The opinion of the court was delivered by: McLAUGHLIN, Sean J., District J.
Presently pending before the Court in the above-captioned class action lawsuit is a motion by the Plaintiffs, on behalf of the Class, for court approval of a proposed settlement of the litigation and allocation of settlement proceeds. Also pending is a motion by Class Counsel for an award of attorneys' fees, reimbursement of expenses, and incentive awards to the two lead Plaintiffs in the case. Generally speaking, there have been no objections by class members with respect to the amount of the settlement fund, the proposed plan of allocation, or counsels' request for expenses and incentive awards. Notably, however, one class member -- Naomi Purchase, putatively, the largest shareholder of the affected Class,*fn1 has objected to Class Counsels' fee request. Mrs. Purchase both objects to the amount of fees sought by Class Counsel and seeks an award of fees and expenses on behalf of her own counsel relative to work performed in the related case of Purchase, et al. v. Ludrof, et al., 1:06-cv-130 (W.D. Pa.).
This Court has jurisdiction over the instant case pursuant to 28 U.S.C. § 1332(a)(1), as Plaintiff Lin Lan and Defendants are citizens of different states and the matter in controversy with respect to Ms. Lan exceeds $75,000, exclusive of interest and costs. The Court has supplemental jurisdiction pursuant to 28 U.S.C. § 1367 with respect to the claims of Plaintiff J. William Morris and other members of the Class. The following constitute the Court's findings of fact and conclusions of law with respect to these motions.
A. The Underlying Facts and Preliminary Litigation
This litigation arises out events which occurred in connection with a May, 2006 tender offer (the "Tender Offer") for the outstanding publicly owned shares of Erie Family Life Insurance Company ("EFL"). The Tender Offer was undertaken by Erie Indemnity Company ("EIC") and Erie Insurance Exchange ("Exchange"), the majority shareholders of EFL, in an effort to take EFL private through what is known as a "two-step merger."
Prior to the Tender Offer which forms the basis of this litigation, EIC and Exchange together owned approximately 75% of the shares of EFL. On March 21, 2006, EIC and Exchange issued a press release announcing a Tender Offer to purchase essentially all of the shares of EFL that they did not already own for a price of $32.00 per share. This price represented a 6.7% premium over the closing price of EFL shares as of March 21, 2006. In their press release, EIC and Exchange disclosed their intention, in the event that they were successful in increasing their holdings to more than 80% of EFL's shares, to effect a short-form merger with EFL pursuant to 15 Pa. C.S.A. §1924.
The Tender Officer was subject to the condition that it must be accepted by a majority of the shares not owned or controlled by EIC, the Exchange, or their affiliates. Thus, the offer required that only 1,187,827 of the 2,350,538 minority shares be tendered in order that EIC and Exchange could thereafter engage in a short-form merger without further shareholder approval. The offer further provided that, in the event the short-form merger was accomplished, any non-tendering shareholders would receive the same compensation (i.e., $32.00 per share) as those who initially tendered their shares. In addition, shareholders were advised that any shareholder who did not wish to accept the $32.00 per share offer would be entitled to pursue statutory appraisal rights pursuant to 15 Pa. C.S.A. §§ 1571 et seq.
EIC and Exchange filed the required Tender Offer Statement and Rule 13e-3 Transaction Statement with the United States Securities and Exchange Commission ("SEC") on or about April 27, 2006. In addition, EFL filed its Solicitation/ Recommendation Statement under § 14(d)(4) with the SEC. Collectively, these documents disclosed the fact that all members of EFL's board of directors were also directors of EIC, and consequently EFL had no independent directors to evaluate the terms of the Tender Offer on behalf of EFL shareholders. The documents further disclosed that EFL's board of directors had determined not to make any recommendation to the shareholders with respect to whether or not they should accept the Tender Offer. No independent valuation expert had been retained to provide services on behalf of the minority EFL shareholders.
The Tender Offer was scheduled to close on May 24, 2006.
