Hays v. Walgreen Co. (In re Walgreen Co. Stockholder Litig.)

• Decision Date: 10 August 2016
• Docket Number: No. 15-3799,15-3799
• Citation: 832 F.3d 718
• Parties: In re: Walgreen Co. Stockholder Litigation Hays, et al. v. Walgreen Co., et al. Appeal of: John Berlau, Objector.
• Court: U.S. Court of Appeals — Seventh Circuit

832 F.3d 718

In re: Walgreen Co. Stockholder LitigationHays, et al.

v. Walgreen Co., et al.Appeal of: John Berlau, Objector.

No. 15-3799

United States Court of Appeals, Seventh Circuit.

Argued June 2, 2016

Decided August 10, 2016

Patrick V. Dahlstrom, Attorney, Pomerantz LLP, Chicago, IL, David F. E. Tejtel, Attorney, Friedman Oster & Tejtel PLLC, New York, NY, for Plaintiff–Appellee.

Theodore H. Frank, Melissa Ann Holyoak, Attorneys, Competitive Enterprise Institute, Center for Class Action Fairness, Washington, DC, for Appellant.

James W. Ducayet, Elizabeth Yvonne Austin, Kristen R. Seeger, Attorneys, Sidley Austin LLP, Chicago, IL, for Defendants–Appellees.

Before Posner and Sykes, Circuit Judges, and Yandle, District Judge.^*

Posner

, Circuit Judge.

In merger litigation the terms “strike suit” and “deal litigation” refer disapprovingly to cases in which a large public company announces an agreement that requires shareholder approval to acquire another large company, and a suit, often a class action, is filed on behalf of shareholders of one of the companies for the sole purpose of obtaining fees for the plaintiffs' counsel. Often the suit asks primarily or even exclusively for disclosure of details of the proposed transaction that could, in principle at least, affect shareholder approval of the transaction. But almost all such suits are designed to end—and very quickly too—in a settlement in which class counsel receive fees and the shareholders receive additional disclosures concerning the proposed transaction. The disclosures may be largely or even entirely worthless to the shareholders, in which event even a modest award of attorneys' fees ($370,000 in this case) is excessive and the settlement should therefore be disapproved by the district judge. In this case, however, the district judge approved the settlement, including a narrow release of claims and the fee for the plaintiff's lawyers that the company had agreed not to oppose. A shareholder named Berlau, having objected unsuccessfully to the settlement in the district court, has appealed.

In 2012 Walgreen Co. (usually referred to as “Walgreens”) acquired a 45 percent equity stake in a Swiss company named Alliance Boots GmbH, plus an option to acquire the rest of Alliance's equity, beginning in February 2015, for a mixture of cash and Walgreens stock. In 2014 the two companies altered the deal to allow the option to be exercised earlier. Walgreens announced its intent to purchase the remainder of Alliance Boots and then engineer a reorganization whereby Walgreens (having swallowed Alliance Boots) would become a wholly owned subsidiary of a new Delaware corporation to be called Walgreens Boots Alliance, Inc. Within two weeks after Walgreens filed a proxy statement seeking shareholder approval of the reorganization, the inevitable class action was filed, and 18 days later—less than a week before the shareholder vote—the parties agreed to settle the suit.

The suit sought additional disclosures to the shareholders, disclosures alleged to be likely to affect the shareholder vote. The settlement required Walgreens to issue several of the disclosures to the shareholders—that was the entire benefit of the settlement to the class—and released the company from liability for the other disclosure-related claims made in the suit. It also authorized class counsel to ask the district judge to award them $370,000 in attorneys' fees, without opposition from Walgreens.

The disclosures agreed to in the settlement (the parties call these the supplemental disclosures, as shall we) represented only a trivial addition to the extensive disclosures already made in the proxy statement: fewer than 800 new words—resulting in less than a 1 percent increase—spread over six disclosures.

The supplemental disclosure deemed most significant by class counsel concerned the nomination to the board of directors of Walgreens of Barry Rosenstein, who was involved in a hedge fund that had a 1.5 percent interest in Walgreens stock. The disclosure states that before his nomination he had “engaged in preliminary discussions [with Walgreens] during which [he had] expressed his views regarding Walgreens and its strategic direction and prospects,” that Walgreens had entered into a confidentiality agreement with Rosenstein's firm, and that there had been further consultations ending in Walgreens' concluding “that Mr. Rosenstein would be a valuable addition to the Board” of Walgreens Boots Alliance.

