IN RE SMITHKLINE BECKMAN CORP. SECURITIES LIT.

• Decision Date: 29 October 1990
• Docket Number: No. 88-7474.,88-7474.
• Citation: 751 F. Supp. 525
• Parties: In re SMITHKLINE BECKMAN CORPORATION SECURITIES LITIGATION.
• Court: U.S. District Court — Eastern District of Pennsylvania

751 F. Supp. 525

In re SMITHKLINE BECKMAN CORPORATION SECURITIES LITIGATION.

No. 88-7474.

United States District Court, E.D. Pennsylvania.

October 29, 1990.

Dianne M. Nast, Kohn, Savett, Klein & Graf, P.C., Philadelphia, Pa., Richard D. Greenfield, Judith N. Dean, Haverford, Pa., Sherrie R. Savett, Berger & Montague, Philadelphia, Pa., for plaintiffs.

David L. Cohen, Ballard, Spahr, Andrews & Ingersoll, Philadelphia, Pa., for defendant.

MEMORANDUM

RAYMOND J. BRODERICK, District Judge.

The individual plaintiffs in this consolidated class action seek, pursuant to Federal Rule of Civil Procedure 23, judicial approval of a negotiated settlement agreement in which the defendants agreed to pay class members the sum of $22 million. Plaintiffs' lead counsel have filed a joint petition for reimbursement of expenses and an award of attorneys' fees. As part of the latter application, counsel also request that special awards be conferred upon the class representatives. An appropriately noticed public hearing was held on October 3, 1990. For the reasons that follow, the Court will grant both motions.

I.

A.

This litigation consists of eight class action suits instituted under Section 11 of the Securities Act of 1933, 48 Stat. 74, 15 U.S.C. § 77k, Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. §§ 78j(b) & 78t(a), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. The defendants are SmithKline Beckman Corporation, which is now known as SmithKline Beecham Corporation, members of its Board of Directors, Henry Wendt, George Ebright, and Kenneth Kermes. The Court consolidated the separate lawsuits for pretrial purposes and, over the defendants' opposition, certified as a class all persons (excluding the defendants and their successors, affiliates, and family members) who purchased SmithKline common stock from March 13, 1987 through September 28, 1988.

The plaintiffs alleged in their complaint that the individual defendants, acting in their capacities as officers or directors of SmithKline, made misrepresentations of material fact in the company's 1986, 1987, and 1988 shareholder reports, in its 10-K reports¹ filed with the SEC in 1987, and in various public statements. More precisely, the plaintiffs charged that the defendants fraudulently had fostered the expectation that SmithKline would continue its ten percent rate of annual growth in operating earnings throughout the 1980s. This was ostensibly despite the fact that the market for the drugs Tagamet and Dyazide, the company's principal sellers, was eroding, that SmithKline lacked any new substantial products which could be introduced in the short term, and that price increases for existing drugs could not generate sufficient revenues to compensate for the market share decline of Tagamet and Dyazide, let alone achieve the anticipated level in corporate growth.

In consequence, the plaintiffs asserted, the market price of SmithKline common stock was artificially inflated from March 13, 1987 until the company's public announcements of June 16, 1988 and September 27, 1988. On June 16th, SmithKline forecasted that its operating earnings for the second and third quarters of 1988 would fall approximately twenty-five percent below 1987 quarterly earnings. The per share price of common stock dropped twenty percent, to $45.75, in response to the company's revelation. According to the plaintiffs, however, this was only a partial disclosure of SmithKline's true financial condition because the defendants continued to misrepresent the nature and expense of its global restructuring plan and had not related the full gravity of the company's market share losses.

On September 27th, the defendants allegedly reported that, as part of its business restructuring strategy, SmithKline would lay off some 1600 employees, close its Philadelphia manufacturing plant, and sell its subsidiaries, for a one-time charge of $300 to $400 million in 1988. The price of the company's common stock declined $3.00 per share. A month later, SmithKline revealed that it would take a pre-tax charge of $398.3 million in the third quarter. This represented a net loss of $195.5 million, which the defendants purportedly blamed on lethargic sales of Tagamet and Dyazide.