On May 15, 2006 Plaintiff Lin Lan commenced this action by filing a Class Action Complaint on behalf of herself and all similarly situated minority shareholders of EFL who had suffered or would suffer injury as a result of the Defendants' actions in connection with the Tender Offer. Lan's sole cause of action was one for breach of fiduciary duty against the following Defendants: (1) EIC, Exchange, and EFL (collectively, the "Corporate Defendants"); and (2) numerous individuals (the "Individual Defendants") who were affiliated with the Corporate Defendants as officers and/or directors of EIC, EFL, and/or other Erie Insurance companies. The complaint alleged that these Defendants had breached their fiduciary duties to the Plaintiff and other similarly situated minority shareholders by, inter alia, offering an unfair and inadequate price arrived at by unfair procedures and failing to provide sufficient information in the Tender Offer documents and otherwise by which the EFL minority shareholders could make an informed decision as to whether to tender their shares.
Defendants subsequently filed an amendment to the Tender Offer documents on May 19, 2006. Thereafter, on May 25, 2006, Plaintiff Lan, joined by new Plaintiff J. William Morris, filed their First Amended Class Action Complaint ("FAC") against the Defendants, once again alleging a claim on behalf of all similarly situated EFL minority shareholders for breach of fiduciary duty by the Defendants in connection with the Tender Offer. Like the original complaint, the FAC premised the breach of fiduciary duties claim upon the Defendants' alleged offering of an unfair and inadequate tender offer price arrived at by unfair procedures and their alleged failure to provide sufficient information in the Tender Offer documents and otherwise from which EFL minority shareholders could make an informed decision about whether to tender their shares. However, the FAC identified specific facts and disclosures in support of the allegation that the Tender Offer documents had been unreasonably slanted so as to lead the minority stockholders to believe that both the proffered $32.00/ share price and the underlying valuation method were fair.
On June 1, 2006, a separate class action lawsuit arising out of the Tender Offer was commenced in this Court by Naomi Purchase, naming essentially the same Defendants as were named in the Lan action. See Purchase, et al., v. Ludrof, et al., 1:06-cv-130 (W.D. Pa.). Like Ms. Lan, Mrs. Purchase asserted a claim for breach of fiduciary duty and complained that the Defendants had used their board positions and/or control over EFL to essentially "freeze out" EFL's minority shareholders at an unreasonably low price and through unfair means. However, unlike Lan, Purchase included in her complaint a claim under Section 14(e) of the Securities Exchange Act of 1934 (commonly known as the "Williams Act") based on allegations that Defendants had committed fraud in connection with the Tender Offer by manipulating downward to $32 the price at which the Tender Offer was consummated, and by failing to disclose such manipulation in the Tender Offer documents, thereby providing false and misleadingly incomplete information to the EFL shareholders in connection with their decision whether or not to tender their EFL shares.
Meanwhile, in the Lan action, the Defendants filed their answers to the Amended Complaint and this Court entertained an initial case management conference on August 21, 2006. At that conference, a date of February 21, 2007 was established as a deadline for initial discovery.
Discovery in this case proceeded accordingly. In mid-July, Plaintiffs' counsel served Defendants with requests for the production of documents. Thereafter, Plaintiffs' counsel subpoenaed third parties, including Cochran Caronia Waller Securities ("CCW") and Houlihan Lokey Howard and Zukin, who had served as consultants to Defendants in connection with the Tender Offer, and Archstone Consulting, who had provided financial advice to Defendants in and around the time the Tender Offer was being considered. Following extensive discussions and negotiations with counsel for Defendants and their consultants, Plaintiffs' counsel were ultimately provided, and reviewed, in excess of 20,000 pages of documents in response to their discovery requests.
On October 11, 2006, counsel involved in the Lan and Purchase actions submitted to the Court a stipulation and proposed order [Doc. # 61] relative to the coordination of discovery in the two cases, which was approved by the Court that same day [Doc. # 62]. Among other things, the stipulation provided that the Defendants would provide Mrs. Purchase's counsel with copies of all documents produced in the Lan action as soon as possible and that all depositions in the two actions would be noticed jointly but taken only once, with Lan counsel generally asking questions first and Purchase counsel asking questions thereafter.
