The Delaware Court of Chancery in In re The Coleman Co., Inc. Shareholders Litigation, 1999 Del. Ch. LEXIS 234, 1999 WL 1261303 (Del. Ch. Nov. 12, 1999), approved a noteworthy settlement of a shareholder action where the court believed that "plaintiffs raised several colorable claims that might well have survived a motion to dismiss, if not beyond" but the lack of collectibility of any potential judgment "vitiate[d] the strength of plaintiff's potential recovery as a practical matter." The decision was written by Delaware Chancellor William B. Chandler III.
The case arose out of merger agreements entered into on February 27, 1998 by Sunbeam Corporation with two distinct groups of Coleman shareholders: (1) MacAndrews & Forbes ("M&F"), which held approximately 81 percent of Coleman's shares, and (2) public shareholders, which held approximately 19 percent of Coleman's shares. The cash and stock merger consideration paid in these merger agreements by Sunbeam to M&F and by Sunbeam to Coleman's public shareholders was "essentially identical" with one exception: M&F received a larger percentage of its consideration in cash. At the close of both transactions, Coleman would become a wholly owned subsidiary of Sunbeam. On March 30, 1998, an M&F affiliate, as the then-owner of 81 percent of Coleman's shares, executed a written consent approving the public merger. The M&F merger then was consummated and the Coleman board comprised of M&F designees resigned. Sunbeam, as the new controlling shareholder, appointed a new Coleman board.
Over the next several weeks and months, and before the public merger could be consummated, allegations of financial improprieties caused Sunbeam's stock price - and thus the value of the merger consideration paid to M&F and to be paid to Coleman's public shareholders in the form of stock - to drop precipitously. Several Sunbeam directors and officers were removed from Sunbeam's board and management team, and M&F personnel stepped in to fill a management vacuum at Sunbeam and assumed day-to-day control of Sunbeam's affairs. Sunbeam's board also formed a special committee of directors who were independent of both Sunbeam and M&F.
The pubic shareholders commenced litigation alleging that by refusing to terminate or renegotiate the public merger, Sunbeam and the post-March 30, 1998 Coleman board, which consisted of Sunbeam designees, breached their fiduciary duties to the public shareholders by putting Sunbeam's interests ahead of the interests of Coleman's shareholders.
The special committee entered into settlement agreements first with M&F and later with the public shareholders. The settlement agreements included similar terms. These settlement agreements provided M&F five year warrants to purchase 23 million shares of Sunbeam stock at $7 per share (with no liquidity) and provided the public shareholders warrants to purchase 4.98 million Sunbeam shares at the same exercise price and with the same expiration date (with some liquidity). These 23 million and 4.98 million figures were proportional to the M&F and public shareholders' respective pre-merger stakes in Coleman. Using a Black-Scholes option pricing model, the warrants provided to the public shareholders had a value of $2.475 each for an aggregate value of $12,324,592 - significantly lower than the dollar amount of the public shareholders' alleged losses. The issue before the court was the fairness of the settlement to the public shareholders.
The court stated that plaintiffs' claims against Sunbeam and Coleman's March 30, 1998 directors with respect to the Sunbeam-Coleman public merger "raised several colorable claims that might well have survived a motion to dismiss, if not beyond." The court noted plaintiffs' contention - made in support of the settlement - that neither Sunbeam nor Coleman's March 30, 1998 board carried the burden of establishing entire fairness because unaffiliated Coleman directors approved the transaction before Sunbeam became Coleman's majority shareholder. The court also noted plaintiffs' contention - also made in support of the settlement - that Coleman's board did not have the legal option to terminate the merger agreement because the agreement did not have a fiduciary out termination provision. The court stated that plaintiffs "afford more weight to these defenses than seems appropriate" because "[i]t is far from clear that because M&F and Coleman's M&F designated board purportedly executed the Public Merger that a court would relieve Sunbeam and the March 30 Coleman Board from exercising a fiduciary's judgment as to whether to consummate the Public Merger and under what terms."
The court nevertheless determined that the settlement was fair because "[i]n light of Sunbeam's precarious financial condition, . . . a suit for money damages, whether predicated on fraud, breach of contract or breach of fiduciary duty grounds, might not yield happy results for the public shareholders." The court reasoned that "[e]ven if plaintiffs prevailed and obtained a judgment, they would face the likely eventuality of appearing in a long queue of unsecured creditors confronting the prospect of a court awarded judgment worth even fewer pennies on the dollar then the proposed settlement consideration."
Plaintiffs requested an attorneys' fee award equal to 30 percent of the $12,324,592 settlement fund, to be paid in the same warrants that the settling shareholders would receive. This amounted to $4865 per hour for 760 hours of work. The court reduced the requested fee to 10 percent of the settlement fund due to the limited time and effort expended by counsel due to the early stage at which the case was settled. The court stated that "[w]hile the thought of frivolous discovery and motion practice intended solely to build up a paper trail of filings and logged hours is unappetizing to this Court, I am also reluctant to carve out 30% of a settlement fund for lawyers who appear to have expended a less than heroic measure of time and effort pursuing plaintiffs' claims." To the contrary, the court concluded, "it appears that class counsel largely piggy-backed M&F's negotiation and settlement, essentially mimicking the bargaining position of the settling party that preceded them."
