The opinion of the court was delivered by: MAURICE B. COHILL, JR.
On July 8, 1992 this Court held a hearing to approve a class action settlement proposal. We decided to hold this hearing after protracted negotiations between class counsel and defense counsel had resulted in a stalemate. At the hearing we approved the settlement proposal over the objections of class counsel and, consistent with Rule 52 of the Federal Rules of Civil Procedure, read into the record preliminary findings of fact and conclusions of law. This opinion will provide in greater detail our findings of fact and conclusions of law, as well as an explanation of our reasons for approving the settlement.
The plaintiffs were limited partners in Emerson Research Partners ("ERP I"), which was formed to develop, manufacture and market a two-way automatic communication system (TWACS). TWACS was to be used by electric utilities companies to reduce peaks in demand for electrical power through remote control. After years of losses, Emerson offered to purchase ERP I for an amount approximately one-half of the limited partners' initial investment. This offer was contained in a proxy statement. Plaintiffs then brought this lawsuit alleging that the defendant had devised a scheme to buy out ERP I at an unfairly low price.
The defendants are Load Management Development Corporation ("LMDC"), as general partner of ERP I, Harold F. Faught, owner of LMDC and Emerson Electric Company.
Subsequent to that January 1991 Opinion, the parties conducted extensive discovery in preparation for trial. On April 1, 1992, this Court held a status conference with the parties in order to monitor the parties progress in discovery.
B. Settlement Discussions
Subsequent to the April 1, 1992 conference, the parties entered into settlement discussions. On April 21, 1992, the defendants filed an application to send notice to the class regarding their settlement offer. As a result of this, we ordered the parties to appear on May 7, 1992, for another status conference. At this status conference several interesting facts came to light.
First, we heard that defendant Emerson, had negotiated with the Internal Revenue Service ("IRS"), on behalf of the class, a settlement of a dispute over the deductions taken for ERP I over years 1984 - 1986. At the time of the buyout, the IRS had already challenged certain deductions taken by the limited partners for these years. A condition of the buyout was that LMDC, the general partner and tax matters partner of ERP I, would continue to pay for the services of the Davis, Polk and Wardwell law firm of New York City to negotiate a resolution of the dispute with the IRS on behalf of the limited partners. After three years of tough negotiations, the IRS made an offer that LMDC felt was beneficial to the former limited partners.
We described the IRS settlement offer in our Opinion of June 26, 1992 in the following manner:
Emerson, through Davis Polk and Wardwell, has negotiated a settlement of these IRS claims. The settlement involves other entities aside from ERP I. Under the settlement, the IRS has agreed to assess against LMDC $ 2.5 million in tax liability. This liability represents the liability of ERP I and ERP II to the IRS for certain disallowed deductions taken by the limited partners of these separate research partnerships. Emerson has estimated that 70% of the total liability is allocable to ERP I. Thus, $ 1.75 million of the total $ 2.5 million represents the liability of the ERP I limited partners. Class counsel disputes this calculation. However, we can find no fault with the defendants' figures.
This $ 1.75 million would satisfy what the IRS and Davis Polk and Wardwell agree is the ERP I limited partners estimated $ 6,117,587 tax liability. According to the calculations presented by the defendants, the estimated tax liability for each partnership share is $ 30,900. The settlement allows the parties to satisfy that liability at the reduced price of $ 8,800 per share. In addition to this benefit, the liability will be assessed against LMDC, not the individual limited partners. Thus, these individuals will not have to file amended tax returns for the years 1984 - 1986. Also, the IRS has stated that if LMDC pays this liability for the limited partners, it will not consider this monetary benefit to the partners as taxable income. As a result, $ 1.75 million of this settlement will not be taxable to the members of the class.
Opinion dated June 26, 1992 at 5 - 6. Most importantly for the class, this offer also had a time limit. The IRS originally gave Emerson until June 15, 1992 to accept the offer or it would expire. However, due to this Court's scheduling difficulties and the need to receive the ballots from the class, the IRS extended the deadline to July 10, 1992.
The second interesting development in this case was Emerson's settlement offer. Emerson offered to pay the class members' liability to the IRS and create a cash fund of $ 250,000 in settlement of this law suit. Class counsel outright refused this offer as undervaluing the claims at issue.
Class counsel added a ballot to their notice requesting that the class members express their opinion on the settlement offer. The results of the balloting were inconclusive. Of those that responded, approximately half stated that they needed more information, half said they would like to settle and a few others rejected the settlement offer. However, one plaintiff, class representative plaintiff Hoffman Electric Company, employed the law firm of Reed Smith Shaw and McClay ("Reed Smith") to intervene on its behalf. Hoffman Electric wished to accept the settlement offer over the objections of class counsel and Reed Smith, in turn, filed a motion to intervene to represent the class for the purpose of settlement.
C. June 26, 1992 Opinion and Order
As a result of the inconclusive balloting and Reed Smith's motion to intervene, we decided to issue a preliminary opinion on the reasonableness of the settlement. We placed the parties on an expedited briefing schedule and required extensive documentation be placed on the record to support the parties' arguments. We issued an Opinion disposing of these issues on June 26, 1992.
In that Opinion we found, preliminarily, that the settlement offer was fair, adequate and reasonable. We also denied Reed, Smith's motion to intervene and scheduled a full settlement hearing for July 8, 1992. In addition, we ordered the defendants to send a court approved notice to the class.
That notice informed the class of the settlement offer, that the court had preliminarily approved the offer, and that a settlement hearing was scheduled for July 8, 1992. We also included a ballot with the notice. The class was told to return the ballot by July 6, 1992. We also stated that if the class members objected to the settlement, the objections should be filed by July 6, 1992.
A large percentage of the class members returned their ballots. The total class consists of 220 former ERP I limited partners. 210 of the 220, received notice of the settlement offer. 145 class members voiced their opinion on the settlement ballots by July 6, 1992.
134 of the 145 voted in favor of accepting the settlement, and the remaining 11 rejected the settlement. Thus, 63.8% of the class members of voted to accept the settlement while 5.3% rejected the offer.
Many of the class members held less than a full unit of ERP I while some held more than one full unit. Thus, the acceptance percentage changes when viewed in terms of ERP I unit. However, the votes were still overwhelmingly in favor of settlement. Class members representing 57.9% of the ERP I units voted to accept the settlement while class members holding 9.4% ...