TBK Partners, Ltd. v. Western Union Corp.

• Decision Date: 18 March 1982
• Docket Number: No. 375,D,375
• Citation: 675 F.2d 456
• Parties: TBK PARTNERS, LTD., et al., Plaintiffs-Appellees, v. WESTERN UNION CORPORATION, et al., Defendants-Appellees. Frances D. Spier, et al., Objectors-Appellants. ocket 81-7523.
• Court: U.S. Court of Appeals — Second Circuit

Page 456

675 F.2d 456

TBK PARTNERS, LTD., et al., Plaintiffs-Appellees, v. WESTERN UNION CORPORATION, et al., Defendants-Appellees Frances D. Spier, et al., Objectors-Appellants.

No. 375, Docket 81-7523.

United States Court of Appeals Second Circuit.

Argued Nov. 19, 1981.

Decided March 18, 1982.

Edward J. Walsh, Jr., New York City (Morris Shilensky, Russell Ann Nobles, Edward F. Campbell, Jr., and Hays, St. John, Abramson & Heilbron, New York City, on the brief), for objectors-appellants.

Burton L. Knapp, New York City (Neil L. Selinger, and Lowey, Dannenberg & Knapp, New York City, on the brief), for plaintiffs-appellees.

Herbert M. Wachtell, New York City (Steven M. Barna, Theodore N. Mirvis, and Wachtell, Lipton, Rosen & Katz, New York City, on the brief), for defendants-appellees.

Before MANSFIELD and NEWMAN, Circuit Judges. ^*

NEWMAN, Circuit Judge:

This is an appeal from a judgment of the District Court for the Southern District of New York (Milton Pollack, Judge), approving the settlement of a consolidated shareholder class and derivative action involving a dispute over a century-old lease. In 1882, the Gold and Stock Telegraph Company ("Gold & Stock") leased its entire private telegraph business to the Western Union Telegraph Company ("Western Union") for a period of 99 years in return for annual payments to Gold & Stock's shareholders. Over the years, Western Union acquired 95.3% of Gold & Stock's 50,000 shares. Those minority shareholders who object to the settlement and who are appellants here contend that upon the expiration of the lease, Gold & Stock shareholders were entitled to Western Union's 1981 business, worth $17,000 per share of Gold & Stock. Pursuant to a proposed short-form merger between Western Union and Gold & Stock Western Union had valued Gold & Stock shares at $256.97. The settlement increased this value by $126.53 to $383.50 per share. The objectors contend that the District Court erred in approving the settlement because (1) it enjoins class members from prosecuting claims that were not part of the class action and (2) the opposition of more than half of the class of minority shareholders to the settlement demonstrates its unfairness. We find neither reason persuasive and affirm the District Court's approval of the settlement.

Under the lease, Western Union acceded to 1881-vintage poles, wires, insulation, printers, transmitters, battery cells, magnets, call bells, registers, switches, and the like, as well as the rights to Gold & Stock's franchises, easements, patents, and shares of stock of other telegraph companies. Over the years, the operating assets outlived their usefulness, and the business lost its separate identity as Western Union's modern telecommunications business developed. The lease made no provision as to what interest, if any, was to revert to Gold & Stock upon its expiration. Under appellants' view of the lease, in light of Western Union's failure to preserve the operating identity of Gold & Stock, the proper result upon expiration of the lease should have been distribution of all the assets of Western Union among the Gold & Stock shareholders as a reversionary interest.

In July 1980, a class action suit was commenced by TBK Partners Ltd. ("TBK Partners") on behalf of a class of all Gold & Stock minority shareholders. The complaint alleged that Gold & Stock was an investment company under the Investment Company Act of 1940, 15 U.S.C. § 80a (1976), and that Western Union had violated the Act by not registering it as such and by causing it to engage in transactions prohibited by the Act without the approval of the SEC. The complaint further alleged in a pendent state law claim that Western Union had breached fiduciary duties owed to the minority shareholders by wrongfully commingling Gold & Stock's assets with Western Union's. The complaint requested, among other things, an injunction against any merger between Western Union and Gold & Stock.

