Ross-Williams v. Bennett

• Decision Date: 27 April 2018
• Docket Number: No. 117,139,117,139
• Citation: 55 Kan.App.2d 524,419 P.3d 608
• Parties: Monica ROSS-WILLIAMS, derivatively, ON BEHALF OF SPRINT NEXTEL CORPORATION, Plaintiff/Appellee/Cross-appellant, v. Robert R. BENNETT, et al., and Sprint Nextel Corporation, a Kansas corporation, Defendants/Appellees, Michael Hartleib, Objector/Appellant/Cross-appellee.
• Court: Kansas Court of Appeals

55 Kan.App.2d 524

419 P.3d 608

Monica ROSS-WILLIAMS, derivatively, ON BEHALF OF SPRINT NEXTEL CORPORATION, Plaintiff/Appellee/Cross-appellant,

v.Robert R. BENNETT, et al.,andSprint Nextel Corporation, a Kansas corporation, Defendants/Appellees,Michael Hartleib, Objector/Appellant/Cross-appellee.

No. 117,139

Court of Appeals of Kansas.

Opinion filed April 27, 2018.

Michael Hartleib, objector/appellant pro se/cross-appellee.

Thomas J. Hershewe and Tim E. Dollar, of Dollar, Burns & Becker, L.C., of Kansas City, Missouri, and Brett D. Stecker and Robert B. Weiser, of the Weiser Law Firm, P.C., of Berwyn, Pennsylvania, for plaintiff/appellee/cross-appellant Monica Ross-Williams.

Jennifer L. Berhorst, Sarah R. Holdmeyer, and W. Perry Brandt, of Bryan Cave LLP, of Kansas City, Missouri, for defendants/appellees Robert R. Bennett, Keith J. Bane, Gordon M. Bethune, Frank M. Drendel, Larry C. Glasscock, James H. Hance, Jr., Daniel R. Hesse, V. Janet Hill, Irvine O. Hockaday, Jr., Frank Ianna, William E. Kennard, Linda K. Lorimer, Sven-Christer Nilsson, William R. Nuti, Rodney O'Neal, and William H. Swanson.

Mark W. McGrory, of Erise IP, P.A., of Overland Park, Scott D. Musoff, of Skadden, Arps, Slate, Meagher & Flom LLP, of New York, New York, and Jenness E. Parker, of the same firm of Wilmington, Delaware, for defendant appellees Mark E. Angelino, William G. Arendt, Timothy E. Kelly, Paul N. Saleh, Barry J. West, and nominal defendant Sprint Nextel Corporation.

Before Arnold-Burger, C.J., Standridge and Bruns, JJ.

Bruns, J.:

This is a derivative action filed in Johnson County District Court by Monica Ross-Williams on behalf of the Sprint Nextel Corporation. The action arises out of the 2005 merger of the former Sprint Corporation and Nextel Communications. In her verified petition, Ross-Williams asserted claims for monetary damages as well as for non-monetary relief against several officers and directors of the Sprint Nextel Corporation. In addition, the verified petition named the corporation as a nominal defendant. Three other shareholders filed similar derivative actions on behalf of the Sprint Nextel Corporation.

Each of the derivative actions was stayed pending the resolution of a related shareholder class action lawsuit filed in the United States District Court for the District of Kansas. While the derivative actions were stayed, the SoftBank Group Corp. (SoftBank) and the Sprint Nextel Corporation merged to form a new corporation—also known as the Sprint Corporation—in Delaware. As a result, the Sprint Nextel Corporation became a wholly owned subsidiary of the new corporation.

After the federal class action settled, the parties to the four derivative actions entered into a comprehensive proposed settlement agreement. Unlike the settlement in the federal class action, the proposed settlement in the derivative actions did not provide for any monetary relief to the corporation or its shareholders. Rather, the proposed settlement included non-monetary relief in the form of various changes in the governance structure and internal controls of the newly formed Sprint Corporation. The proposed settlement also included $4.25 million in attorney fees and expenses as well as $5,000 incentive awards for each of the individual plaintiffs in the derivative actions.

After the district court preliminarily approved the proposed settlement agreement, the parties provided notice to all owners of record—as well as to the beneficial owners—of common stock of the new Sprint Corporation. In response to the notice, one of the shareholders—Michael Hartleib—filed a timely objection to both the substantive portions of the proposed settlement as well as to the request for attorney fees and expenses. Ultimately, the district court approved the proposed settlement but awarded $450,000 in attorney fees and expenses instead of the amount requested. The district court also approved the incentive awards for each of the plaintiffs in the derivative actions. Additionally, the district court denied Hartleib's request for an incentive award or expense reimbursement.

