filed: March 9, 1994; As Corrected March 29, 1994.
On Appeal from the United States District Court for the Eastern District of Pennsylvania. (D.C. Civil No. 92-02722).
Before: Hutchinson, Cowen and Nygaard Circuit Judges.
This case presents the question whether a state court has the power to allow parties as part of a comprehensive court-approved settlement to release exclusive federal securities law claims arising from the same transaction or occurrence as the state law matters before it, even though the state court would not have jurisdiction to hear the federal claims in the first instance. A subsidiary issue presented is whether a non-resident owner of corporate stock who tendered his shares to the Delaware corporation in response to a proxy offer following a merger transaction had sufficient minimum contacts to be bound by the settlement and release entered into on behalf of the plaintiff class of shareholders by a Delaware state court. Answering both questions in the affirmative, we will affirm the district court.
The complicated background giving rise to this lawsuit in federal court started with a merger agreement between two Delaware corporations. Vitalink Communications Corporation ("Vitalink") was a manufacturer of computer internetworking products known as wide area bridges. Network Systems Corporation ("Network"), a manufacturer of data communications equipment which connects mainframe computers, minicomputers, and computer networks, entered into a merger agreement on May 6, 1991 by which it would acquire the stock of Vitalink. It is not necessary for purposes of this opinion to lay out precisely the intricate details of the merger negotiations and the final agreement, other than to note that Network ultimately agreed to pay $10.50 in cash for each share of outstanding Vitalink stock.
On May 13, 1991, Leslie G. Denend, President of Vitalink, sent a letter to all stockholders stating that the Vitalink Board of Directors had unanimously approved the merger, indicating that the Board of Directors believed the terms of the merger were fair, and recommending that the stockholders accept the offer. The plaintiffs in this action, C.L. Grimes, a Pennsylvania resident, and G.W. Holbrook, a Connecticut resident, were among the Vitalink stockholders.
Shortly after the merger agreement was announced seven state law actions were commenced, four in Delaware and three in California. The plaintiffs in these cases alleged that the Vitalink defendants breached their fiduciary duties and that the Network defendants aided and abetted the Vitalink defendants in doing so. The Delaware cases were consolidated and the parties engaged in expedited discovery. Within several days of commencing discovery, the parties agreed to a settlement. The California and Delaware plaintiffs entered into a Stipulation and Agreement of Compromise, Settlement and Release on June 13, 1991. They agreed to settle the dispute and release all claims arising from the merger transaction*fn1 in exchange for a ten day extension of the merger offer, a reduction in the amount payable to Network under a stock option agreement if a third party made an offer for Vitalink, and for an amendment limiting the reimbursement of Network's fees by Vitalink in the event the merger agreement was terminated. In addition, the defendants agreed not to oppose an application by plaintiffs' counsel for an award of attorneys' fees not to exceed $275,000, and expenses not greater than $25,000.
The merger was completed on July 1, 1991, when Vitalink became a wholly-owned subsidiary of Network. Vitalink shares that were not tendered were converted into the right to receive $10.50 per share or to seek appraisal. A notice of the completed merger was sent by Vitalink to all shareholders on July 11, 1991. In that letter, stockholders were given the option of surrendering their shares to the paying agent in exchange for $10.50 in cash per share, or to seek appraisal of the shares pursuant to Delaware corporation law. Mr. Holbrook tendered his shares in response to the letter from Vitalink, while Mr. Grimes did not do so.
On July 18, 1991, the Delaware Court of Chancery certified the Vitalink stockholders as a non-opt-out settlement class pursuant to Court of Chancery Rule 23(b)(1) and (2).*fn2 This class, consisting of all persons who owned Vitalink common stock between May 6, 1991 and July 1, 1991, included plaintiffs Grimes and Holbrook. A notification letter was sent to all class members discussing the pending class action litigation, describing the settlement benefits to the class, indicating that all class members had an opportunity to oppose settlement, and notifying the class of the date of the settlement hearing. Upon receiving written notice, a group of stockholders including Grimes filed objections to the settlement and presented argument at the subsequent hearing. Mr. Grimes and the other objectors argued that the interests of the stockholders were not adequately represented by the class representatives and that the settlement agreement did not result in any material benefits for the class. Mr. Holbrook did not enter an appearance in the Delaware state court proceedings and never opposed settlement of the class action claims.
The Delaware Court of Chancery approved the settlement by memorandum opinion issued on November 8, 1991. See In re Vitalink Communications Corp. Shareholders Litig., [1991-92 Transfer Binder] Fed. Sec. L. Rep. (CCH) P 96,585 (Del. Ch. Nov. 8, 1991). Mr. Grimes and the other objectors appealed this decision to the Delaware Supreme Court, which affirmed the Court of Chancery in an unpublished Disposition without opinion. See Grimes v. John P. McCarthy Profit Sharing Plan, 610 A.2d 725 (Del. 1992) (table). In a petition for certiorari, Mr. Grimes argued that the Delaware court proceedings violated due process because the court did not develop a sufficient record to consider whether absent class members were adequately represented. The Supreme Court denied this petition on October 5, 1992. Grimes v. John P. McCarthy Profit Sharing Plan, __ U.S. __, 121 L. Ed. 2d 124, 113 S. Ct. 179 (1992).
