The opinion of the court was delivered by: YOHN
The parties to the instant class action law suit, alleging violation of the federal securities laws, have requested the court to approve a final settlement reached between class counsel, on behalf of the class, and the defendants. Under the terms of the settlement, the defendants would be obligated to pay $ 1,150,000 in cash into a gross settlement fund in exchange for the release of all class members' claims against them. Class counsel has also petitioned the court for attorney fees amounting to 30% of the gross settlement fund and for reimbursement of their expenses, as well as three $ 1,000 incentive awards to the named representatives in the action.
After careful consideration and close scrutiny of the proposed settlement, the court concludes that the proposed settlement in this case meets the stringent standards for settlement now required in this circuit. The court will therefore approve the settlement. For reasons set out at length below, the court will award plaintiffs' counsel an attorney fee of 30% of the net settlement fund. The court will also reimburse plaintiffs' counsel for their reasonable out-of-pocket litigation expenses in the amount of $ 86,801.68. Finally, the court will award each named plaintiff $ 1,000 from the settlement fund for their efforts on behalf of the class.
THE UNDERLYING ALLEGATIONS
Undeterred, ValueVision commenced a hostile takeover attempt in February 1994, seeking to purchase 5,825,000 shares of National Media stock at $ 10.50 per share. On March 7, 1994, however, the two companies reached terms and the hostile takeover was terminated. National Media announced a merger agreement valued at over $ 150 million. ValueVision agreed to offer $ 11.50 in cash per share for all outstanding National Media stock.
In another turn of events, however, ValueVision backed out of the merger on April 21, 1994, alleging that National Media had failed to meet its obligations under the merger agreement by making inaccurate representations and warranties.
National Media's response to the failed ValueVision take-over constitutes the basis for this lawsuit. On April 25, 1994, defendants filed a Form 8-K with the SEC and simultaneously released a press release stating that National Media planned to file suit against ValueVision in connection with the failed takeover. The press release stated that ValueVision's allegations were "patently ridiculous" and that the real reason ValueVision backed out of the deal was its own inability to obtain financing. Plaintiffs allege that this statement was designed to instill public confidence in National Media's financial condition, and implicitly ensured the public that the stock was worth at least $ 11.50 per share--the price offered by ValueVision in the takeover. National Media continued to release positive statements about the company's prospects in light of the failed merger through the later part of April and into May 1994, including a statement that National Media planned to expand its operations to South America and Taiwan.
On June 29, 1994, however, National Media announced that it would be delaying the filing of its Form 10-K pending completion of negotiations for the acquisition of additional capital. The company also announced that it expected to report a loss of approximately $ 8.7 million for the previous year, but attributed the expected loss to "unusual charges" of approximately $ 9 million. Two weeks later, however, on July 15, 1994, the company announced that independent auditors would indicate on the company's Form 10-K that "negative cash flows and litigation raise substantial doubts as to the Company's ability to continue as a going concern." Upon this announcement, National Media stock declined 28.2% and closed at a low of $ 3.50 per share.
Plaintiffs allege that National Media and its directors knew of National Media's financial difficulties upon the failure of the merger with ValueVision, yet attempted to deceive the public into believing that the company was actually in sound financial condition. The class action complaint alleges that each of the positive statements following the failed ValueVision merger was calculated to maintain the stock price of National Media at an artificially inflated level, despite the fact that National Media and its directors knew of the problems which eventually led independent auditors to question whether the company could continue as a going concern. Furthermore, plaintiffs allege that the defendant directors capitalized on this artificially inflated stock price by selling large volumes of shares between the time of the failed merger and the announcement of National Media's financial woes in July of 1994.
On July 19, 1994, four days after the precipitous announcement that National Media's future as a going concern was uncertain, plaintiff Sandra Lachance ("Lachance"), filed the complaint in the instant matter, alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), as amended, 15 U.S.C. §§ 78j(b) & 78t(a), seeking relief on her own behalf, and on behalf of a class consisting of all persons and entities who purchased the common stock of National Media during the period from April 25, 1994 (the date of the 8-K filing and press release) through July 14, 1994 (the date of the "going concern" statement). The Philadelphia law firm of Spector & Roseman signed the complaint on behalf of Lachance, while three other law firms were named "of counsel;" Milberg Weiss Bershad Hynes & Lerach, Stull, Stull & Brody, and Abbey & Ellis.
