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IN RE RITE AID CORPORATION SECURITIES LITIGATION

June 8, 2001

IN RE RITE AID CORPORATION SECURITIES LITIGATION


The opinion of the court was delivered by: Dalzell, J.

      MEMORANDUM

In fulfillment of our duties under Fed.R.Civ.P. 23(e) and 23.1, we here consider the fairness and propriety of two settlements in this multi-district litigation involving Rite Aid Corporation. The first settlement partially resolves pending class action shareholder litigation under the federal securities laws, and the second constitutes the complete settlement of federal and state derivative litigation.*fn1

We received voluminous submissions from the parties, and conducted, after due notice, a fairness hearing on April 6, 2001. Although the economic aspects of both settlements have great merit and manifestly benefit the Class and Rite Aid, because of reservations as to the proffered Bar Order we must at this time deny the overall settlement package submitted to us without prejudice to the parties' right to resubmit an amended version that addresses the reservations we describe below.*fn2 We stress, however, that these technical concerns aside, the two settlements warrant unhesitating approval, as will be seen in the comprehensive analysis that follows.*fn3

The Settlements

A. Partial Class Action Settlement

The economic aspects of the Class Action Settlement have drawn no objection from any shareholder. Those terms include the provision of $43.5 million in cash, coming largely from Rite Aid's insurers, of which $5 million is actually part of the derivative settlement described below. The insurers have paid this sum to Rite Aid on the understanding that it will be remitted by Rite Aid into the Class Action Settlement fund.

In addition, Rite Aid will issue to the class at least twenty million shares of Rite Aid Common Stock, or in some instances, a combination of stock, other securities, and cash, to be worth one hundred forty-nine million five hundred thousand dollars as valued by January 15, 2002. Thus, the guaranteed market value of the Class Action Settlement will be $193 million, which gave it a present value as of April 6, 2001 of $177,119.000. Declaration of Wilbur L. Ross, Jr. at ¶ 29.*fn6

The Class Action Settlement also provides that the Settling Defendants will cooperate with plaintiffs in their continuing litigation against the non-settlers. Rite Aid itself will cooperate in this endeavor.

The Class Action Settlement also provides that Class counsel may seek as much as one-third of the settlement value as counsel fees, though they have in fact petitioned for only one-quarter of that settlement.

The provisions of the Class Action Settlement that have drawn fire from the Non-Settling Defendants do not relate to the foregoing consideration, but rather to three provisions of that document. First, the objectors take issue with paragraph 4(f) of the Agreement, which provides that "Rite Aid shall assign to the Lead Plaintiffs, on behalf of the Class, any and all claims that Rite Aid has against the Non-Settling Defendants."

Second, Grass, Bergonzi and Noonan also take issue with Rite Aid's compromise of its directors' and officers' liability insurance policy. In consideration of a policy release and indemnification against non-settler claims, the insurers compromised their $50 million in coverage for $43.5 million.

The objections that have prompted the most contention — at least in page count — have to do with paragraph 28 of the Class Action Settlement which, at subparagraphs 28(a) through 28(f), supply the content of the proffered Bar Order. This proposed order bars certain claims against the settling defendants from any other party, including the non-settling defendants.

The Class Action Settlement also details the plan of allocation, which was mailed to potential class members as part of their notification. This plan of allocation identifies how the settlement monies will be divided and paid. The proposed allocation identifies five sub-periods of common stock purchasers within the overall class period, with the sub-periods defined by when the buyer purchased shares. Each sub-period, in turn, has a number of separate provisions identifying a different calculation for per-share damages depending upon the time of sale of the shares. The plan of allocation also sets up allocation amounts for purchasers of notes and for purchasers of call options and sellers of put options.

None of the objections takes issue with the plan of allocation.

B. The Derivative Settlement

As noted above, the cash consideration for the Derivative Settlement*fn7 is the $5 million paid to Rite Aid that will then be folded into the $43.5 million payment in the Class Action Settlement. Derivative counsel may seek (and have sought) up to $1 million in counsel fees. The Derivative Settlement also contains a Bar Order similar to that of the Class Bar Order.

It is important also to note that the two settlements are interdependent to the extent that the Derivative Settlement will be automatically voided if we fail to approve the Class Action Settlement.