Prior to the Disposition of the writ of certiorari, Grimes and Holbrook filed the present action in the U.S. District Court for the Eastern District of Pennsylvania. In this case, the plaintiffs alleged that the defendants violated their duty of disclosure pursuant to sections 10(b) and 14(e) of the Securities Exchange Act of 1934. See 15 U.S.C. §§ 78j & 78n(e) (1988). Federal courts have exclusive jurisdiction over suits alleging violations of these securities law provisions. 15 U.S.C. § 78aa (1988);*fn3 Cramer v. General Tel. & Elecs. Corp., 582 F.2d 259, 270 n.15 (3d Cir. 1978), cert. denied, 439 U.S. 1129, 99 S. Ct. 1048, 59 L. Ed. 2d 90 (1979). In addition, the plaintiffs complained that the procedures employed by the state courts in resolving the Delaware action denied them due process of law.
Vitalink, Network, and the other defendants moved the district court to dismiss the federal action based on the judgment in the Delaware action. In essence, they argued that the state court approved a release of all claims arising from the merger, including exclusive federal claims, and that the federal court was required to adhere to that judgment consistent with full faith and credit.*fn4 Grimes and Holbrook opposed dismissal of their suit and requested the district court to treat the motion as one for summary judgment. Likewise, they moved the district court for partial summary judgment and submitted several supporting documents to the court.
In a memorandum opinion dated February 27, 1993, the district court denied plaintiffs' partial motion for summary judgment and granted defendants' motion for summary judgment. Grimes v. Vitalink Communications Corp., No. 92-2722, 1993 WL 56032 (E.D. Pa. Feb. 27, 1993). The district court ruled that the legal doctrines of collateral estoppel and release bar the federal court from considering the alleged violations of federal securities law stemming from the merger. Id. at 2-5. First, the district court found that the plaintiffs in this case were members of the non-opt-out state court class who were bound by the broad release approved by the Delaware Court of Chancery. Id. at 2-4. Second, and alternatively, the district court held that this federal securities case is barred by the collateral estoppel effect of the Delaware judgment because the predicate facts that underlie the federal case, which primarily involve issues of nondisclosure, overlap significantly with facts conclusively established in the state court proceeding. Id. at 4-5. Finally, the district court also examined the federal plaintiffs' allegation that they were denied due process in the state court proceedings and concluded that this claim was not meritorious. Id. at 5-6.
The district court had jurisdiction over this case pursuant to section 27 of the Securities Exchange Act of 1934. 15 U.S.C. § 78aa. By granting the defendants' motion for summary judgment, the district court ordered the case dismissed. We have appellate jurisdiction pursuant to 28 U.S.C. § 1291 as plaintiffs have appealed a final judgment of dismissal.
The district court's grant of summary judgment in favor of defendants is subject to plenary review. Wheeler v. Towanda Area School Dist., 950 F.2d 128, 129 (3d Cir. 1991); American Medical Imaging Corp. v. St. Paul Fire and Marine Ins. Co., 949 F.2d 690, 692 (3d Cir. 1991). To the extent the district court interpreted and applied Delaware law, the district court is not entitled to deference. The determinations regarding state law, where appropriate, will be reviewed de novo. Salve Regina College v. Russell, 499 U.S. 225, 113 L. Ed. 2d 190, 111 S. Ct. 1217, 1221 (1991); Borse v. Piece Goods Shop, Inc., 963 F.2d 611, 613 (3d Cir. 1992).
The central issue raised in this appeal is whether a state court, which does not have subject matter jurisdiction to hear exclusive federal claims, may nevertheless approve a settlement and release of those claims by the parties. The plaintiffs urge this court to adhere to the view that the Delaware release does not extinguish the exclusive federal claims because Congress did not authorize Delaware or other state courts to hear such claims in the first instance. As a starting point, however, it is important to emphasize that the Delaware court did not purport to exercise any inherent power to release causes of action that it had no jurisdiction to entertain. Rather, the Delaware court only acted to enter a settlement agreement that was initiated, negotiated, and adopted by the parties to a lawsuit that was properly before it.
It is significant to note that a release may take one of at least two distinct forms. In the first situation, a release may be entered into by parties engaged in a colorable legal dispute for which no formal complaint has been filed. The parties may negotiate a settlement of the dispute and in the process execute a release of all claims. The release acts as a simple contract between two private parties not engaged in a lawsuit. If one of the parties later breaches that contract by filing a complaint stemming from the relevant transaction, then the defendant may present the release as a defense to the lawsuit and argue that the claims alleged in court were contracted away by the plaintiff. Assuming that there is no relevant exception to the release defense, for instance that the release was only entered into on the basis of deception or coercion, see In re Complaint of Bankers Trust Co., 752 F.2d 874, 885 (3d Cir. 1984), then the contract should be given full preclusive effect by the court.
