On February 8, 2018, Justice Shirley Werner Kornreich of the New York Supreme Court denied a motion for final approval of a disclosure-only settlement in a class action suit brought by shareholders of Martin Marietta Materials, Inc. (“MMM”) regarding its acquisition of Texas Industries, Inc. (“TXI”). City Trading Fund v. Nye, 2018 WL 792283 (N.Y. Sup. Ct., Feb. 8, 2018). Plaintiff, which owned only ten shares in MMM, asserted breach of fiduciary duty claims and sought to enjoin the merger on the ground of inadequate disclosures in the proxy provided to shareholders. The parties, however, reached a settlement, which required defendants to make certain “supplemental disclosures” and provided for the payment of $500,000 in attorneys’ fees to plaintiff’s counsel. Justice Kornreich previously denied approval of the settlement, but that decision was reversed by the New York Supreme Court, Appellate Division and remanded for a fairness hearing. City Trading Fund v. Nye, 144 A.D.3d 595, 21 (N.Y. App. Div. 2016). Moreover, in the interim, the Appellate Division, in Gordon v. Verizon Communications, Inc., 148 A.D.3d 146 (N.Y. App. Div. 2017), adopted a more lenient approval standard for disclosure-only settlements than that followed recently by courts in Delaware and elsewhere. Nevertheless, Justice Kornreich found the supplemental disclosures “utterly useless to the shareholders” and, therefore, declined to approve the settlement.
The merger, which was announced on January 28, 2014, was subject to approval by both companies. The definitive proxy was filed on May 30, 2014. Plaintiffs filed suit the same day. The parties reached a disclosure-only settlement on June 20, 2014, which also provided for the payment of $500,000 in attorneys’ fees. On June 30, 2014, shareholders of each company approved the merger with more than 98% of the shares voting in favor. The merger closed on July 2, 2014. Plaintiff argued that the four supplemental disclosures in the settlement justified its approval: (i) additional information on management discussions about the potential merger; (ii) publicly available consensus estimates used by MMM’s financial advisors; (iii) the interests in TXI held by MMM’s financial advisors; and (iv) information indicating that MMM’s CEO was among the previously unnamed officers and directors who might receive additional compensation after the merger.
As discussed in our post on the decision in Gordon, the Appellate Division adopted a seven-factor test for the consideration of disclosure-only settlements, which focuses on whether the settlement will be of “some benefit to the shareholders.” While Justice Kornreich acknowledged that the “some benefit” test is less stringent than the “plainly material standard” adopted by the Delaware Court of Chancery in In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016), she concluded that “there is no reason why that test cannot be interpreted to have some teeth.” Accordingly, Justice Kornreich determined that even under the “some benefit” test, “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.”
Declining to approve the settlement, Justice Kornreich concluded that all the supplemental disclosures were “useless.” First, Justice Kornreich found that the supplemental information on management discussions was terse, vague, and general, as well as not material. Second, as to the consensus estimates, Justice Kornreich explained that, while management projections have been considered material, analyst projections generally are not. Third, Justice Kornreich noted that “[n]o reasonable shareholder should care” about the financial advisors’ holdings of common shares in TXI, where there was no “reason to think the banks’ advice was rendered to profit from the merger.” Fourth, Justice Kornreich added that it was already “obvious” that the CEO was among the officers and directors who might receive additional compensation. In sum, “neither the Company nor its shareholders were made better off by the supplemental disclosures.”