On April 11, 2019, the First Department unanimously affirmed a decision issued by Justice Shirley Werner Kornreich, formerly of the Commercial Division, which denied the plaintiffs’ motion for final approval of a class action settlement in City Trading Fund v. Nye (2019 NY Slip Op 02789). This was the second time the Appellate Division had considered Justice Kornreich’s denial of approval of a settlement in this case, having reversed her prior denial of preliminary approval of the settlement in November 2016 and remanding the case for a fairness hearing in order to review the settlement terms.[1]

This case began with the filing of a pre-merger class action seeking to enjoin the acquisition of Texas Industries, Inc. (“TXI”) by Martin Marietta Materials, Inc. (“MMM”), a North Carolina corporation. An MMM stockholder suit alleged that MMM had breached its fiduciary duties to its shareholders by making material misstatements and omissions in the definitive proxy provided to shareholders for the purpose of evaluating and voting on the TXI merger. On the eve of the preliminary injunction hearing, the parties settled for a “peppercorn and a fee”: the plaintiffs would receive additional disclosures to remedy the deficiencies in the proxy and plaintiffs’ counsel would receive attorneys’ fees of $500,000. Justice Kornreich denied preliminary approval of this “disclosure only” settlement, noting several atypical features of the lawsuit and the settlement, including the fact that it was brought by the shareholders of the acquiring company, rather than the target company, and that the suit was based on the definitive proxy, rather than the preliminary proxy, which gave the shareholders and the court considerably less time to consider the disclosures that had been made.[2]

In November 2016 the First Department unanimously reversed, ruling that the evidence was insufficient to warrant denial of preliminary approval of the settlement, and remanded the matter for a fairness hearing to determine whether the settlement should be given final approval by the court.[3]

On remand, as this blog previously detailed, Justice Kornreich once again could not find any benefit in the settlement for the company or its shareholders, and declined to grant final approval.[4] The opinion was noteworthy as it was among the first Commercial Division decisions to apply the “some benefit” standard previously adopted by the First Department in Gordon v. Verizon Commc’ns, Inc. (a decision we covered here) for reviewing class action settlements.[5] Under this standard, in determining whether a disclosure would have “some benefit,” the court “must be able to plausibly conclude that the supplemental disclosures would, in fact, aid a reasonable shareholder in deciding whether to vote for the merger.”[6] In her ruling, Justice Kornreich could not find any benefit in the settlement for MMM or its shareholders, instead concluding they would be the settlement’s net losers.[7]

Plaintiffs appealed to the First Department and this time the appellate court unanimously affirmed.[8] The First Department first noted that a final approval of a putative class action settlement is subject to a more stringent standard than a preliminary approval, and that plaintiffs’ reliance on the court’s previous favorable decision was therefore misplaced.[9] The panel then considered the supplemental disclosures made under the settlement, and agreed with the Commercial Division that plaintiffs had failed to demonstrate that the disclosures would be of “some benefit” to the shareholders, and thus failed to show that MMM’s payment of $500,000 in attorneys’ fees was in the shareholders best interests.[10] Given plaintiffs’ failure to show some benefit to shareholders, the court found consideration of the remaining Gordon factors, including the likelihood of success on the merits and the extent of the parties’ support for the proposed settlement, to be academic.[11]

Accordingly, the City Trading decision underscores that even under the “some benefit” test for approving class settlements, there must be some articulable benefit to class members to warrant such approvals.