After class certification, the plaintiffs embarked on extensive discovery, which lasted for over a year. SmithKline produced several hundred thousand pages of documents. A comparable magnitude of documents were divulged, pursuant to subpoena duces tecum, by non-parties, including Peat Marwick Main & Company and Coopers & Lybrand, which had served as SmithKline's auditors during the relevant period. Plaintiffs' counsel served two sets of interrogatories on all defendants and conducted depositions of nine SmithKline officers and employees. Attorneys for the class also retained experts conversant in accounting and investment banking to assist in their evaluation of discovery materials. The parties began settlement negotiations in October 1989. The defendants requested, and the plaintiffs provided, a comprehensive analysis of evidence supportive of liability to class members. After several months of discussion, the litigants entered into a written Stipulation of Settlement on August 10, 1990.

The Court then approved a notice of hearing on the proposed settlement agreement. The notice related the terms of the Stipulation, indicated that counsel for the plaintiffs would petition the Court for an award of fees comprising up to 30% of the settlement fund, stated that the Court had scheduled a hearing to consider the appropriateness of the Stipulation, and invited class members to file written comments in support of or in opposition to the Stipulation of Settlement. The notice was mailed to all class members known to the parties, and a summary of it was published in The Wall Street Journal, The New York Times, The Philadelphia Inquirer, and the Financial Times.

B.

As provided by the Stipulation, the defendants paid into an escrow account $22 million, which, together with interest earned less deductions for attorneys' fees and proper expenses, constitutes the net settlement fund that will be distributed to class members whose claims are approved as valid and timely. Paragraph 10 of the Stipulation enunciates the procedures that class members must follow to become authorized claimants against the net settlement fund. Each class member must submit a proof of claim, along with supporting documentation, to the claims administrator. Claims rejected by the administrator are subject to review by plaintiffs' lead counsel, and, ultimately, this Court.

A two-step process, which endeavors to tailor the shareholder's recovery to his or her economic injury, regulates allocation of the net settlement fund. First, the amount of an authorized claimant's recognized loss depends on when that individual purchased or sold SmithKline securities. The various formulae set forth in the Stipulation are as follows:

(i)(a) With respect to shares of SmithKline common stock purchased from March 13, 1987 through June 15, 1988, and held after the close of business on June 15, and with respect to shares purchased on June 16, 1988, Recognized Loss is defined as the amount paid for such shares (excluding commission), less the number of such shares multiplied by $44.06, the closing price for SmithKline common stock on September 28, 1988;

(b) with respect to shares of SmithKline common stock purchased from June 17, 1988 through September 27, 1988, and held after the close of business on September 27, and with respect to shares purchased on September 28, 1988, Recognized Loss is defined as the amount paid for such shares (excluding commissions), less the number of such shares multiplied by $44.06; and

(c) with respect to shares of SmithKline common stock purchased from March 13, 1987 through June 15, 1988 and not held after the close of business on June 15, 1988, and with respect to shares purchased from June 17, 1988, through September 27, 1988, and not held after the close of business on September 27, 1988, Recognized Loss is defined as one-third (33 1/3 percent) of the following: the amount paid for such shares (excluding commissions) less the amount realized (net of commissions) from the sale of such shares (based on trade date, not settlement date).

Stip. of Settlement ¶ 9(b). Second, the net settlement fund will be divided by the total recognized loss of all claimants to arrive at a distribution ratio. Each authorized claimant's share of the net settlement fund is then ascertained by multiplying the distribution ratio by that claimant's recognized loss.

II.

The standard for approval of a proposed class action settlement is well known. The Court must ascertain whether the submitted compromise is "fair, adequate, and reasonable." Walsh v. Great Atlantic & Pacific Tea Co., 726 F.2d 956, 965 (3d Cir.1983). The Third Circuit has articulated several factors to guide this inquiry. These include the "complexity, expense and likely duration of the litigation," the reaction of class members to the proffered settlement, "the stage of the proceedings and the amount of discovery completed," the impediments to establishing liability and damages, "the risks of maintaining the class action through the trial," the defendant's ability "to withstand a greater judgment," and "the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation." Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir.1975) (quoting City of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir.1974)); see also Protective Comm. for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424-25, 88 S.Ct. 1157, 1163, 20 L.Ed.2d 1 (1968). The Court finds that the Stipulation of Settlement in this action is fair, adequate, and reasonable.

First, further litigation in this case would...