The case arose out of merger agreements entered into on February 27, 1998 by Sunbeam Corporation with two distinct groups of Coleman shareholders: (1) MacAndrews & Forbes ("M&F"), which held approximately 81 percent of Coleman's shares, and (2) public shareholders, which held approximately 19 percent of Coleman's shares. The cash and stock merger consideration paid in these merger agreements by Sunbeam to M&F and by Sunbeam to Coleman's public shareholders was "essentially identical" with one exception: M&F received a larger percentage of its consideration in cash. At the close of both transactions, Coleman would become a wholly owned subsidiary of Sunbeam. On March 30, 1998, an M&F affiliate, as the then-owner of 81 percent of Coleman's shares, executed a written consent approving the public merger. The M&F merger then was consummated and the Coleman board comprised of M&F designees resigned. Sunbeam, as the new controlling shareholder, appointed a new Coleman board.
Over the next several weeks and months, and before the public merger could be consummated, allegations of financial improprieties caused Sunbeam's stock price - and thus the value of the merger consideration paid to M&F and to be paid to Coleman's public shareholders in the form of stock - to drop precipitously. Several Sunbeam directors and officers were removed from Sunbeam's board and management team, and M&F personnel stepped in to fill a management vacuum at Sunbeam and assumed day-to-day control of Sunbeam's affairs. Sunbeam's board also formed a special committee of directors who were independent of both Sunbeam and M&F.
The pubic shareholders commenced litigation alleging that by refusing to terminate or renegotiate the public merger, Sunbeam and the post-March 30, 1998 Coleman board, which consisted of Sunbeam designees, breached their fiduciary duties to the public shareholders by putting Sunbeam's interests ahead of the interests of Coleman's shareholders.
The special committee entered into settlement agreements first with M&F and later with the public shareholders. The settlement agreements included similar terms. These settlement agreements provided M&F five year warrants to purchase 23 million shares of Sunbeam stock at $7 per share (with no liquidity) and provided the public shareholders warrants to purchase 4.98 million Sunbeam shares at the same exercise price and with the same expiration date (with some liquidity). These 23 million and 4.98 million figures were proportional to the M&F and public shareholders' respective pre-merger stakes in Coleman. Using a Black-Scholes option pricing model, the warrants provided to the public shareholders had a value of $2.475 each for an aggregate value of $12,324,592 - significantly lower than the dollar amount of the public shareholders' alleged losses. The issue before the court was the fairness of the settlement to the public shareholders.
The court stated that plaintiffs' claims against Sunbeam and Coleman's March 30, 1998 directors with respect to the Sunbeam-Coleman public merger "raised several colorable claims that might well have survived a motion to dismiss, if not beyond." The court noted plaintiffs' contention - made in support of the settlement - that neither Sunbeam nor Coleman's March 30, 1998 board carried the burden of establishing entire fairness because unaffiliated Coleman directors approved the transaction before Sunbeam became Coleman's majority shareholder. The court also noted plaintiffs' contention - also made in support of the settlement - that Coleman's board did not have the legal option to terminate the merger agreement because the agreement did not have a fiduciary out termination provision. The court stated that plaintiffs "afford more weight to these defenses than seems appropriate" because "[i]t is far from clear that because M&F and Coleman's M&F designated board purportedly executed the Public Merger that a court would relieve Sunbeam and the March 30 Coleman Board from exercising a fiduciary's judgment as to whether to consummate the Public Merger and under what terms."
The court nevertheless determined that the settlement was fair because "[i]n light of Sunbeam's precarious financial condition, . . . a suit for money damages, whether predicated on fraud, breach of contract or breach of fiduciary duty grounds, might not yield happy results for the public shareholders." The court reasoned that "[e]ven if plaintiffs prevailed and obtained a judgment, they would face the likely eventuality of appearing in a long queue of unsecured creditors confronting the prospect of a court awarded judgment worth even fewer pennies on the dollar then the proposed settlement consideration."
Plaintiffs requested an attorneys' fee award equal to 30 percent of the $12,324,592 settlement fund, to be paid in the same warrants that the settling shareholders would receive. This amounted to $4865 per hour for 760 hours of work. The court reduced the requested fee to 10 percent of the settlement fund due to the limited time and effort expended by counsel due to the early stage at which the case was settled. The court stated that "[w]hile the thought of frivolous discovery and motion practice intended solely to build up a paper trail of filings and logged hours is unappetizing to this Court, I am also reluctant to carve out 30% of a settlement fund for lawyers who appear to have expended a less than heroic measure of time and effort pursuing plaintiffs' claims." To the contrary, the court concluded, "it appears that class counsel largely piggy-backed M&F's negotiation and settlement, essentially mimicking the bargaining position of the settling party that preceded them."