In the second situation, which encompasses the case sub judice, a lawsuit has been commenced by one party asserting claims against the other. When the parties in a pending case negotiate a settlement, the resulting court order dismissing the case is a final judgment in that lawsuit. As a judgment, the settlement and release of claims is a contract that not only is agreed upon by the parties, but also is stamped with the imprimatur of the court with jurisdiction over the parties and the subject matter of the lawsuit. See Nottingham Partners v. Trans-Lux Corp., 925 F.2d 29, 33 n.2 (1st Cir. 1991). Thus, the release is not simply a contract entered into by private parties, but is one that has been given a stamp of approval by the court.
When the underlying legal dispute is a class action, as is the present case, then the court has more than a ministerial duty to enter the negotiated settlement and release as a judgment. In this circumstance, the court has an elevated duty to ensure that the settlement is fair and adequate to all the plaintiff class members, not just the named representatives who negotiated its substantive terms. This duty is particularly acute when the class action is one certified under Federal Rules of Civil Procedure 23(b)(1) or (2), or their state counterparts, because the class members have been denied an opportunity to opt out of the putative class. In effect, all ordinary class members are bound by the deal struck by their named representatives in the event the court determines that they were adequately and fairly represented during the course of the negotiations.
That is not to say, however, that non-representative class members are without recourse in the event that they do not feel the negotiated settlement and release is in their individual or the class' best interest. When this fairly usual circumstance arises, the objecting class members must be given an opportunity to address the court as to the reasons the proposed settlement is unfair or inadequate. The court then rules as to the adequacy and fairness of the settlement. See, e.g., Girsh v. Jepson, 521 F.2d 153, 156-57 (3d Cir. 1975) (discussing the factors a trial court should utilize when determining the fairness of a class action settlement for absent members of the plaintiff class).
As the district court noted, Grimes, No. 92-2272, 1993 WL 56032, at 3, the federal plaintiffs pursuing this case on appeal were provided with such an opportunity in the state court litigation. As the district court stated:
The plaintiffs, as class members, received notice of the Delaware proceedings and were provided an opportunity to be heard. Indeed, plaintiff Grimes vigorously exercised this opportunity. Both the Delaware Chancery Court and the Delaware Supreme Court rejected Mr. Grimes' disclosure claims and found the settlement to be fair to the Vitalink stockholders.
Id. (citing the Delaware court Dispositions); see also In re Vitalink, [1991-92 Transfer Binder] Fed. Sec. L. Rep. (CCH) P 96,585, at 92,743-45 (Del. Ch. Nov. 8, 1991). Not only did plaintiff Grimes pursue the adequacy of representation and disclosure claims through the Delaware court system to its highest court, but when relief was denied he petitioned the United States Supreme Court to hear the case. When the Supreme Court declined to disturb the decision of the Delaware Supreme Court, see Grimes, __ U.S. at __, 113 S. Ct. at 179, he and the other class members had been granted all the process that was due. The members of the class, including Holbrook and Grimes, were provided an opportunity to be heard, actually litigated, and lost on the issue of whether they were deprived due process in the state court proceeding.
The plaintiffs' attempt to relitigate the issue of whether they were adequately represented during the settlement negotiations and whether the state court considered sufficient evidence to make its determination is even less compelling than that of the federal plaintiffs in Nottingham Partners, the most analogous case on point. In Nottingham Partners, the plaintiffs filed suit in federal court "in vain pursuit of back-door relief" without even appealing the state court adjudication to the United States Supreme Court. 925 F.2d at 33. Here, the objectors pursued their direct appeal all the way to the Supreme Court without obtaining relief.
Although plaintiffs concede they pursued the adequacy of representation issue on appeal through the Delaware court system, they argue that such process cannot bind non-resident, non-objecting class members like Holbrook who never entered an appearance during the pendency of the Delaware litigation.*fn5 Plaintiffs would even take this argument one step further to assert that the Delaware judgment does not bind Holbrook because he did not formally consent to personal jurisdiction in the Delaware court and because he does not have "minimum contacts" with this forum for purposes of this adjudication. See International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S. Ct. 154, 158, 90 L. Ed. 95 (1945).
Although the class members in the present case were not provided with an opportunity to opt out, the state court had the requisite power to bind absent class members as long as they had minimum contacts with the forum and they were not otherwise denied due process. See id. at 317-18, 66 S. Ct. at 159 (minimum contacts in and of themselves suffice for specific jurisdiction). We first consider whether Holbrook had sufficient minimum contacts with the Delaware forum to be bound by its judgment. Addressing this issue, a Delaware court has held that it may exercise in personam jurisdiction over absent members of a plaintiff class who have not been provided an opportunity to opt out ...