At the case management conferences held on August 21 and September 22, 2006 in the Lan case, the topic of class certification was discussed and this Court inquired, on at least one occasion, whether it would be appropriate for the parties to resolve the issue of class certification by way of stipulation. The parties did subsequently stipulate to: (a) certification of a class comprised of "[a]ll shareholders of Erie Family Life on May 25, 2006, except Defendants and any person, firm, trust, corporation, or other entity related to or affiliated with any of the Defendants," see Order Regarding Class Certification [Doc. # 65] at p. 2 ¶ 1; (b) certification of Plaintiffs Lin Lan and J. William Morris as class representatives with respect to the breach of fiduciary duty claim asserted in the FAC; and (c) appointment of Wechsler Harwood, LLP, by William R. Weinstein, Esq., as Class Counsel. (Id. at p. 4, ¶ 3.) On October 20, 2006 this Court approved the Stipulation, making these certifications official. Id.*fn2
In the meantime, on August 18, 2006, the Individual Defendants in the Lan Action moved to dismiss the Amended Complaint and for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c) on the grounds that Plaintiffs were precluded under Pennsylvania law from asserting claims for breach of fiduciary duty directly against the Individual Defendants. Two months later, all Defendants in the Purchase action moved to dismiss that case in its entirety. As to Mrs. Purchase's Williams Act claim, the Defendants asserted that the complaint failed to state an actionable claim with the particularity required by applicable law. As to her state law breach of fiduciary claim, the Defendants argued that there was no remaining basis for federal jurisdiction because Mrs. Purchase and the Defendants were non-diverse parties. Following extensive briefing on these matters, the Court entertained oral argument on November 13, 2006.
While these pending motions were under advisement, counsel for both parties in the Lan action notified the Court in correspondence dated February 20, 2007 that they had reached a settlement agreement in principal. Following this notice, the Court stayed further litigation in the Purchase action and allowed the moving Defendants in this action to withdraw their Rule 12(c) motion without prejudice to be refiled in the event final settlement was not achieved.
B. The Settlement Negotiations and Terms of Settlement
The Stipulation of Settlement (the "Stipulation") provides for the payment of total Settlement Consideration equal to $5,234,277.17 (or $2.45 per share for 2,136,439.66 total shares held by the members of the Class on May 25, 2006) in settlement of all claims that were or could have been asserted in connection with the Tender Officer, including but not limited to the Williams Act and fiduciary duty claims asserted in the Purchase Action.
When added to the original $32.00/share offering, this additional compensation of $2.45 per share represents a total premium of 14.9% over the closing price of EFL's stock as of March 21, 2006.
Under the terms of the Settlement, no claim form or any other document is required to be filed by Class members to be entitled to participate in the Settlement. All Class members who do not request exclusion from the Class will be entitled to receive payment under the Settlement without taking any further action. The Settlement Fund plus any interest earned before distribution, less the costs of notice to the Class, administration of the Settlement, any applicable taxes and related expenses, the award of attorneys' fees and reimbursement of expenses to Plaintiffs' Counsel, and any incentive fees awarded to Plaintiffs, is defined in the Stipulation as the "Net Settlement Fund."
Upon approval of the Settlement by the Court, the Net Settlement Fund will be distributed by the Settlement Administrator pro rata (i.e., in accordance with the ratio of each Class member's EFL shares owned on May 25, 2006 to the total 2,136,439.66 minority shares held on May 25, 2006) (i) to all Class members who have not validly excluded themselves from the Settlement, and (ii) to Erie Insurance Exchange with respect to those shares owned by Class members who validly exclude themselves. Any Net Settlement Funds (other than the pro rata reversion to Erie Insurance Exchange relating to valid exclusions) not ultimately paid to Class members after the expiration of 180 days from the date of the initial distribution of the Net Settlement Fund and the completion of reasonable follow-up efforts by the Settlement Administrator will be paid to an agreed-upon charity.