A similar action was filed on November 8, 1994 by Bruce Efron and Philip Cohen, also seeking to recover on behalf of themselves and all others similarly situated. See Efron v. Harrington, Civ. No. 94-6800 (E.D. Pa. 1994). The complaint in that matter was filed by The Law Offices of Bernard M. Gross, P.C., another Philadelphia law firm. That case was consolidated with this action by order dated February 23, 1995.
On August 11, 1995, plaintiffs first moved for class certification. In response, defendants filed a cross motion for conditional class certification to which plaintiffs agreed by letter. In an order dated February 6, 1996, this court denied plaintiffs' and defendants' motions for class certification without prejudice to file a subsequent motion for class certification. Noting that the Court of Appeals for the Third Circuit has demanded that district courts must be especially vigorous in ensuring that all the requirements of Federal Rule of Civil Procedure Rule 23 have been met before certifying a class for settlement purposes, see In re General Motors Corp. Pick-up Truck Fuel Tank Prod. Liab. Litig., 55 F.3d 768, 794 (3d Cir.), cert. denied, 133 L. Ed. 2d 45, 116 S. Ct. 88 (1995), the court found that it did not have a sufficient factual record to "rigorously apply" those pre-requisites. See Lachance v. Harrington, 1996 U.S. Dist. LEXIS 1339, Civ. No. 94-4383, 1996 WL 53801 at *2 (E.D. Pa. Feb. 6, 1996).
Plaintiffs filed a second motion for class certification on March 11, 1996 which provided considerably more detail as to each of the prerequisites for class certification under Rule 23(a) and Rule 23(b)(3). The court carefully considered the evidence presented in favor of class certification, and in an opinion and order dated April 30, 1996, found that all the requirements of Rule 23(a) and Rule 23(b)(3) were satisfied. See Lachance v. Harrington, 1996 U.S. Dist. LEXIS 5688, Civ. No. 94-4383, 1996 WL 210806 (E.D. Pa. Apr. 30, 1996). The court therefore certified the following class:
All persons and entities who purchased the common stock of National Media Corporation between April 21, 1994 and July 15, 1994, inclusive, excluding the defendants herein, members of the immediate families of defendants John J. Turchi, Jr., Mark P. Hershhorn and Kevin Harrington, subsidiaries and affiliates of National Media, and the legal representatives, heirs, successors, or assigns of any excluded party.
Before the parties even addressed the issues of class certification, class counsel and the defendants were busily negotiating a settlement. Settlement negotiations began in the fall of 1994 and, in April 1995, an agreement in principal had been reached. On November 20, 1995, the parties reduced their agreement to writing. Defendants, while denying any liability as to the underlying causes of action, agreed to pay $ 1.15 million into a settlement fund to be paid to class members. See Stipulation and Agreement of Compromise and Settlement at P 2. In return, class members agreed to release the defendants from all future claims against defendants arising from the allegations in the class action complaint. See id. at P 3. The agreement also stipulated that defendants would not contest that administrative expenses were to be paid out of the settlement fund, see id. at P 5, and that plaintiffs' counsel would seek an attorney fee based on a percentage of the settlement fund. See id. at P 6.
On July 23, 1996, plaintiffs moved the court for preliminary approval of the proposed settlement and for authorization to disseminate notice of the proposed settlement. The court held a hearing on August 8, 1996 regarding the propriety of preliminary approval of the proposed settlement, and in an order dated September 17, 1996, the court found that there were no obvious deficiencies in the proposed settlement, and therefore ordered preliminary approval of the class for purposes of disseminating notice pursuant to Federal Rule of Civil Procedure 23(e). In the order, a final hearing as to the fairness and adequacy of the settlement was scheduled for January 24, 1997. The court approved the form of notice which included, inter alia, information regarding the amount of the settlement, notice that failure to opt out or object would bind the class members to release the defendants from any further liability, notice that class members must either opt out or file objections by January 3, 1997 and notice that class counsel reserved the right to claim up to 33 1/3% of the gross settlement fund as an attorney fee. The court also ordered that class counsel file their brief in support of the settlement with the court by December 9, 1996, so that class members would have the opportunity to review the brief before the opt-out date of January 3, 1997. No objections have been filed and no class member has chosen to opt-out of the proposed settlement.