Fairness Analysis

A. The Class Action Settlement

It is well-settled that we may only endorse a settlement if the compromise is "fair, adequate, and reasonable", Eichenholtz v. Brennan, 52 F.3d 478, 482 (3d Cir. 1995). More specifically, our Court of Appeals has identified nine factors that will support approval of a Class Action Settlement. In re General Motors Pick-up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 785 (3d Cir. 1995) (restating Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir. 1975)). These Girsh factors are:

(1) the complexity and duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining a class action; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement in light of the best recovery; and (9) the range of reasonableness of the settlement in light of all the attendant risks of litigation.

General Motors, 55 F.3d at 785 (citing Girsh).

As will be seen, these factors weigh in favor of the Class Action Settlement. We shall, however, focus on items seven though nine, as they are most pertinent to the particulars of this litigation and to a large extent eclipse the first six items.*fn8 We have the economic realities of this case, especially as measured against Rite Aid's precarious financial health, uppermost in mind.

It is important to note, at the outset, that Class notices were mailed to over 300,000 recipients who appeared to be putative members of the class.*fn9 Among those recipients were approximately three hundred institutional investors, including such large mutual fund groups as Putnam and Vanguard. Of this large universe of stockholders, only seventy-three out of three hundred thousand have asked to be excluded from the Class, and not one institution has asked for such exclusion. No stockholder other than the Non-Settling Defendants have objected to any aspect of either settlement or the attorneys' fees requests. Indeed, as to the economic provisions of both settlements, no one has interposed any objection of any kind.

1. The Economic Aspects

It is not hard to understand why no Class member has objected to the economic aspects of the Class Action Settlement.

In their submissions to us in favor of that Settlement, plaintiffs' co-lead counsel have proffered two declarations of great relevance to our appraisal of this settlement's fairness. Professor John C. Coffee, Jr., Adolf A. Berle Professor of Law and Columbia University Law School, submitted a Declaration reviewing the settlement in detail and, more to the point, comparing it with other securities class action settlements. As a law professor whose principal academic interests have included "class action litigation (with a special focus on the management of the large class action and the incentive structure that the law creates to reward the successful plaintiff's attorney)", Coffee Decl. at ¶ 4, Professor Coffee is well-suited to supply highly pertinent information to us.*fn10 Indeed, his published writings, cited in ¶ 7 of his Declaration, confirm his self-description as one who has "often been critical of the performance of class action plaintiff's attorneys." Id. at ¶ 4. In measuring the adequacy of the Class Action Settlement, Professor Coffee concludes that:

Id. at ¶ 11.

On a relative basis, Professor Coffee reports that a recent study shows that settlements since 1995 of securities class actions "have recovered between 5.5% and 6.2% of the class members' estimated losses." Id. at 8 n. 4, (citing Laura Simmons, "Securities Lawsuits: Settlement Statistics for Post-Reform Act Cases" (1999) at 4). As measured against potential damages here of approximately $2 billion as "actual recoverable losses", the percentage of recovery under the Class Action Settlement is thus sixty-five percent above the mid-point of Simmons's average recovery.*fn11

We hasten to note, however, that it is clear that the Class could not realistically ever collect anything approaching $2 billion in damages. On this point plaintiffs' co-lead counsel provided the Declaration of Wilbur L. Ross, Jr., Chairman and Chief Executive Officer of WL Ross & Co. LLC, said to be "a leading merchant banking and private equity firm with offices in New York City, Seoul and Tokyo." Ross Decl. at ¶ 2. Mr. Ross's Declaration canvasses, in rather depressing detail, the "common knowledge within the financial community that Rite Aid was under severe financial pressure, and the Company had been scrambling for many months just to keep itself afloat." Id. at ¶ 6. After reviewing Rite Aid's publicly-filed financial statements and other financial information, Mr. Ross concluded that Rite Aid's "representations that it lacked (and would continue to lack for some time) the ability to offer any significant amount of cash towards the settlement of this action without gravely jeopardizing the future of the Company were reasonable and well-founded." Id. at ¶ 14. Given Rite Aid's sharply limited liquidity, therefore, "it became clear early on that any large settlement would have to include a significant non-cash component." Id. at ¶ 15. Mr. Ross therefore concludes his opinion as follows:

Given the severe financial situation that the Company was operating in during the negotiations, based on an ability to pay basis I believe that plaintiff's counsel negotiated an exceptionally favorable settlement on behalf of the Class.

Id. at ¶ 31.