2. The Settlement Negotiations
From the time that Plaintiffs filed their complaint in this action and throughout 2006 and the beginning of 2007, Plaintiffs' counsel investigated, discussed and actively pursued with Defendants' counsel the possibility of resolving the action through settlement.
The settlement negotiations were conducted principally by William R. Weinstein, Esq., Plaintiffs' Class Counsel, on behalf of Plaintiffs, and John Soroko, Esq. of Duane Morris, LLP, counsel for the Corporate Defendants. Both Messrs. Weinstein and Soroko have submitted declarations in support of the Settlement providing substantial detail regarding the settlement negotiations.
Among other things, these supporting declarations confirm that the Settlement was reached as a result of extended, vigorous, and arms-length negotiations between Mr. Weinstein and Mr. Soroko, who are both experienced counsel.
These declarations establish that, by late October of 2006, Plaintiffs' Class Counsel had completed an initial review of voluminous materials produced by the defense, had pursued numerous follow-up inquires, and were pushing for formal depositions. Settlement negotiations followed thereafter, prompted in part by this Court's suggestion, on at least one occasion, that the parties consider mediation.
In fact, Messrs. Weinstein and Soroko exchanged the names of potential mediators and, at one point, reached agreement as to a mediator. Ultimately, however, Lan counsel agreed to attempt to reach an agreement without the attendant costs of depositions or formal mediation. Mr. Weinstein represents that he viewed these costs as likely to be ultimately borne by the Class if the case was successfully resolved through negotiations.
The parties reached agreement in mid-January, 2007 based on the terms discussed above. These principal terms were memorialized in a Memorandum of Understanding ("MOU") thereafter negotiated and ultimately executed by counsel for the parties on February 15, 2006. As previously noted, the prescribed Settlement Fund, as set forth in the MOU, consists of $5,234,277.17, or $2.45 per share for 2,136,439.66 total shares held by the members of the Class on May 25, 2006, plus interest, to be paid in settlement of all claims that were or could have been asserted in connection with the Tender Offer. The MOU further prescribed that the ultimate distribution to the Class of the Net Settlement Fund would be made without the need for the filing of individual claim forms by Class members.
Mr. Weinstein's declaration establishes that he consulted with an expert financial consultant throughout the course of the negotiations, a fact corroborated by the Declaration of his expert, Candace Preston, which has also been submitted in support of the Settlement. In her declaration, Ms. Preston opines that the Tender Offer Price of $32.00 per share is not fair to the minority EFL shareholders and that a more reasonable range of fairness is $33.00 to $36.50. (See Decl. of Candace Preston in Support of Settlement  at ¶ 17.) Thus, the agreed upon Settlement Consideration is squarely in the middle of the range of reasonable values she has computed as more fair to the EFL minority shareholders than the $32 price paid by Defendants in the Tender Offer.
Mr. Weinstein's declaration further establishes that, in light of Defendants' agreement to the provision eliminating the need for the filing of claim forms, Class Counsel considered the reversion back to Defendants regarding excluded shares to be a reasonable compromise -- particularly in light of his discussions with Mr. Soroko where they both understood that the reversion was principally intended to provide funds enabling the Defendants to address, as required, any actual and potential claims of EFL shareholders -- such as Mrs. Purchase -- who might wish to be excluded from the Settlement.
The parties to the Lan settlement further agreed that an award of attorneys' fees could be based on the "pre-reversionary" amount of the Settlement fund because it was anticipated that the number of shares that might validly be excluded from the Settlement would be de minimis.
Finally, Mr. Weinstein states in his declaration that he had no objection to the condition demanded by Defendants that any potential settlement be accompanied by a global release of all claims, including the Purchase Williams Act claim, because of his personal view that the claim was legally problematic and because it did not seek damage amounts different or greater than those claimed under state law and subject to resolution by the proposed Settlement. Mr. Weinstein states that resolution of the Purchase Williams Act claim as part of a global settlement achieved in this action is consistent with well-established federal law in these types of federal class actions.