The court held a fairness hearing on January 24, 1997. The court is now prepared to rule on the fairness and adequacy of the settlement, and enter an appropriate order.
Before the court may delve into the merits of the settlement, it must first determine whether the class received adequate notice of the settlement. Federal Rule of Civil Procedure 23(e) provides: "A class 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 all members of the class in such manner as the court directs." Fed. R. Civ. P. 23(e). Adequate notice of a proposed settlement which will fix the rights of class members who do not opt-out and forever bar them from seeking further relief on their causes of actions is required not only by the rules of civil procedure, but also by the constitutional mandate of due process. See Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 811-12, 86 L. Ed. 2d 628, 105 S. Ct. 2965 (1985); Kyriazi v. Western Elec. Co., 647 F.2d 388, 395 (3d Cir. 1981). In order to satisfy due process, notice to class members must be "reasonably calculated under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections." Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314-15, 94 L. Ed. 865, 70 S. Ct. 652 (1950).
In a 23(b)(3) class action such as this one, the court is required to disseminate "to the members of the class the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort." Fed. R. Civ. P. 23(c)(2); see Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 175-76, 40 L. Ed. 2d 732, 94 S. Ct. 2140 (1974). In a security class action such as this one, individual notice is required to be disseminated to all class member shareholders who can be identified with reasonable effort. See id. at 177; Steiner v. Equimark Corp., 96 F.R.D. 603, 614 (W.D. Pa. 1983) (individual notice should be sent to shareholders in the corporation's records).
The court is satisfied that the notice provided to class members in this case meets the requirements of Rule 23(c)(2) and due process. The form of notice adequately advises class members of the nature of the action, their rights in the action, and that they will be bound by the judgment should they fail to exercise their option to opt-out of the class. See Fed. R. Civ. P. 23(c)(2); Phillips Petroleum, 472 U.S. at 812. The notice also advised class members of their right to object to the proposed settlement of the class.
The dissemination of notice also meets the requirements of Rule 23 and due process. Individual notice was sent to each record holder identified by National Media's transfer agent as having purchased stock during the class period. See Mulholland Aff. at P 2; N.T. Jan. 24, 1997 at 10, 14. Additionally, notice was sent to the nation's 225 largest banks and brokerage companies, as well as 704 institutional investors. See Mulholland Aff. at P 2. An additional 1,661 notices were sent to institutional groups and individual investors who later requested notice, presumably in response to the notice they had received from their bank or brokerage company. See id. at P 5. The notice which was sent to record holders was calculated to ensure that proper notice would be sent to the beneficial owners of the stock. See id. at exh. B; N.T. Jan. 24, 1997 at 15. Finally, notice was disseminated through publication in the national edition of the Wall Street Journal on October 24, 1996. See Mulholland Aff. at P 4. The court is therefore satisfied that class members received the "best notice practicable under the circumstances," including individual notice to "all class members who [could] be identified with reasonable effort." Eisen, 417 U.S. at 177.
