit is speculative, for it depends on whether or not MSGI will become profitable, distribute dividends, or enter into a rewarding corporate transaction. Meanwhile, the prospective benefit to MSGI of a cash recovery from the lawsuit is lost.
Under Section 16(b), corporate insiders are considered fiduciaries, held to a duty not to profit from short-term trading of their shares.Castellano v. Young Rubicam, Inc., 257 F.3d 171, 179 (2d Cir. 2001) (describing analogous insider's obligations under Securities Exchange Act § 10b, 15 U.S.C.A. § 78j and Rule 10-b5. 17 C.F.R. § 240.10b-5). Their profits are thus subject to disgorgement in favor of the corporation for, as Section 16(b) presumes, their trading appropriates corporate values. See, e.g., Adler v. Klawans, 267 F.2d 840, 846 (2d Cir. 1959) (trading on inside information appropriates corporate asset and requires disgorgement of profits in favor of corporation).
The settlement proffered to me has not been shown to create one dollar of real value to MSGI. GECC argues that there are intangible values, that corporations frequently purchase shares from their shareholders in order to reduce the number of outstanding shares and thereby increase shareholder values and facilitate useful transactions, and a reduction in the exercise rights of a warrant is the equivalent. See letter, Irwin H. Warren, April 28, 2001. But there has been no showing that such purposes are likely to result from the proposed settlement before me, or that MSGI, having experienced enormous decline in its liquidity, profitability, and share values, is likely to benefit in any substantial degree by the proposed transaction with GECC, or that the proposed settlement does much more than shift values from one insider shareholder to other shareholders and, substantially, to other insider shareholders. The purpose of Section 16(b) is not significantly satisfied by the proposed settlement presented to me.
In this case, GECC was unwilling to settle with the derivative plaintiff and both GECC and the derivative plaintiff, having concluded their discovery, were prepared to brief the issue of liability for judicial resolution. In the meantime, a deal was negotiated by MSGI and GECC, and GECC conditioned its acceptance of MSGI's proposal on a release of its exposure to liability, not only in connection with this existing lawsuit, but also in connection with a future transaction and a possible future lawsuit should a merger occur and should it sell some or all of its shares. MSGI easily accepted the condition, for it had never had the desire to sue GECC in the first place, notwithstanding the right given to it by Section 16(b) to take over the lawsuit. And the derivative plaintiff, having been offered an opportunity for a cash fee of $300,000 to $350,000, easily accepted as well. In my judgment, however, the proffered settlement was not shown to provide sufficient benefit to MSGI, the corporation for whose benefit the lawsuit was brought and which, under section 16(b), is supposed to receive the benefit of the recovery. Accordingly, I decline to approve the proposed settlement.
At oral argument, noting my displeasure with such a clause relating to a future transaction and lawsuit, ECC offered to cancel this clause.
I advised derivative plaintiffs counsel, at oral argument, that, were Ito approve the settlement, I would not be inclined to approve a cash fee. Since the settlement proposed a payment of the equivalent of equity to the non-GECC shareholders, I considered that the fee to derivative plaintiffs counsel should be in like kind, for counsel should not take better care of himself in a settlement than those he represents.
Conclusion
For the reasons stated, the motion to approve the settlement is denied. Defendant GECC shall have until October 1, 2001 to oppose plaintiffs pending motion for summary judgment and to file any motion of its own for summary judgment The derivative plaintiff shall then have until October 19, 2001 to reply. That will close the briefing. subject to any application made to me at the argument for leave to file additional papers. I will hear argument on October 30, 2001 at 4:00 p.m.
SO ORDERED.