The Court was advised of the settlement in principle on February 20, 2007 -- the day before the Court-imposed discovery cutoff established in the Court's August 21, 2006 Scheduling Order. The final settlement papers were presented to the Court for preliminary approval on April 27, 2007
3. Preliminary Approval and Mailing of Notice
Plaintiffs filed their unopposed motion for preliminary approval of the Settlement on April 27, 2007. The Court held a telephonic hearing with counsel for all Parties both in the instant action and in the Purchase action on May 23, 2007.
On May 24, 2007, the Court entered the Order Preliminarily Approving Settlement (the "Hearing Order"), in which the Court, among other things: (i) certified the Class for purposes of settlement only; (ii) preliminarily approved the Settlement; (iii) scheduled a hearing for July 12, 2007 to consider whether to approve the Settlement as being fair, reasonable and adequate, to enter final judgment thereon and to consider any application by Plaintiffs' Counsel for attorneys' fees and expenses and an award of incentive fees to Plaintiffs (the "Fairness Hearing"); and (iv) directed that notice of certification of the Class, the proposed Settlement and the Fairness Hearing, substantially in the form annexed as Exhibit B to the Stipulation (the "Notice"), be disseminated to all Class Members who could be identified with reasonable effort.
The Notice mailed to Class members advised that Plaintiffs' Counsel intended to apply for attorneys' fees in an amount equal to not more than 30% of the Settlement Fund, plus expenses and the incentive awards. Class members were also advised that if the awarded attorneys' fees, expenses, Plaintiffs' incentive fees and the costs to administer the Settlement do not exceed 33% of the Settlement Fund, then each Class member who did not request exclusion will receive payment equal to at least $1.64 for each share of EFL stock owned on May 25, 2006.
Plaintiffs' Class Counsel have submitted a Declaration from the Settlement Administrator appointed in the Hearing Order attesting that the Notice was disseminated in accordance with the Court's Hearing Order. According to the Settlement Administrator's Declaration, 1188 copies of the Notice of the Settlement were disseminated to putative Class Members. The deadline for serving objections to the Settlement or requesting exclusion from the Class expired on July 2, 2007. A total of seven exclusion requests were received, representing only 52,463 of the total 2,136,439.66 minority EFL shares subject to the Settlement. Otherwise stated, those Class Members who will be participating in the Settlement represent 2,083,976.66 shares, or 97.5%, of the total minority EFL shares subject to the Settlement.
Among the seven exclusion requests was a request on behalf of the PWH Trust with respect to 49,872 shares. This is the same entity that had previously commenced an appraisal action in connection with the Tender Offer, and the exclusion request was a condition of a private settlement entered into between the Trust and Defendants whereby the Trust agreed to accept the same $2.45 per share consideration as was agreed to under the present proposed Settlement.
The other six exclusion requests comprise a total of 2,591 shares, or slightly more than 0.1% of the total shares subject to the Settlement. Even as to this group, one or two of the exclusions were based on the shareholder's rationale that the original $32.00 offering was sufficient compensation. (See Declaration of John J. Soroko, Esq. [Doc. # 83] at Ex. F.)
C. Plaintiffs' Counsels' Request for Attorneys' Fees, Expenses and Plaintiff Incentive Fees
As compensation for their efforts on behalf of the Class, Plaintiffs' Counsel seek an award of attorneys' fees in the amount of $1,308,569.29, representing twenty-five percent (25%) of the $5,234,277.17 Settlement Fund, as well as reimbursement of expenses in the amount of $66,080.81 (including the fees and costs of the Settlement Administrator), which were incurred in connection with the prosecution and successful resolution of the Action, along with interest on these amounts at the same rate as earned by the Settlement Fund. Plaintiffs' Counsel also request incentive fee awards for plaintiffs Lin Lan and William Morris in the amounts of $5,000 and $2,000, respectively.
Plaintiffs' Counsel originally requested that the Court approve an award of attorneys' fees in the amount of $1,465,597.60, representing twenty-eight percent (28%) of the $5,234,277.17 Settlement Fund.
