Seigal v. Merrick
| Decision Date | 17 March 1980 |
| Docket Number | D,Nos. 239,240,s. 239 |
| Parties | Fed. Sec. L. Rep. P 97,318 David SEIGAL and Ethel Seigal, Plaintiffs, v. David MERRICK, William T. Gossett, William R. Hearst, Jr., F. Warren Hellman, H. Blackmer Johnson, John H. Johnson, William C. Keefe, Ralph F. Lewis, Malcolm A. MacIntyre, Harry J. McIntyre, John T. Pollock, Dennis C. Stanfill, Gordon Stulberg, Gerald Trautman, and John L. Vogelstein, Defendants, Twentieth Century Fox-Film Corporation, Defendant-Appellant-Cross-Appellee, and Norman Annenberg, Esq., Appellee-Cross-Appellant. Harry GEHLER, Plaintiff, v. William R. HEARST, Jr., H. Blackmer Johnson, John H. Johnson, William C. Keefe, Malcolm A. MacIntyre, David Merrick, Harry J. McIntyre, John T. Pollock, Ralph Lewis, Dennis C. Stanfill, Gordon Stulberg, Gerald A. Trautman, William T. Gossett, Defendants, Twentieth Century Fox-Film Corporation, Defendant-Appellant-Cross-Appellee, and Norman Annenberg, Esq., Appellee-Cross-Appellant. ockets 79-7420, 79-7444. |
| Court | U.S. Court of Appeals — Second Circuit |
Max Freund, New York City (Rosenman, Colin, Freund, Lewis & Cohen, New York City, Joseph Zuckerman, and Marc S. Dreier, New York City, of counsel), for defendant-appellant-cross-appellee Twentieth Century Fox-Film Corporation.
Norman Annenberg, New York City (Griffith G. deNoyelles, Jr., New York City, of counsel), for appellee-cross-appellant Norman Annenberg, Esq.
Before MOORE, FRIENDLY and MESKILL, Circuit Judges.
Twentieth Century Fox-Film Corporation (Fox) appeals and Norman Annenberg, an attorney, cross-appeals from an order of the District Court for the Southern District of New York awarding fees to Annenberg and Colman Abbe, an expert employed by him, for their services in successfully objecting to an improvident settlement of derivative actions by stockholders of Fox. The district court, endeavoring to follow the teaching of City of Detroit v. Grinnell Corp., 495 F.2d 448 (2 Cir. 1974) (Grinnell I) and 560 F.2d 1093 (2 Cir. 1977) (Grinnell II), awarded Annenberg $256,436 in legal fees and $1,519.34 in disbursements, and Abbe $12,225 for his services as an expert witness. See (Current) Fed.Sec.L.Rep. (CCH) P 96,867 (April 27, 1979). Fox appeals from the awards to Annenberg and Abbe; Annenberg cross-appeals from the award to him, claiming it to be inadequate. The briefs stretch over 234 pages, Annenberg's alone being 128 pages long; the appendix runs to 1,119 pages. We have considered affirming on the simple basis that fee awards in such litigation lie in the district court's discretion, see Lindy Bros. Builders, Inc. v. American Radiator & Standard Sanitary Corp., 540 F.2d 102, 114 (3 Cir. 1976) (en banc) (Lindy II ); that the district court's decision should stand if it has applied the correct criteria even if we would have ruled differently in certain respects, id. at 116; and that, in any event, appeals from fee decisions are not to be encouraged. However, certain unusual characteristics of this case dictate a more extended analysis and a different result.
