MCA, Inc., In re

• Decision Date: 30 January 1991
• Docket Number: No. 11740,11740
• Citation: 598 A.2d 687
• Parties: Fed. Sec. L. Rep. P 95,897 In re MCA, INC. Shareholders Litigation. Civ. A. . Submitted:
• Court: Court of Chancery of Delaware

Page 687

598 A.2d 687

Fed. Sec. L. Rep. P 95,897

In re MCA, INC. Shareholders Litigation.

Civ. A. No. 11740.

Court of Chancery of Delaware,

New Castle County.

Submitted: Jan. 30, 1991.

Decided: April 22, 1991.

Denial of Proposed Settlement of Class Action.

Joseph A. Rosenthal, Morris, Rosenthal, Monhait & Gross, Wilmington, Liaison Counsel (Steven G. Schulman, Milberg Weiss Bershad Specthrie & Lerach, Mark C. Gardy, Abbey & Ellis, New York City, Stanley Wolfe, Berger & Montague, P.C., Philadelphia, Pa., of counsel), for plaintiff.

Martin P. Tully, and A. Gilchrist Sparks, III, Morris, Nichols, Arsht & Tunnell, Wilmington, (Theodore N. Mirvis, and Paul K. Rowe, Wachtell, Lipton, Rosen & Katz, New York City, of counsel) for MCA, Inc. and Individual defendants.

R. Franklin Balotti, Richards, Layton & Finger, Wilmington, (Barry R. Ostrager, Dennis G. Jacobs, Mary K. Vyskocil, Simpson Thacher & Bartlett, New York City, of counsel), for Matsushita Elec. Indus. Co., Ltd.

Craig B. Smith, Lassen, Smith, Katzenstein & Furlow, Wilmington, for objectors.

HARTNETT, Vice Chancellor.

The Court must consider whether to approve the proposed settlement of this purported class action pursuant to Chancery Rule 23(e). Plaintiffs ("Settling Plaintiffs") in this action join the defendants in urging the approval of the settlement. The Objectors, who are not parties in this action but are the plaintiffs in a pending action in Federal Court in California, object to that part of the settlement which would bar their federal claims and request the opportunity to opt-out of the Class or to have the federal claims excluded from the settlement.

After reviewing the settlement, the Court finds that the State claims being compromised have little or no merit and therefore no value. The value of the settlement to the Class is also minimal. The claims asserted in the Federal Court, however, have at least arguable merit and therefore have significant value. This Court, on balance, finds, in its business judgment, that it would be unfair to bar the federal claims and therefore the settlement cannot be approved in its present form.

I. PROCEDURAL BACKGROUND

This action was commenced in this Court as a purported class action on behalf of the stockholders of MCA, Inc., a Delaware corporation ("MCA"), on September 26, 1990--one day after the public announcement that Matsushita Electric Industrial Co. Ltd. ("Matsushita") and MCA were negotiating a possible acquisition of MCA by Matsushita. The complaint named MCA and its directors as defendants. Although no agreement between MCA and Matsushita existed at that time, breaches of fiduciary duties were claimed on the grounds that there was a failure by the directors of MCA to implement a market check procedure to ensure maximum shareholder value.

On November 26, 1990, MCA and Matsushita announced that they had entered into a Merger Agreement. Pursuant to the Merger Agreement, a wholly-owned subsidiary of Matsushita would make a cash tender offer for all MCA outstanding shares for $66 per share, conditioned upon the tender of at least 50% of the outstanding shares and the spinoff of a MCA wholly-owned subsidiary, known as Pinelands. The spinoff asset was a corporation that owned a television station that Matsushita was prohibited by federal law from acquiring. According to the Merger Agreement, 100% of Pinelands' stock was to be distributed to the MCA shareholders pro rata in the form of a stock dividend prior to the completion of the tender offer.

On December 3, 1990, an action was filed in the United States District Court for the Central District of California as Epstein v. MCA, Inc., et al., No. CV-90-6451-R, ("the Epstein action"). It was alleged in that suit that Matsushita's tender offer involved a special deal for Lew R. Wasserman, MCA's chairman and chief executive officer. The Wasserman Agreement, apparently entered into contemporaneously with the MCA Merger Agreement, provided that immediately following completion of the tender offer, Mr. Wasserman would surrender his MCA stock in exchange for shares of preferred stock of the Matsushita subsidiary. The complaint further alleged that the Wasserman Agreement was in violation of Section 14(d)(7) of the Federal Securities Exchange Act of 1934 ("Federal Securities Act") (15 U.S.C. § 78n(d)(7)) and SEC Rules 14d-10 and 10b-13. The Epstein action named Matsushita as a defendant claiming alleged securities laws violations and also named MCA and Mr. Wasserman as defendants because they allegedly aided and abetted Matsushita.