In support of their fee and expense request, Plaintiffs' Counsel have submit the Declaration of Mr. Weinstein, which provides a detailed explanation of the number of hours and usual hourly rates for the lawyers and paralegals who have worked on the Action from its inception through Settlement, as well as the scope and nature of the work performed. The Declaration represents that Plaintiffs' Counsel collectively will have expended a total of 923.1 hours through the date of the Final Settlement Hearing. This time collectively results in a total lodestar of $430,176 through that date.*fn3 The resulting multiplier in light of this original fee request was 3.40.
Class Member Naomi Purchase, through her primary counsel of record, Frank J. Johnson, Esq., filed an objection to this requested fee award on July 2, 2007 [Doc. # 78]. In her objection, Mrs. Purchase took the position that the requested 28% fee award was excessive and that a total fee award of 21% of the Settlement amount actually paid to class members would be appropriate. Moreover, Mrs. Purchase argued that the 21% award should be apportioned in the ratio of 14% to Class Counsel and 7% to her own counsel. While she advocated a total award of attorneys' fees equal to no more than 21% of the amount actually distributed to the Class, Mrs. Purchase opined that, in all events, the total fee award should be no greater than 25% of the Net Settlement Fund.
In light of Mrs. Purchase's objection, Class Counsel unilaterally reduced their fee application to 25% of the gross Settlement Fund. In addition, they proposed a fee award to Mr. Johnson equal to 25% of the three-percent reduction of their own fee request (or approximately $39,257.08) as suitable compensation for his contribution toward achieving this benefit for the Class. Class Counsel oppose any further fee award to Mr. Johnson.
Mrs. Purchase remains opposed to Class Counsels' revised fee request as the Court will discuss in more detail below.
Plaintiffs' Counsel collectively seek an award of expenses totaling $66,080.81. On its face, this amount equals about 1.25% of the entire Settlement Fund. Furthermore, $30,758.30 of this amount is the agreed upon total fee negotiated by Plaintiffs' Class Counsel with the Settlement Administrator, RG2, for the performance of all administrative functions, and $24,850.46 is the amount incurred by Plaintiffs' Class Counsel for the fees and expenses of his retained financial consultant/expert, Candace Preston. Invoices for those amounts are submitted with the Declaration of Plaintiffs' Class Counsel. The remaining expenses, $10,472.05, are comprised of expenditures for document reproduction, legal research, transportation, meals and lodging. Collectively, they comprise less than .2% of the total Settlement Fund. The Declaration of Plaintiffs' Class Counsel provides substantial detail about the amounts incurred by each of Plaintiffs' Counsel and the nature of the expenses incurred.
No Class Member has opposed this request. However, Mrs. Purchase and her counsel have requested reimbursement of their own expenses in the amount of approximately $15,379.*fn4
In support of Class Counsels' request for incentive fee awards for the two named Plaintiffs totaling $7,000, the Declaration of Class Counsel details the services they rendered to the Class. Class Counsel represents that Ms. Lan was involved in this litigation throughout, including in connection with the drafting of the complaints, responding to Defendants' document requests and interrogatories, and in connection with the status of settlement negotiations as they progressed. Mr. Morris participated in responding to Defendants' document requests and interrogatories, and also kept apprised of the developments of the case, including its ultimate Settlement.
No Class Member has opposed this request.
D. Class Member Objections
There is no objection filed by any Class Member relative to the fairness, reasonableness and adequacy of the proposed Settlement, or the requests of Class Counsel for reimbursement of their expenses and incentive awards for the two named Plaintiffs. There have been only seven requests for exclusion from the Settlement, which we address in more detail below.
There has been one objection by Mrs. Purchase to Class Counsels' requested fee award. As matters currently stand, that objection is three-fold: (1) Mrs. Purchase believes that any award of attorneys' fees in this case should be based on a reasonable percentage of the Settlement Funds actually paid to the Class, as opposed to a percentage of the Gross Settlement Fund; (2) Mrs. Purchase believes that a total award of attorneys' fees equal to no more than 21% of the Settlement Funds actually paid to the Class would be most appropriate but that, in all events, the total cap should not exceed 25% of the funds actually paid to Class members; and (3) Mrs. Purchase believes that the award of attorneys' fees should be apportioned such that ...