Calling the lawsuit an example of a “racket” aimed
at merging companies, a federal appeals panel in Chicago has tossed out a
settlement intended to end a shareholder class action brought over the
Walgreens Boots Alliance merger, saying the lawsuit and related settlement did nothing
more than contribute a quick $370,000 payment to the plaintiffs’ lawyers.
On Aug. 10, a three-judge panel of the U.S. Seventh Circuit
Court of Appeals overturned a federal district judge’s decision to approve the
settlement between Walgreens and a group of shareholders, led by named
plaintiff investor John Hays and represented by several law firms, including Pomerantz
LLP, of Chicago and New York; DiTomasso Lubin P.C., of Oakbrook Terrace;
Friedman Oster PLLC, of New York; Law Office of Alfred G. Yates Jr. P.C., of
Pittsburgh; and Levi & Korsinsky LLP, of New York.
“The only concrete interest suggested by this litigation is
an interest in attorneys’ fees, which of course accrue solely to class counsel
and not to any class members,” wrote Judge Richard Posner, who authored the
panel’s unanimous opinion.
Seventh Circuit Judge Diane S. Sykes and U.S. District Judge
Staci M. Yandle concurred in the opinion.
The litigation landed before the Seventh Circuit after U.S.
District Judge Joan B. Gottschall approved the settlement in November 2015, over
several objections to the deal from other Walgreens shareholder.
Hays had first filed suit in late 2014, asserting Walgreens
had not disclosed enough information to help its shareholders case knowledgeable
votes on the proposed merger of Walgreens with European retail pharmacy
operator Alliance Boots.
Among other subjects, Hays and his co-plaintiffs said they
had sought more information concerning: the company’s handling of a defamation
lawsuit brought in the fall of 2014 by Walgreen’s former chief financial
officer Wade Miquelon; the ascent of billionaire investor Stefano Pessina to
the position of CEO of the new combined company; and the role played by certain
“activist” investors, identified in court documents as the JANA Partners LLC hedge
fund, in spurring and consummating the merger, and in the process, acquiring
allegedly outsized representation on the company’s board, relative to the
proportion of the shares held by the hedge fund investors.
In the proposed settlement to end the litigation, Walgreens
agreed to make certain disclosures, ostensibly to satisfy the concerns spelled
out in Hays’ complaint. And the drug store chain agreed to pay $370,000 to the
lawyers representing Hays and the other plaintiffs.
However, the settlement was challenged by the Competitive Enterprise
Institute, which represented John Berlau, a Walgreens stockholder who had
objected to the settlement. The Washington, D.C.-based CEI describes itself as
a “nonprofit public policy organization dedicated to advancing the principles
of limited government, free enterprise and individual liberty.” Among other
ventures, the CEI operates the Center for Class Action Fairness, which has
filed objections to numerous class action settlements its leaders believe
unfairly benefit plaintiffs’ lawyers who may earn large fees, compared to
purportedly nominal awards for class members.
Berlau is also listed as a “senior fellow” at the CEI.
Appealing Gottschall’s decision to approve the settlement,
CEI argued the disclosures provided by Walgreens under the settlement were “trivial”
and did not meet the legal standard needed to justify the accompanying payment
to the plaintiffs’ lawyers.
They pointed to the standard spelled out in a decision in Delaware
in the litigation surrounding the merger of online real estate sites Trulia and
Zillow, in which the court there said it would begin to demand informational
disclosures be “plainly material” to the demands of the shareholders who had
CEI lawyer Ted Frank argued, in light of this standard, “nominal
disclosures” should merit “nominal fees.”
The Seventh Circuit judges echoed CEI’s position, saying
they believed Walgreens’ additional disclosures under the settlement added
little to nothing to shareholders’ knowledge of the Boots merger, and wasn’t
worth the $370,000 payment.
“The value of the disclosures in this case appears to have
been nil,” Posner wrote. “The $370,000 paid class counsel - pennies to
Walgreens, amounting to 0.039 cents per share at the time of the merger-bought
nothing of value for the shareholders, though it spared the new company having
to defend itself against a meritless suit to void the shareholder vote.”
The CEI in its arguments had said the Walgreens shareholder
suit was just the latest example of a problem plaguing corporate mergers in
courthouses across the country, with lawyers attempting to extract a quick
payday in exchange for minimal to no benefit for the class of plaintiffs they
claim to represent.
Posner largely agreed, saying the disclosures fell well
short of being “plainly material,” as called for in the Trulia decision.
“The type of class action illustrated by this case - the
class action that yields fees for class counsel and nothing for the class - is
no better than a racket,” the judge said. “It must end. No class action
settlement that yields zero benefits for the class should be approved, and a class
action that seeks only worthless benefits for the class should be dismissed out
The panel also remanded the case to Gottschall, instructing
her to “give serious consideration” to dismissing the lawsuit entirely or
ordering the plaintiffs’ lawyers be replaced, as the current counsel for the
plaintiffs, “if one may judge from their performance in this litigation, can’t
be trusted to represent the interests of the class.”
In response to the Seventh Circuit decision, CEI’s Ted Frank, in a prepared statement, said the ruling was “a tremendous victory for shareholders and against
“We hope other courts follow Delaware and the Seventh
Circuit in taking steps to shut down this racket,” Frank said.