The stockholders' complaints, filed in late May and early June, 1974, asserted that the defendants, directors of Fox, violated the federal securities laws and breached their common law fiduciary obligations in causing Fox to purchase 241,000 shares of its stock in March, 1974 on a public tender offer for 2,000,000 shares at an average price of $9.58 a share and then purchasing another 747,900 shares at approximately $9.02 per share from defendant David Merrick as part of a settlement of an action brought by Fox against Merrick for having interfered with its tender offer. On February 11, 1977, the parties to the actions, which had been consolidated, entered into a stipulation of settlement. This provided that Fox would receive from the directors (or in one instance from the director's insurer). $1,138,500 in cash and also certain consideration furnished by Merrick which Fox valued at $200,000. However, in return for the cash payment, the directors were to receive rights to purchase 425,000 shares of unregistered Fox stock together with the power to compel registration under certain circumstances. The exercise price was $13.25 per share, as against a closing price of $11.375 on the New York Stock Exchange on the day preceding execution of the stipulation and an average closing price of $10.46 during the preceding 90 days. The rights could not be exercised until one year after initial court approval of the stipulation or the date when approval became final, whichever was later. Thereafter the rights would be exercisable for three years. The rights were subject to usual restrictions designed to insure compliance with the registration requirements of the Securities Act of 1933. The objecting stockholders and the parties to the settlement disagreed on the extent to which the stipulation also restricted the public sale of shares issued pursuant to the exercise of the rights. 1
On May 13, 1977, Annenberg as attorney for a Fox shareholder filed objections to the adequacy of the settlement and of the notice given to the stockholders. The gravamen of the objections was the issuance of the rights. Whereas the notice asserted that these were worth 80cents per right, or $340,000 in total, the objections claimed the rights had a value in excess of the.$1,138,500 which the directors were paying and that the settlement must thus be found unfair without any need to examine the value of the claims Fox was to abandon. Later, with the spectacular success of Fox's film "Star Wars" which was released on May 25, 1977 and the attendant substantial rise in the price of Fox stock, the issues were broadened to include whether information on the prospects of "Star Wars" was withheld from the settling stockholders when the settlement was negotiated.
At the hearing on October 11-14, 1977, Fox conceded that, with its stock having doubled in price, the settlement would not be fair if the negotiated, but nevertheless asked for approval 2 on the ground that it was fair on the day the stipulation of settlement was signed. 3
On the basis of the testimony of objector's expert Colman Abbe, the court found that, whereas the open market value of a right may have been only $.80, as testified by defendant's expert, the rights were worth $3.50 to the recipients and especially to defendant Vogelstein, who was allotted the lion's share of the rights (89%) under a separate agreement among the defendants, and who, under the stipulation, was permitted to assign his rights to EMW Associates Incorporated, Fox's largest single shareholder. 4 The court reasoned that the distinction between defendants' $.80 market valuation and plaintiff's $3.50 valuation hinged primarily on the import of restrictions on the rights and the sale of the underlying Fox shares imposed by the stipulation, see note 1 supra. It further determined that defendant Vogelstein, the primary recipient of the rights, had no intention of selling shares that might be accumulated pursuant to exercise of the rights, and hence that the stipulation's restrictions did not affect the value of the rights to Vogelstein, whatever their impact on other buyers. Believing that the appropriate valuation was what the rights were worth to the recipients, since Fox had a duty to obtain that amount, the district court found the value of the rights as of February 11, 1977, to be $1,487,500, as against either the $1,138,000 that the directors were to pay under the settlement terms or the meager $340,000 ($.80 X 425,000) that the directors claimed was fair consideration for the rights. 5 Realistically, the court found, Fox would be paying the directors $349,000 to settle its action against them. Accordingly she disapproved the settlement. On the other hand, the court found no evidence that the defendants had inside information about the probable spectacular success of "Star Wars" when the settlement was negotiated.
Both the plaintiffs and the defendants-directors appealed to this court from the order of disapproval. However, on March 15, 1978, after several conferences under this court's Civil Appeals Management Plan, Annenberg and counsel for plaintiffs, the defendant directors, and Merrick entered into a new agreement (the "appellate settlement"), to which Fox stated it did not object. With some modifications and additions, the appellate settlement incorporated the terms of the original stipulation but increased the payment to be made by the directors for the 425,000 rights by $191,750 and the exercise price from $13.25 to $14.25 per share. 6 In addition, plaintiffs' counsel were to receive fees of $375,000 plus disbursements and expenses and Annenberg was to be paid $185,000, a sum that was to include the fee and expenses of Abbe. The parties opined that no further notice to stockholders or hearings by the district court was required, not even concerning the negotiated attorneys' fees. This court was requested to enter an order dismissing the appeals and directing the district court to enter judgment in accordance with the stipulation. After actions unnecessary to detail, this plan was aborted.
Fox and the objectors then moved to dismiss the appeal from the order disapproving the settlement for want of appellate jurisdiction. Annenberg carried the burden of the motion, which this court granted in an opinion by the late Judge Gurfein, Seigal v. Merrick, 590 F.2d 35 (1978).
When the case returned to the district court, Annenberg renewed an earlier application for fees. He sought $734,287.50 for himself and $12,225 for Abbe. His application showed 1204 hours of his own time devoted to the case and 938.50 of an associate's, deNoyelles. Judge Motley deducted time spent in preparing the fee application, for overbilling, for work on the appellate settlement, for four hours devoted to a motion to be designated lead counsel, and for "duplicative work", to wit, the...
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