The new disclosure was worthless because it was and is obvious that Walgreens would not nominate a person for election to its board of directors without discussing with the prospective nominee the company's strategic direction and prospects. The only new thing to be gleaned from the disclosure related to the timing of the conversations. Rosenstein had been nominated on September 5, 2014, and the disclosure indicated that there had been conversations stretching back at least a month. But even without that revelation, the shareholders would have assumed that Rosenstein's appointment to the board had not happened overnight, and the disclosure revealed no further details about the period or content of the pre-nomination consultations.

A second supplemental disclosure concerned the allocation of stock in Walgreens Boots Alliance to two investment groups, SP Investors and KKR Investors, after the merger. The disclosure estimated that SP Investors would have about 11.3 percent of the shares and KKR Investors about 4.6 percent. But as these estimates could be derived by simple arithmetic from data in the proxy statement, the disclosure added nothing. See, e.g., Werner v. Werner, 267 F.3d 288, 299–300 (3d Cir. 2001)

.

Supplemental disclosure number three: in 2014, shortly before Walgreens and Alliance decided to merge, Walgreens' executive vice president and chief financial officer and president of its international division, Wade D. Miquelon, had resigned from the company and sued it for defamation. The proxy statement did not mention Miquelon's resignation or his suit; the supplemental disclosure listed the claims made in his suit and said that Walgreens had denied them. There was no suggestion that the suit (seven of the nine counts of which were dismissed in 2015) could have had a significant impact on the formation or operation of Walgreens Boots Alliance, or that it was even related to the formation of the new company.

Supplemental disclosure number four: The proxy statement included a bullet-point list of risk factors that the Walgreens board had considered in deciding whether to merge with Alliance Boots. The supplemental disclosure added four to the list—but all were based on language found in the proxy statement. The additional disclosure provided no new information to shareholders.

Supplemental disclosure five: The proxy statement noted that Stefano Pessina, who was designated to become CEO of Walgreens Boots Alliance and had interests in Alliance Boots resulting from his affiliation with SP Investors had, along with one other member of Walgreens' board, not voted on whether to approve the merger. The supplemental disclosure explained that “as a result of their interest in the proposed transaction” the two had recused themselves from the Board's decision to exercise Walgreens' option to buy the rest of Alliance Boots. The supplemental disclosure merely stated the reason they'd not voted, and there is nothing to suggest that the disclosure of that reason could have upended the merger. And their recusal from voting on the reorganization because of their financial interest in it had been highlighted elsewhere in the proxy statement. Class counsel argues that the disclosure revealed that the two board members also had not participated in discussions leading up to the shareholder vote, but the disclosure does not say that.

Supplemental disclosure number six, the last supplemental disclosure, also concerns Pessina. According to a public filing, he had been appointed acting CEO of the new entity because of his “extensive leadership experience and knowledge of Walgreens and Alliance Boots.” The statement went on to list previous positions he'd held, and boards he'd sat on. The supplemental disclosure embroidered the enumeration of Pessina's qualifications by remarking that among the “factors” that the board had considered were his “considerable knowledge of the industries in which both Walgreens and Alliance Boots operate, his familiarity with both ... businesses and leadership teams and his international experience and background in managing global businesses.” This was frosting on the cake—the cake consisting of the detailed enumeration in the public filing of his business history. And to be told that the board considered “a number of factors” was to be told nothing.

The reorganization that ratified Walgreens Boots Alliance was approved by 97 percent of the Walgreens shareholders who voted. It is inconceivable that the six disclosures added by the settlement agreement either reduced support for the merger by frightening the shareholders or increased that support by giving the shareholders a sense that now they knew everything. This conclusion is supported by recent empirical work which shows that there is little reason to believe that disclosure-only settlements ever affect shareholder voting. Jill E. Fisch, Sean J. Griffith & Steven Davidoff Solomon, “Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform,” 93 Tex. L. Rev . 557, 561, 582–91 (2015)

. The value of the disclosures in this case appears to have been nil. The $370,000 paid class counsel—pennies...