In late 1980, after the District Court as well as a New York state court had denied requests for preliminary injunctive relief, Western Union, as the owner of more than 95% of Gold & Stock's shares, proposed to effect a short-form merger of Gold & Stock into Western Union pursuant to N.Y.Bus.Corp.Law § 905 (McKinney 1963). Western Union determined that the fair value per share payable in the merger would be $256.97, calculated as follows:

(1) $423,203 or $8.46/share for the aggregate value of assets transferred to Western Union;

(2) $12,200,246 or $244.01/share for net proceeds from the disposition of stock assets transferred to Western Union under the lease;

(3) $150,000 or $3.00/share for the stock assets still in the possession of Western Union; and

(4) $1.50/share for the final quarterly payment due Gold & Stock under the lease.

Plaintiff TBK Partners was granted leave to assert additional claims related to the proposed merger. The new claims included allegations that (1) the Information Statement sent to Gold & Stock shareholders at the time of the proposed merger misstated or omitted material facts regarding the value of the reversionary interest under the lease in violation of the federal securities laws, (2) Western Union would violate a fiduciary duty owed to Gold & Stock by effecting the merger while undervaluing Gold & Stock's reversionary interest, and (3) the merger would violate the lease by depriving Gold & Stock shareholders of their right to the full value of the reversionary interest. ¹ The District Court certified the action as a class action pursuant to Fed.R.Civ.P. 23(a), 23(b)(1)(A), 23(b)(1)(B), and 23(b)(2) "on behalf of a class consisting of all owners of Capital Stock of (Gold & Stock other than Western Union) as of July 3, 1980." The Notice of Pendency of the class action informed all owners of Gold & Stock capital stock that:

All persons who fall within the definition of the class are automatically members of the class. Any judgment or other disposition of the Action will include and be binding upon all members of the class, whether or not favorable to the class. If there is a decision adverse to the class, members of the class ... would be subject to the contention that they are barred from asserting any claim arising out of or connected with the claims asserted in the Action.

Upon the approval of the New York Public Service Commission, the merger took effect on December 30, 1980.

As provided for by New York law, many of the objectors chose to dissent from the merger price offered by Western Union and they accordingly commenced an appraisal proceeding in state court to determine the fair value of their Gold & Stock shares. N.Y.Bus.Corp.Law § 623 (McKinney 1963). That action was dismissed without prejudice by the state court because it involved "essentially the same issues" as the federal court action.

TBK Partners and Western Union then reached a settlement of the federal suit. Under the terms of the settlement, Western Union agreed to pay $383.50 per outstanding share of Gold & Stock stock, an increase of $126.53 over the price it had originally offered to pay for each share. The increase represented in effect an increase of over $6,000,000 in the valuation of the reversionary interest, which had been previously valued at less than $13,000,000. The settlement released Western Union from all claims that might be asserted in connection with the action and enjoined all class members from prosecuting such claims, including the appraisal proceeding that had been dismissed without prejudice by the state court. The settlement was binding on all class members; class members could not opt out of the settlement. The terms of the settlement were fully set forth in the Notice of Settlement and Settlement Hearing mailed to each class member.

The District Court then, with the benefit of a full record of the history of the controverted lease, held a settlement hearing to consider the objectors' claims. Fed.R.Civ.P. 23(e), 23.1. After carefully considering the provisions of the lease as they related to each claim of the objectors, the District Court found that the proponents of the settlement had met their burden of showing the settlement to be "fair, reasonable and adequate, negotiated at arm's length, and reached in good faith and in the considered judgment of those fully aware of the factors and the strengths and weaknesses in the litigation." In light of the sizable risks to the class from the "complex, costly and protracted litigation" that would otherwise result, the District Court found the settlement to be reasonable. 517 F.Supp. 380.

I.

The objectors first contend that the District Court erred in approving a settlement that barred class members from pursuing appraisal proceedings in state court. ² They suggest that a federal court approving a settlement of a class action lacks the power to bar claims that were not and could not have been asserted in the class action. A claim for appraisal, they contend, could not have been asserted on behalf of the class because (1) appraisal rights are individual statutory rights personal to class members that are inappropriate for adjudication in a class action and had not matured by the time the class action was commenced and (2) the New York State Supreme Court has exclusive jurisdiction over appraisal proceedings.

We do not need to determine whether objectors are correct that an appraisal claim as such could not have been part of the class action. ³ As long as the overall settlement is found to be fair and class members were given sufficient notice and opportunity to object to the fairness of the release, ⁴ we see no reason why the judgment upon settlement cannot bar a claim that would have to be based on the identical factual predicate as that underlying the claims in the settled class action. We have previously "assume(d) that a settlement could properly be framed so as to prevent class members from subsequently asserting claims...