On December 14, 1990, plaintiffs in this Delaware action filed an Amended Complaint and at their request a preliminary injunction hearing was scheduled for December 18, 1990. The Amended Complaint added an allegation of a failure to disclose a substantial conflict of interest involving defendants Wasserman, MCA management and its directors, based on a claim that Mr. Wasserman received preferential treatment. Matsushita was also named as a defendant in this Delaware action for the first time because it allegedly aided and abetted MCA in a breach of fiduciary duty by entering into a special deal with Wasserman. The Amended Complaint, however, did not challenge the Wasserman Agreement on the grounds that it constituted a breach of the Federal Securities Act as had been asserted in the federal court in California.

On December 18th, the parties in this Delaware action filed a Stipulation and Agreement of Compromise and Settlement (the "Settlement Agreement"). The settlement provided for a dismissal of the Delaware action with prejudice and for the release of all the claims of any member of the Class arising out of the transaction, including claims asserted in the federal Epstein action. On that same day, this Court provisionally certified the Class pursuant to Chancery Rule 23(b)(2), and set a hearing on the proposed settlement for January 30, 1991.

The Matsushita tender offer was successfully completed about December 29, 1990 after the stock of the Pinelands subsidiary had been distributed to the MCA shareholders. About January 4, 1991, MCA merged into and with a Matsushita subsidiary.

On January 23, 1991, David Minton and Andrew Minton (the "Objectors") filed their objection to the proposed settlement insofar as it purports to bar the claims they have individually asserted in the federal suit in California.

II. LAW OF SETTLEMENTS

The law of Delaware strongly favors voluntary settlement of contested issues. Nottingham Partners v. Dana, Del.Supr., 564 A.2d 1089, 1102 (1989); Polk v. Good, Del.Supr., 507 A.2d 531, 535 (1986); Rome v. Archer, Del.Supr., 197 A.2d 49 (1964).

In the settlement of a class action, the Court's role is to protect the Class members by balancing the fairness and reasonableness of the proposed settlement, with the policy favoring settlements. Nottingham at 1102; Barkan v. Amstead Indus., Inc., Del.Supr., 567 A.2d 1279, 1283 (1989). The Court, in reviewing a settlement, should not decide the merits of the issues, but must consider the nature of the claims, the defenses asserted, and the factual and legal circumstances, and then apply its own business judgment to decide if the settlement is intrinsically fair. Id.; Polk, 507 A.2d at 536; Nottingham, 564 A.2d at 1102.

In determining if a proposed settlement should be approved, this Court must review various factors including the strengths and weaknesses of the asserted claims, the value of the benefit conferred on the Class by the settlement, and the risks, expenses, and delays of litigation. Neponsit Investment Co. v. Abramson, Del.Supr., 405 A.2d 97 (1979). The Court must especially balance the value of all the claims being compromised against the value of the benefit to be conferred on the Class by the settlement. Sullivan v. Hammer, Del. Ch., C.A. No. 10,823-NC, Hartnett, V.C. (Aug. 14, 1990), slip op. at p. 14, 1990 WL 114223 app. pending (upholding a settlement because there was adequate benefit to the class.)

III. EFFECT OF THE RELEASE

It is not disputed that this Court may enter a judgment in connection with the settlement of a class action that results in the release of both state law claims and exclusively federal claims if the claims arise from the same factual predicate, even if the state court could not dismiss or adjudicate the federal claims. TBK Partners, Ltd. v. Western Union Corp., 675 F.2d 456, 460 (2nd Cir.1982); In re Mobile Communications Corporation of America, Inc., Consolidated Litigation, Del. Ch., C.A. No. 10,627-NC et seq., 1991 WL 1392 Allen, C. (Jan. 7, 1991) (approving a settlement of both state and federal claims as fair.) As a practical matter, a so-called "global settlement" is often necessary if any settlement at all will occur. See, Raskin v. Birmingham Steel Corp., Del. Ch., C.A. No. 11,365-NC, Allen, C. (Dec. 4, 1990), slip op. at 13, 1990 WL 193326 (holding that the settlement was not fair.)

When a state court settlement of a class action releases all claims which arise out of the challenged transaction and is determined to be fair and to have met all due process requirements, the class members are bound by the release or the doctrine of issue preclusion. Class members cannot subsequently relitigate the claims barred by the settlement in a federal court. Nottingham Partners v. Trans-Lux Corp., 925 F.2d 29 (1st Cir.1991); Abramson v. Pennwood Investment Corp., 392 F.2d 759, 762 (2nd Cir.1968). A federal court is, however, free to review and determine the effect and scope of the release on the federal claims. Nottingham Partners, supra; see also, In re Mobile, supra; Abramson, supra.

Therefore, if this Court provides for the release of all the claims arising out of the challenged transaction, the claims which the Objectors have asserted in the federal suit will likely be forever barred.

IV. CLASS CERTIFICATION

On December 18, 1990 the Class was provisionally certified by this Court pursuant to Chancery Rule...