General Tire and Rubber Co. Securities Litigation, In re
| Decision Date | 08 March 1984 |
| Docket Number | Nos. 82-3129,82-3130,s. 82-3129 |
| Citation | 726 F.2d 1075 |
| Parties | Fed. Sec. L. Rep. P 91,468, Fed. Sec. L. Rep. P 99,622 In re GENERAL TIRE AND RUBBER COMPANY SECURITIES LITIGATION. John J. PEARL & Curtis R. Pearl (82-3129), George Brooks Schreiber (82-3130), Objectors-Appellants, v. The GENERAL TIRE & RUBBER COMPANY, et al., Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Sterling Newell, Jr., Ron Tonidandel (argued), Spieth, Bell, McCurdy & Newell, Cleveland, Ohio, for appellants in No. 82-3129.
Robert D. Storey, Thomas P. Meaney, Jr., Burke, Haber & Berick, Cleveland, Ohio, Steven R. Riokin (argued), Washington, D.C., for appellant in No. 82-3130.
Gene Mesh (head counsel), Gene Mesh Co., L.P.A., Cincinnati, Ohio, for appellees Kramer, Milberg, Weintraub, Lewis, Kaufman, Moheit and Barr.
Avery S. Cohen, Kenneth G. Weinberg, Guren, Merritt, Sogg & Cohen, Cleveland, Ohio, Stanley L. Kaufman, Kaufman, Taylor & Kimmel, New York City, for Lewis.
David L. Creskoff, Mesirov, Gelman, Jaffe, Cramer & Jamieson, Philadelphia, Pa., for Kramer.
Jeffrey W. Herrmann, Peter S. Pearlman, Saddle Brook, N.J., for Weintraub.
Stanley Nemser, Wold, Popper, Ross, Wolf & Jones, New York City, for Barr.
Arthur N. Abbey, New York City, for Kaufman.
Richard B. Dannenberg, Lowey, Dannenberg & Knapp, Benjamin L. Rose, New York City, for Moheit, The General Tire & Rubber Co., and RKO Co.
Richard E. Guster, Ruetzel & Andress, Akron, Ohio, for Michael O'Neil, The General Tire & Rubber Co., and John O'Neil.
Isaac Schulz, Cleveland, Ohio, for Michael O'Neil, J.W. Gurtner, Fincher, Eichner, Vollbrecht and Nichols.
Marvin Schwartz (argued), Philip K. Howard, Sullivan & Cromwell, New York City, for The General Tire & Rubber Co., General Tire Intern., R.K.O. General, Aerojet General, D. Bruce Mansfield and J.T. Morley.
John G. Harkins, Jr., Pepper, Hamilton & Scheetz, Philadelphia, Pa., for Price Waterhouse.
William S. Burton, Cleveland, Ohio, John W. Beatty, Dinsmore, Shohl, Coates & Deupree, Cincinnati, Ohio, for Henkel, Mansfield, Morley and Walsh.
Before JONES and WELLFORD, Circuit Judges, and HARVEY, District Judge. *
Objecting stockholders of General Tire and Rubber Company (General Tire) John J. Pearl, Curtis R. Pearl and George B. Schreiber (objectors) appeal from an order of the district court approving the settlement of derivative claims arising from General Tire's extensive corporate misfeasance. Schreiber additionally contends that the district court erred in denying his petition to intervene, while the Pearls additionally claim that the district court erred in failing to provide adequate notice of and an adequate hearing on the proposed settlement. The principal issue before this Court, however, is whether the district court's approval of the settlement of eight shareholder derivative suits pending against General Tire constituted an abuse of discretion. After careful consideration of the law and policy in this complex area, we conclude that the district court did not abuse its discretion in approving the settlement.
The lengthy and convoluted history, from which the present appeal derives, begins in the 1960's and early 1970's. During that period, General Tire engaged in ubiquitous corporate improprieties and apparent illegalities. The United States Securities and Exchange Commission (SEC) uncovered these activities and instituted civil proceedings against General Tire. On May 10, 1976, the SEC's investigation culminated in the filing of a complaint, consent decree and judgment. SEC v. The General Tire and Rubber Co., [1975-76] Fed.Sec.L.Rep. (CCN) p 95,542 (D.D.C.1976).
