Granada Investments, Inc. v. DWG Corp.

Citations: 962 F.2d 1203; 1992 U.S. App. LEXIS 8833; 1992 WL 85075Docket: Nos. 91-3297, 91-3343, 91-3399, 91-3402 and 91-3407

Court: Court of Appeals for the Sixth Circuit; April 30, 1992; Federal Appellate Court

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Granada Investments, Inc. proposed a $572 million merger with DWG Corporation, which DWG rejected. Subsequently, Granada, a beneficial owner of over 5% of DWG's stock, filed a derivative lawsuit against DWG and its directors, including Chairman Victor Posner, alleging breaches of fiduciary duties, self-dealing, and market manipulation in violation of federal securities laws. DWG and Posner denied the allegations and counterclaimed, accusing Granada of insider trading and violations of securities regulations. After extensive discovery and negotiations, a stipulated settlement was reached on August 30, 1990, and preliminarily approved by the district court on September 18, 1990. Key elements of the settlement included the dismissal of all claims with prejudice, the appointment of three new independent directors to DWG’s board, the establishment of a special committee to oversee certain financial transactions involving Posner, the requirement for annual shareholder meetings, and the possibility for Granada to seek reimbursement of up to $5.5 million in legal costs. A fairness hearing was scheduled for November 14, 1990, following notifications to DWG shareholders and public announcements. At the hearing, 31 investors raised objections regarding the lack of monetary benefit to DWG from the settlement, the broad release of claims, Granada's adequacy as a representative, and the fairness of the reimbursement request.

The district court found the settlement for DWG Corporation to be fair, reasonable, adequate, and in the corporation's best interests, a decision subject to review for abuse of discretion. The court emphasized that settlements are generally favored in shareholder derivative actions due to the unpredictable nature of litigation. Key factors in evaluating the settlement include the likelihood of success on the merits, litigation risks, and any objections from class members. Objecting shareholders argued that the settlement was inadequate, claiming conflicts of interest among Granada and DWG's directors compromised fairness. They characterized the settlement as a "parody" lacking real benefits. However, the court noted that a settlement reflects compromises from all sides and that potential self-interest does not negate benefits to shareholders. The settlement provided significant advantages, including the release of DWG from liability for claims by Granada and governance changes involving the appointment of three new directors with oversight responsibilities. These changes aimed to curb excessive payments to Victor Posner, who had received substantial compensation from DWG. The court also addressed objections regarding the release of all parties from future liability, stating that such provisions are typical in settlements, and their existence alone does not indicate unfairness.

Evaluation of the components of an agreement must consider the settlement as a whole, as established in Armstrong v. Board of School Directors. Shareholders express concerns about the release provision potentially barring unspecified future claims, but these objections are deemed speculative and do not indicate an abuse of discretion by the district court in approving the settlement. The court distinguishes the reliance on National Super Spuds, which cautions against broad release provisions, noting that its reasoning applies only to class actions, not derivative suits. The settlement is viewed favorably as it provides a projected savings of $108 million for DWG and its shareholders, informed by past corporate governance issues and anticipated changes, including restrictions on loans to Posner entities and oversight of executive compensation. The district court awarded approximately $4.3 million in fees and expenses, constituting about 4% of the anticipated savings. Additionally, concerns raised by DWG shareholders about the legitimacy of Granada's costs and the basis for attorney fees are noted, with the stipulated settlement allowing for court discretion on costs related to specific services rendered.

The settlement terms stipulate reimbursement for costs related to legal services provided by Granada's attorneys, which DWG’s shareholders challenge, citing the case Trustees v. Greenough. In Greenough, the Supreme Court ruled that while reasonable litigation costs could be reimbursed, personal expenses could not. Vose, the creditor in that case, sought reimbursement for various costs, including personal services to improve the health of the trust, which were disallowed. DWG’s shareholders argue that Granada's costs resemble these disallowed "private costs," but it is clarified that all reimbursed expenses pertained to litigation advancement on behalf of all shareholders, distinguishing them from personal costs. The court also emphasized its discretion in determining reasonable costs, having better insight than appellate courts. Additionally, while shareholders questioned the lack of evidence for Granada's hourly rates, they did not dispute the overall reasonableness of the legal fees. The Supreme Court's precedent in Hensley v. Eckerhart supports that reasonable fees are based on documented hours worked and supported rates, and the district court found Granada's evidence sufficient. The objecting shareholders sought to redefine the district court's award as a disallowance of $1.1 million, which the court rejected, stating that no such disallowance occurred. Should the shareholders succeed in recharacterizing the award, they could then seek reimbursement for their legal fees related to securing the benefit.

The district court has the discretion to reject objections from shareholders regarding the representation of their interests in a derivative action. Rule 23.1 mandates that a derivative action cannot proceed if the plaintiff does not adequately represent the shareholders' interests. Historical precedents, such as Davis v. Comed, Inc., outline factors indicating inadequate representation, including conflicting economic interests and lack of genuine involvement by the named plaintiff. In this case, the objecting shareholders failed to substantiate their claims of inadequate representation with more than generalized assertions. The interests of Granada and the shareholders align concerning allegations of fiduciary duty breaches by DWG, and Granada's additional interest in the merger does not create a conflict. The district court confirmed that there is a sufficient community of interests between Granada and the shareholders to ensure adequate representation. The court also affirmed its assessment of the settlement's fairness, considering Granada's likelihood of success, litigation complexity, and shareholder objections, along with its approval of the settlement and costs awarded to Granada.