II.Fairness, Reasonableness and Adequacy of the Settlement
"The law favors settlement, particularly in class actions and other complex cases where substantial judicial resources can be conserved by avoiding formal litigation." In re General Motors Corp. Pick-Up Truck Fuel Tank Prod. Liab. Litig., 55 F.3d 768, 784 (3d Cir.), cert. denied, 133 L. Ed. 2d 45, 116 S. Ct. 88 (1995). However, having said this, our court of appeals has also concluded that when the lawyers for both sides have agreed on terms of settlement, the typical adversarial setting is distorted, see id. at 789, and the court must beware of the potential for collusion between class counsel and defense counsel which is contrary to the interests of the class members. See id. at 805 (noting that "[a] number of courts have recognized the need for a special focus on precluding the existence of collusion"); id. at 802 ("At worst, the settlement process may amount to a covert exchange of a cheap settlement for a high award of attorney's fees." (quoting John C. Coffee, Jr., Understanding the Plaintiff's Attorney: The Implications of Economic Theory for Private Enforcement of Law Through Class and Derivative Actions, 86 Colum. L. Rev. 669, 714 n.21 (1986))). Thus, both "courts and commentators have interpreted [Rule 23(e)] to require courts to 'independently and objectively analyze the evidence and circumstances before it in order to determine whether the settlement is in the best interest of those whose claims will be extinguished.'" General Motors, 55 F.3d at 785 (quoting 2 Herbert Newberg & Alba Conte, Newberg on Class Actions § 11.41, at 11-88 to 11-89 (3d ed. 1992)). In sum, "the court cannot accept a settlement that the proponents have not shown to be fair, reasonable and adequate." Id. (quoting Grunin v. International House of Pancakes, 513 F.2d 114, 123 (8th Cir.), cert. denied, 423 U.S. 864, 46 L. Ed. 2d 93, 96 S. Ct. 124 (1975)); see Lake v. First Nationwide Bank, 900 F. Supp. 726, 732 (E.D. Pa. 1995).
In Girsh v. Jepson, 521 F.2d 153 (3d Cir. 1975), our court of appeals provided district courts with a list of factors to consider in determining whether a settlement under Rule 23(e) is fair, reasonable and adequate to the class:
(1) the complexity, expense and likely duration of the litigation;
(2) the reaction of the class to the settlement;
(3) the stage of the proceedings and the amount of discovery completed;
(4) the risks of establishing liability;
(5) the risks of establishing damages;
(6) the risks of maintaining the class action through trial
(7) the ability of the defendants to withstand a greater judgment;
(8) the range of reasonableness of the settlement fund in light of the best possible recovery; and
(9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation.
Additionally, the court of appeals emphasized in General Motors that there are "special difficulties the court encounters with its duties under Rule 23(e) in approving settlements where negotiations occur before the court has certified the class." General Motors, 55 F.3d at 805. In such cases the court must be "even more scrupulous than usual in approving settlements . . . ." Id.
After careful application of the Jepson factors to the facts of this case, the court concludes that the settlement proposed by class counsel is fair, reasonable and adequate. The case is made much closer by the exacting scrutiny required by the court of appeals in General Motors, especially when the facts before the district court in this case are compared to the facts presented to the district court in General Motors. Even under the stringent standard set out in that opinion for the approval of settlements in class action law suits, however, the court believes it is appropriate to approve the settlement in this case, especially if the law is to continue supporting early resolution of litigation through settlement. See Williams v. First Nat'l Bank of Pauls Valley, 216 U.S. 582, 595, 54 L. Ed. 625, 30 S. Ct. 441 (1910) ("Compromises of disputed claims are favored by the courts . . . .")
A. The Value of the Settlement to the Class Members
If courts are to encourage and favor settlements, at the end of the day the best any court can do for absentee class members in a class action seeking damages, such as this one, is to ensure that they are receiving settlement commensurate with the value of their stake in the litigation. Thus, the most important factor in evaluating whether a settlement is fair, reasonable and adequate is the value of the settlement to the class. See Petruzzi's, Inc. v. Darling-Delaware Co., Inc., 880 F. Supp. 292, 296 (M.D. Pa. 1995); Richard L. Marcus & Edward F. Sherman, Complex Litigation 535 (2d ed. 1992).
As Chief Judge Posner has stated, "[a] settlement is fair to the plaintiffs in a substantive sense . . . if it gives them the expected value of their claim if it went to trial." Mars Steel Corp. v. Continental Ill. Nat. Bank & Trust Co. of Chicago, 834 F.2d 677, 682 (7th Cir. 1987). Our court of appeals, appears to agree: "in cases primarily seeking monetary relief, the present value of the damages plaintiffs would likely recover if successful, appropriately discounted for the risk of not prevailing, should be compared with the amount of the proposed settlement." General Motors, 55 F.3d at 806 (citing Manual on Complex Litigation Second § 30.44, at 252 (1985)). The reasonableness of a settlement, therefore, can be reduced to the following formula to make an estimate of the reasonableness of settlement:
likelihood of establishing liability x expected damages (maximum recoverable damages x likelihood of recovering maximum damages in the event liability is established) proposed settlement figure.