In view of Rite Aid's financial straits — which its New York Stock Exchange market price has for many months reflected — it is hard to see how anyone of any financial worldliness could quibble with Mr. Ross's conclusion. Rite Aid was and is simply not in a position to pay any meaningful cash, and the proposed Class Action Settlement avails itself of the only realistic source for a cash contribution. As three-quarters of the consideration is in (largely) equity securities that will have an assured market value of $149.5 million, the only risk to the Class of actually realizing such value would be the bankruptcy of the company. But as Mr. Ross points out, no rational plaintiff would push Rite Aid into that condition, because to do so would, quite literally, kill the goose that once laid golden eggs and may, some day, do so again. The Class Action Settlement at least leaves open the possibility of such a happy conclusion to this so far unhappy financial story. The continued distraction and hemorrhaging of litigation, and the possibility of a bankruptcy-inducing catastrophic judgment, would not.

Under these circumstances, it is therefore not in the least surprising that the shareholders, including three hundred highly-sophisticated institutional ones, have without economic objection elected to take this bird in the hand. Plaintiffs' co-lead counsel have therefore won the best possible settlement available under these very difficult circumstances, and there is simply no benefit in further belaboring this obvious point.

2. The Non-Economic Aspects

(a) Assignment of Claims

We begin by noting that the Class Action Settlement contains what is now a non-economic term that holds the possibility of a future infusion of additional cash. We refer to Rite Aid's assignment of all its claims against Grass, Bergonzi, Noonan and KPMG provided in ¶ 4(f) of the Class Action Settlement. Of those four non-settling defendants, only Grass and Bergonzi object to this assignment of claims, and do so on their belief that the assignment is champertous.*fn12

As champerty is no longer part of the argot of lawyers and courts in this country as it once was, it is well to recall that it is defined as a "bargain between a stranger and a party to a lawsuit by which the stranger pursues the party's claim in consideration of receiving part of any judgment proceeds". Black's Law Dictionary 231 (6th ed. 1990) (citations omitted). See also, e.g., Ames v. Hillside Coal & Iron Co., 171 A. 610, 612 (Pa. 1934). As Black's points out, champerty is a form of maintenance, Black's Law Dictionary at 231, which is in turn defined as an "officious intermeddling in a lawsuit by a non-party by maintaining, supporting or assisting either party, with money or otherwise, to prosecute or defend the litigation." Id. at 954 (citation omitted).

These well-settled definitions, of ancient provenance in Anglo-American jurisprudence, on their face demonstrate why the proposed assignment of claims cannot be champertous. Put simply, the shareholders of Rite Aid are the antithesis of "strangers" to the claims that some of the former senior officers and directors breached their duties to the corporation those shareholders own. Moreover, assigning such claims to a class of such persons can in no sense of the English language be regarded as "officious intermeddling". Indeed, if these investors do not have a direct or historical interest in what happened to Rite Aid, who else would?

In the context of a publicly-held corporation riding the difficult financial seas Rite Aid has weathered for the past two years, the assignment of ¶ 4(f) makes eminent sense in a way that takes away any champertous shadow on this aspect of the settlement. While it is certainly true that the corporation itself is the victim of the claims sought to be assigned, the prosecution of such claims costs money and, perhaps more importantly, distracts the current management of Rite Aid from the more immediate and important task of assuring Rite Aid's survival and eventual return to prosperity for its shareholders. In the context of this case, therefore, it would be a perverse reading of champerty that would forbid the assignment negotiated here.*fn13

(b) The Insurance Compromise

As noted earlier, Rite Aid's directors' and officers' liability insurance carriers have settled their $50 million in total coverage with the already-made payment into escrow of $43.5 million. This 87% compromise on the face amount of the policy represents a complete settlement of all claims under this coverage, and represents the cash portion of both settlements.

Both Grass and Bergonzi took no part in the negotiations that led to this insurance compromise, and because they assert that they will no longer directly benefit from that coverage, they object to this aspect of both settlements. There is little law in Pennsylvania or Delaware on this subject, and both sides point to a decision of Judge Pellegrini of the Commonwealth Court, Anglo-American Ins. Co. v. Molin, 670 A.2d 194 (Pa.Cmwlth. 1995), in support of their respective positions.*fn14

These officers' objection on this point therefore depends upon a putative legal proposition that would hold that insurers may never settle claims against their policies unless the settlement involves all insureds under the policy. It is clear, however, that neither Anglo-American nor any other case brought to our attention so holds. To the contrary, in ...


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