A little less than a year after Walgreens and some of its
shareholders moved to settle a class action over a lack of disclosures to
shareholders who said they were concerned over the company’s merger with
European retail pharmacy operator Alliance Boots, objectors to that settlement
deal are hoping a federal appeals court will toss out or rewrite the settlement
over concerns the deal is little more than a $370,000 payoff to trial lawyers
using the investor action as a tactic to insert themselves into the merger
On June 2, Ted Frank, an attorney with the Competitive
Enterprise Institute, on behalf of objector John Berlau, squared off before a
three-judge panel of the U.S. Seventh Circuit Court of Appeals, against
attorneys representing Walgreens Boots Alliance and Walgreens shareholder investor
John Hays, arguing the settlement deal Hays and Walgreens reached last summer
failed key legal tests.
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.
The arguments before the Seventh Circuit come as the latest
step in a process launched in late 2014, when Hays and a group of fellow
Walgreens shareholders first took Walgreens to court over their purported
belief the company had left investors in the dark on certain details in the
company’s narrative to shareholders concerning the events leading up to the
merger proposal with Boots Alliance.
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 November 2015, U.S. District Judge Joan B. Gottschall
granted approval of the settlement, over several objections to the deal,
including that of Berlau, a Walgreens shareholder who is listed as a “senior
fellow” at the CEI.
The settlement included $370,000 for lawyers representing
Hays and other plaintiffs, while providing Walgreens shareholders with
additional company information disclosures concerning the merger.
The plaintiffs were represented by the firms of 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.
On appeal, Berlau and the CEI argued the informational
disclosures were not “material” enough to justify the attorney fees awarded in
the settlement deal and approved by Gottschall.
Frank said the settlement marked the latest example of what
he called the “Merger Tax,” in which trial lawyers and certain shareholders
challenge corporate mergers in court, and many secure relatively quick paydays,
while their clients receive only informational disclosures, which may or may
not reveal anything of consequence. Frank estimated as many as 97 percent of
all corporate mergers end up so challenged and, usually, settled.
Frank said in other jurisdictions courts have begun to take
a dim view of so-called “disclosure-only settlements.” In Delaware, a state in
which large numbers of corporations are registered, courts in January, in the
litigation surrounding the merger of online real estate sites Trulia and Zillow,
declared they would begin to demand the informational disclosures be “plainly
material” to the demands of the shareholders bringing the legal challenge.
In the Walgreens case, Frank argued the disclosures provided
by Walgreens under the settlement were “trivial,” and didn’t meet this
In reply, attorneys for Hays, including David Tetjel, of
Friedman Oster, and Walgreens, including James W. Ducayet,
of Sidley Austin LLP, of Chicago, argued Gottschall had found at least four of
the six specific disclosures provided by Walgreens under the settlement to be “material”
enough to satisfy legal requirements and allow her to sign off on the deal.
During oral arguments, judges appeared divided
on the questions. The Seventh Circuit panel included Circuit Judges Richard
Posner and Diane S. Sykes, and U.S. District Judge Staci M. Yandle.
Yandle said she and Frank disagreed on a number
of elements of the case, including Frank’s assessment of Gottschall’s legal
reasoning in approving the settlement, which Frank had called “erroneous.”
She said there could “practical consequences”
of rejecting the settlement, as it could cause litigation surrounding the case
to be extended, costing everyone more time and money.
Frank said he and CEI believed the court would
be within its power to alternatively approve the settlement, but greatly reduce
the attorney fees to “nominal” levels, perhaps as low as $1.
“Nominal disclosures get nominal fees,” Frank
Judge Richard Posner appeared to differ with
his colleague, saying the settlement appeared to him to be Walgreens attempt to
quickly deal with “a gnat,” essentially with its pocket change, saying “$370,000
is nothing to a company like Walgreens.”
“They just wanted you to go away,” Posner said.