Barr v. Harrah's Entertainment, Inc.

Citations: 242 F.R.D. 287; 2007 U.S. Dist. LEXIS 32435; 2007 WL 1288585Docket: Civil Action No. 05-5056 (JEI)

Court: District Court, D. New Jersey; May 3, 2007; Federal District Court

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Plaintiffs' Motion to Certify a Class has been granted by the Court, establishing a class defined as all individuals who held options under the Park Place Entertainment Corporation 1998 Stock Incentive Plan and exchanged their options due to the merger involving Caesars Entertainment Inc., Harrah’s Entertainment Inc., and Harrah’s Operating Company. Excluded from this class are HET, its officers, directors, and their immediate families, as well as entities controlled by HET.

The Court appointed the Plaintiff as the lead plaintiff and their counsel as class counsel, following Federal Rule of Civil Procedure 23(g)(1). The class claim addresses whether the Defendant breached the 1998 Stock Incentive Plan by only compensating the class members with cash equivalent to the consideration paid to Caesars’ shareholders, excluding compensation for Caesars’ Restricted Stock Units or Supplemental Retention Units.

The Court retains the authority to amend this order prior to final judgment. The parties are required to provide a stipulated Form of Class Notice and a plan for its dissemination by June 4, 2007. If no agreement is reached, separate submissions are to be made by each party.

The class action, initiated by Plaintiff Barr, who was the former CEO of Caesars, alleges breach of contract following a merger with HET. Barr contends that he and other option holders did not receive the full value of their options as stipulated in the plan upon payment. The merger agreement provided for shareholders to choose between a cash option or shares of HET common stock for their Caesars shares.

The "Exchange Ratio" determines how Caesars’ common stock is converted into HET’s common stock, as detailed in Section 2.01(e) of the Merger Agreement. A higher percentage of Caesars’ shareholders opting for the exchange leads to a reduced Exchange Ratio, resulting in 97.35% of shareholders receiving 0.2212 shares of HET plus $5.66 for each Caesars share. On the Merger's closing date, June 13, 2005, HET shares traded at $73.17, yielding $21.85 per Caesars share for those electing the exchange.

Section 2.04(c) addresses the treatment of Caesars’ Restricted Stock Units (RSUs), which could be exchanged for stock or cash upon vesting, with the 2004 Long Term Incentive Plan stipulating that RSUs would vest upon a change in control. In contrast, Section 2.04(e) discusses Supplemental Retention Units (SRUs), which are also convertible upon vesting due to a change in control. Both RSUs and SRUs are exempt from the proration schedule, allowing them to exchange for HET stock at an Exchange Ratio of 0.3247, equating to a value of $23.76 based on HET’s stock price at the Merger.

The 1998 Stock Incentive Plan, amended in 2001, offered stock options to Caesars’ officers and employees, with a "Change in Control Cash-Out" provision allowing option holders to opt for a cash payment based on the Change in Control Price (CCP). The CCP is defined as the highest price of Caesars’ stock over a specified period or the highest price in a tender offer. After the Merger, HET calculated the cash payment for option holders using a CCP of $21.85, derived from the closing price of HET shares and the Exchange Ratio, multiplied by the number of options held minus the exercise price.

On March 14, 2005, option holders who opted for cash received an initial payment of $20.89 per share. Following the Merger on June 24, 2005, they received an additional top-off payment of $0.96 per share, resulting in a total of $21.85 per share. Barr alleges that HET violated the 1998 Plan by not awarding the highest price per share, claiming that since holders of RSUs and SRUs received shares valued at $23.76, this should have been the benchmark for the highest price. This forms the basis of his litigation. 

Caesars engaged Skadden, Arps, Slate, Meagher & Flom LLP for the Merger, and on February 4, 2005, Skadden advised that determining the highest price per share would be difficult within the necessary timeframe. They suggested an initial payment based on the 60 days leading up to the Change in Control and a subsequent top-off, or to ignore the highest price clause. Barr received the Skadden Memo on February 5, 2005, with no immediate response. 

On May 10, 2005, Caesars’ Board discussed the top-off payment mechanics, where Barr claims to have objected verbally, though minutes do not reflect this. He was later informed about the top-off process in a presentation, which noted the price would reflect the cash and stock mix from the merger. Barr, holding 2,150,000 options, received a top-off payment of $2,064,000, equating to $0.96 per share. He then objected to this valuation via email, asserting it should reflect a higher adjustment based on the closing price related to the stock conversion factor. Barr expressed his intent to sign compliance documents while reserving his right to contest the top-off’s accuracy.

For class certification, Barr must satisfy the four prerequisites of Rule 23(a) and at least one criterion from Rule 23(b).

A Rule 23 motion evaluates the appropriateness of a class action as a litigation method rather than the merits of the case, as established in Eisen v. Carlisle. Courts may need to analyze substantive claims and discovery facts to determine if Rule 23’s requirements are met. Rule 23(a) specifies four requirements: (1) numerosity, making individual joinder impractical; (2) commonality of legal or factual questions; (3) typicality of claims or defenses among class representatives; and (4) adequate representation of class interests. Additionally, Rule 23(b)(3) requires that common questions predominate and that a class action is superior for fair and efficient resolution.