In his capacity as an objector, Hartleib timely appeals from the district court's approval of the settlement as well as from the award of attorney fees and expenses. Moreover, Ross-Williams cross-appeals the district court's decision to reduce the amount of the attorney fees and expenses from the amount requested as part of the proposed settlement agreement. After reviewing the record and considering the legal arguments raised on appeal, we conclude that the district court did not abuse its discretion in approving the settlement or in awarding attorney fees and expenses. Finally, although we find that the objector performed a valuable service in this case, we conclude that neither the district court nor this court has the authority to grant Hartleib's request for an incentive award or expense reimbursement. Thus, we affirm.

FACTUAL AND PROCEDURAL HISTORY

Merger of Sprint Corporation and Nextel Communications

In December 2004, the Sprint Corporation, then organized under the laws of the State of Kansas, announced that it would acquire Nextel Communications, Inc., which was organized under the laws of the State of Delaware. On August 12, 2005, the transaction—which was publicized as a "merger of equals"—was completed. On the same day, the Sprint Corporation filed documents with the Kansas Secretary of State's Office to officially change its name to the Sprint Nextel Corporation.

Because the purchase price of $37.8 billion paid by the Sprint Corporation was $15.6 billion more than the fair market value of the assets of Nextel Communications, the Sprint Nextel Corporation booked the difference as goodwill. Evidently, the purchase price reflected the anticipated benefit of integrating the wireless networks of the two companies. However, subsequent efforts to integrate the two technologies proved to be unsuccessful. As a result, the Sprint Nextel Corporation began suffering substantial financial losses.

On January 18, 2008, the Sprint Nextel Corporation publicly disclosed that it suffered a net loss of 683,000 prepaid subscribers during the fourth quarter of 2007. Then, on February 28, 2008, the Sprint Nextel Corporation publicly disclosed that it would be recording a non-cash goodwill impairment charge of $29.7 billion for the fourth quarter of 2007. The next day, the corporation filed its Annual Report for the 2007 fiscal year. The report revealed—among other things—the significant loss of subscribers as well as efforts made to extend credit to subscribers that were apparently inconsistent with previous statements made to shareholders.

Commencement of Litigation in State and Federal Court

On March 10, 2009, a securities class action was filed on behalf of shareholders against the Sprint Nextel Corporation in the United States District Court for the District of Kansas. See Bennett v. Sprint Nextel Corporation , Case No. 09-CV-2122-EFM-GEB. One year later, Robert B. Weiser of the Weiser Law Firm—at the time located in Wayne, Pennsylvania—sent a pre-suit demand letter on behalf of Ross-Williams to Daniel R. Hesse, President and Chief Executive Officer of the Sprint Nextel Corporation, pursuant to K.S.A. 60-223a. In the letter, Weiser alleged that certain officers and directors of the Sprint Nextel Corporation had breached their fiduciary duties of loyalty and good faith in various ways. Weiser demanded that the Board of Directors of the Sprint Nextel Corporation conduct an independent internal investigation into possible violations of the law and commence a civil action against the corporate officers and directors to recover the damages allegedly suffered by the corporation.

In a letter dated November 15, 2010, the Sprint Nextel Corporation—through its legal counsel—notified Weiser that the Board of Directors had unanimously voted to reject the demand. A few months later, on February 25, 2011, Ross-Williams filed this derivative action on behalf of the Sprint Nextel Corporation against several officers and directors of the corporation in Johnson County District Court. Although Ross-Williams' attorneys called their initial pleading a "Verified Shareholder Derivative Complaint," we will refer to it as a verified petition in this opinion to be consistent with Kansas law. See K.S.A. 2017 Supp. 60-223a(b). In the verified petition, counsel for Ross-Williams asserted claims for breach of fiduciary duty, unjust enrichment, abuse of control, and waste of corporate assets. The verified petition sought both monetary damages and nonmonetary relief in the form of corporate governance reforms. Furthermore, counsel for Ross-Williams asserted a claim for reasonable attorney fees and expenses.

Three similar derivative actions arising out of events surrounding the merger of the Sprint Corporation and Nextel Communications were also filed in Johnson County District Court during 2009 and 2010. See Murphy v. Forsee , Case No. 09 CV 3132; Price v. Forsee , Case No. 11 CV 3257; Randolph v. Forsee , Case Nos. 10 CV 6261 and 12 CV 4447. The Murphy case was removed to the United States District Court of Kansas shortly after it was filed. See Murphy v. Forsee , Case No. 09-CV-2242-EFM-KMH. Although the four derivative actions were never officially consolidated, all of them would eventually become part of the comprehensive settlement approved by the district court in this case.

Before the defendants filed responsive pleadings or commenced discovery, the parties agreed to stay each of the derivative actions until completion of discovery in the federal securities class action. Accordingly, no discovery was completed and no substantive motions were filed in the derivative actions prior to the parties entering into the proposed settlement agreement that is the subject of this appeal. Rather, as a result of an agreement between the parties, the attorneys representing the plaintiffs in the derivative action were given access to the discovery...