This consent decree permanently enjoined General Tire from committing similar violations in the future. The decree also required General Tire to establish a Special Review Committee of its Board of Directors for the purpose of investigating and reporting the suspect activities cited in the SEC's complaint. The SEC approved the director chosen to head the committee, the independent counsel selected to inform the inquiry and the independent accountant procured to aid in the investigation. The committee conducted an extensive investigation, and filed a thorough report in the United States District Court for the District of Columbia. The report details General Tire's prior offensive and illegal practices, and suggests remedial action to prevent future improprieties. The Committee recommended that General Tire overhaul internal auditing procedures, enlarge the scope of independent accountant review, revise the procedures of General Tire's wholly-owned subsidiary, RKO General, and return misappropriated corporate funds. The Committee also determined that because board members Henkel, Henry, Mansfield, Morley, O'Neil and Walsh were not involved in any of the cited suspect activities, they were qualified to implement the proposed changes. In addition, the Committee found that the law and accounting firms chosen to investigate General Tire had no previous contact with the Company.
While the Special Committee conducted its investigation, four separate derivative suits were filed on behalf of General Tire against certain officers and directors alleging damages and seeking remedial relief from the "questionable payments" cited in the SEC complaint. 1 On April 18, 1977, the Judicial Panel on Multi-district Litigation consolidated the suits in the Northern District of Ohio. In Re: General Tire & Rubber Company Securities Litigation, 429 F.Supp. 1032 (J.P.M.D.L.1977). A Committee of the General Tire Board of Directors then retained the independent law firm of Bricker, Evatt, Barton & Eckler of Columbus, Ohio (presently Bricker & Eckler) to aid them in determining whether the continuation of the derivative suits was in General Tire's best interests. The Bricker firm concluded that independent members of the Board had the power to discontinue the suits, that Henkel, Henry, Mansfield, Morley and Walsh were such "independent members" and that they should instruct their counsel to "seek dismissal of the four shareholders derivative suits now pending against the company." 2 Following Bricker's recommendations, these directors decided not to pursue the derivative suits. General Tire and various individual defendants thereafter moved for summary dismissal of the suits. Those motions and further discovery were stayed, pending approval of the settlement.
On January 24, 1980, the Federal Communications Commission (FCC) refused to renew broadcast licenses held by RKO General, a wholly-owned subsidiary of General Tire. These licenses are worth over ten million dollars. The FCC based its decision to deny renewal on the fact that (1) General Tire and RKO General had engaged in reciprocal trade practices in contravention of the anti-trust laws, (2) RKO had filed inaccurate financial records, and (3) RKO had deliberately withheld information from the SEC in its investigation of General Tire. In Re: Application of RKO General, Inc., 78 FCC 2d 1 (1980). RKO appealed the FCC's decision to the United States Court of Appeals for the District of Columbia. The Court reversed the loss of two licenses, but affirmed the loss of a third license because RKO wrongfully withheld information during the renewal proceedings. 3
After the FCC decided to deny the licenses, derivative suits were filed on behalf of both RKO and General Tire. These suits were calculated to recover damages incurred by General Tire and RKO as a result of the loss of the licenses. On March 27, 1980, two new directors, Lester Garvin and R.B. Tullis, were appointed by General Tire to another special litigation committee. They recommended that the Company invoke the business judgment rule and dismiss the derivative actions. That recommendation was supported by additional conclusions reached by Bricker. Seven "independent" directors adopted the recommendation, whereupon the defendants filed motions to dismiss and for summary judgment. The suit was then transferred to the United States District Court for the Northern District of Ohio and joined for settlement purposes with the four previous 1977 derivative suits. 4
On March 3, 1981, the district court ordered discovery on the issue of the independence of directors and requested supplemental briefing on the effect of the termination of RKO's licenses. The plaintiffs in the derivative suits were persuaded by discovery that the directors were indeed independent. After discovery, the parties entered into settlement negotiations.
On June 25, 1981, the parties in the several derivative actions presented for the district court's approval a Stipulation of Settlement. The terms of that Settlement are the subject of this appeal. Those terms reflect the parties' belief that General Tire's independent directors were empowered, as a matter of law, to determine whether these actions should be maintained, that those directors were duly chosen to dismiss the actions and that the continuation of the litigation would create a great business hardship for General Tire. The settlement also acknowledges the plaintiffs' role in implementing remedial action to prevent future improprieties and provides for the appointment for three years of two "outside" directors on the RKO Board. Although the plaintiffs' attorneys did receive a fee award, neither General Tire nor RKO recovered monetary damages. The settlement's terms finally require the dismissal of all claims relating to the complaints and the waiver of all rights to recover losses incurred by General Tire.
On July 20, 1981, notice of a settlement hearing was sent to all 50,000 of General Tire's shareholders. The notice described the nature of the case, the terms of the proposed settlement, the independent directors' conclusion that the continuation of the derivative suits was...
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