In this case, Barr seeks to certify a class of individuals who held options under the 1998 Plan and exchanged them during a merger but did not receive the highest share price. Excluded are HET, its officers, directors, and their immediate families. Barr argues that the class claims stem from HET’s improper cash-out payment practices, relying on breach of contract and specific performance theories. HET does not dispute numerosity, commonality, or Rule 23(b)(3) compliance but challenges typicality and adequacy.

The typicality assessment focuses on the alignment of named plaintiffs' interests with absent class members, where factual differences do not negate typicality if the claims arise from the same conduct and legal theory. The threshold for typicality is low, ensuring class representation aligns with absent members’ interests. Unique defenses that could overshadow class interests may hinder a representative's adequacy. HET argues Barr has a unique defense due to his previous role as CEO, suggesting he was knowledgeable about the 1998 Plan's Change in Control provision. HET must demonstrate that this defense could significantly impact the litigation's focus to challenge typicality and adequacy effectively.

HET contends that Barr was informed multiple times that Caesars intended to calculate the CCP for the 1998 Plan options using the prorated Exchange Ratio, which HET ultimately employed. HET argues that Barr's lack of vocal objection to this method prior to HET’s top-off payments indicates he did not genuinely believe it constituted a breach of contract, thereby estopping him from claiming otherwise now. However, HET has not sufficiently demonstrated that Barr is subject to a unique defense relevant to the litigation, as the merit of this defense is questionable. HET's assertion lacks legal analysis or citations, and the Court finds it unclear how Barr's alleged belief affects his breach of contract claims.

Barr testified that he opposed the prorated Exchange Ratio during a board meeting, although this opposition was not recorded in the minutes. The board did not vote on the issue, as the majority chose to exchange options for cash, delegating the decision to Steven Crown, who ultimately did not decide and allowed HET to determine the CCP calculation. Barr claims he first learned how HET calculated the CCP on June 18, 2005, upon receiving his top-off payment, after which he sent two emails expressing his objections. Thus, HET's argument that Barr waived his right to challenge the prorated Exchange Ratio is weak.

HET also argues that Barr’s inactions could undermine his claims; however, if Barr's testimony is beneficial to HET, they could call him as a witness regardless of his class representative status. This does not create a conflict of interest for Barr. Ultimately, HET did not show that these defenses would play a significant role in the class claim, which will primarily focus on interpreting the 1998 Plan. The potential defense against Barr is unlikely to dominate the litigation, as established in precedent.

HET has not demonstrated that its claimed unique defense will significantly impact the litigation, failing to prove that Barr is an atypical or inadequate class representative. The Third Circuit employs a two-prong test for assessing the adequacy of representation, which requires the attorney to be qualified and experienced, and the plaintiff's interests to align with those of the class. HET bears the burden of proof for challenging Barr's adequacy. HET argues that Barr cannot effectively communicate his claim or direct counsel, citing his deposition where he inconsistently stated that the CCP should be based solely on the price of SRUs, contradicting the original Complaint, which claimed otherwise. Barr also erroneously testified about the conversion of SRUs into Caesars’ common stock, later admitting this was incorrect; thus, he could not articulate the legal relevance of SRUs to the CCP calculation. HET contends that these errors and his inability to present a coherent legal theory regarding SRUs demonstrate his inadequacy as a representative. The requirement under Rule 23(a)(4) is to ensure the class representative protects the class's interests, while the attorney must be capable of conducting the litigation. A representative only needs a minimal understanding of the case to meet the adequacy standard; having competent counsel can compensate for a lack of specific knowledge.

The Court finds Barr to be a suitable class representative, as HET has not demonstrated any conflict of interest or inadequacy in Barr's counsel. HET only established that Barr could not recall specific allegations during his deposition and struggled to articulate the legal theory behind his claims. The Court emphasizes that the standard for class representative adequacy is low, requiring only a minimal degree of knowledge. Barr’s lack of detailed legal understanding does not impede his representation, given the presence of competent counsel.

Consequently, the Court grants the class certification motion, appointing Barr as Lead Plaintiff and Barr’s counsel as Lead Counsel. The class definition will include individuals who held options under the 1998 Stock Incentive Plan at Park Place and exchanged their options due to the merger, excluding HET, its officers and directors, their families, and entities with HET’s controlling interest.

HET's argument regarding equitable estoppel fails as it did not demonstrate that Barr's conduct or representations were intended to induce reliance, nor did it show that such reliance led to detrimental changes in position. HET also did not adequately support its waiver defense, as it did not provide evidence of valuable consideration or clear, decisive acts indicating a waiver by Barr. Thus, HET's defenses are rejected by the Court, which also notes potential confusion arising from the acronyms "RSU" and "SRU."