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Ross-Williams v. Bennett

Court of Appeals of Kansas

April 27, 2018

Monica Ross-Williams, derivatively, on behalf of Sprint Nextel Corporation, Plaintiff/Appellee/Cross-appellant,
v.
Robert R. Bennett, et al., and Sprint Nextel Corporation, a Kansas corporation, Defendants/Appellees, Michael Hartleib, Objector/Appellant/Cross-appellee.

         SYLLABUS BY THE COURT

         1. Although class actions and derivative actions are both types of representative litigation and involve similar procedures, they are separate and distinct causes of action.

         2. While a shareholder class action is brought against a corporation by a representative acting on behalf of a particular group of shareholders, a shareholder derivative action is brought on behalf of a corporation by a representative to enforce a right that the corporation has failed to enforce.

         3. In Kansas, derivative actions are controlled by K.S.A. 2017 Supp. 60-223a.

         4. A derivative action may be commenced by "one or more shareholders or members of a corporation or an unincorporated association" who "fairly and adequately represent the interests of shareholders or members who are similarly situated in enforcing the right of the corporation or association." K.S.A. 2017 Supp. 60-223a(a).

         5. Petitions filed in derivative actions are to be verified and they must assert "that the plaintiff was a shareholder or member at the time of the transaction complained of, or that the plaintiff's share or membership later devolved on it by operation of law." K.S.A. 2017 Supp. 60-223a(b)(1).

         6. The verified petition must "state with particularity" the efforts made by the plaintiff "to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members" as well as "the reasons for not obtaining the action or not making the effort." K.S.A. 2017 Supp. 60-223a(b)(3)(A) and (B).

         7. Similar to class actions, derivative actions may only be settled, voluntarily dismissed, or compromised with court approval. Prior to giving such approval, proper notice must be given to shareholders of a corporation or members of an unincorporated association in order to protect their interests in the proceedings. K.S.A. 2017 Supp. 60-223a(d).

         8. Standing is a component of subject matter jurisdiction. To have standing to bring an action, a party must have a sufficient personal stake in the outcome of a case so as to justify court action to resolve a disputed matter. The existence of subject matter jurisdiction and standing are questions of law over which appellate courts have unlimited review.

         9. The plain and unambiguous language of K.S.A. 2017 Supp. 60-223a permits a shareholder of a corporation or a member of an unincorporated association to bring a derivative action so long as he or she was a shareholder or member at the time of the transaction complained of in the verified petition. The statute does not require that the plaintiff continue to be a shareholder or member after the filing of a derivative action.

         10. Kansas appellate courts review a district court's approval of a settlement in a derivative action under an abuse of discretion standard.

         11. In order to comply with its duties under K.S.A. 2017 Supp. 60-223a(d), a district court must independently scrutinize a proposed settlement of a derivative action-as well as the surrounding circumstances that led to the settlement-to determine whether it is fair and reasonable. The district court must also determine whether the settlement has been induced by fraud or collusion.

         12. District courts are not required to use a specific list of factors in scrutinizing a proposed settlement. Rather, they are to perform a logical and independent analysis of all of the relevant circumstances affecting a particular settlement.

         13. In evaluating a proposed settlement in a derivative action, the district court should place special weight on the net benefit-including pecuniary and non-pecuniary elements-to the corporation or unincorporated association.

         14. A reviewing court must be particularly diligent in exercising its duty to scrutinize a proposed settlement in a derivative action that includes an award of attorney fees but does not include monetary relief for the corporation and its shareholders or the unincorporated association and its members.

         15. In Kansas, courts do not have the equitable power to award attorney fees and expenses. Instead, the allowance of attorney fees and expenses is a matter of public policy to be determined by the Legislature. Accordingly, courts do not have the power to award attorney fees and expenses in the absence of statutory authority or an agreement by the parties.

         16. Unlike K.S.A. 2017 Supp. 60-223(h)-which allows for the award of reasonable attorney fees in class actions-there is no provision in K.S.A. 2017 Supp. 60-223a allowing courts to award attorney fees in derivative actions.

         17. In a derivative action in which the parties agree to an award of attorney fees and expenses, the district court must also determine the reasonableness of the requested attorney fees in light of the eight factors set forth in Kansas Rules of Professional Conduct 1.5(a) (2018 Kan. S.Ct. R. 294).

         18. Appellate courts review both the district court's determination of the reasonableness of requested attorney fees and expenses as well as the actual award of attorney fees and expenses under an abuse of discretion standard.

         19. Although both district courts and appellate courts are experts on the reasonableness of attorney fees, an award of attorney fees by the district court will not be set aside on appeal when it is authorized by law and supported by substantial competent evidence.

         20. The purpose of a motion to alter or amend under K.S.A. 2017 Supp. 60-259(f) is to allow a district court the opportunity to correct a prior error. It is not an opportunity for a party to present additional arguments or to offer additional evidence that the moving party could have-with reasonable diligence-presented prior to the entry of the final order.

          Appeal from Johnson District Court; James F. Vano, judge.

          Michael Hartleib, objector/appellant pro se/cross-appellee.

          Thomas J. Hershewe and Tim E. Dollar, of Dollar, Burns & Becker, L.C., of Kansas City, Missouri, and Brett D. Stecker and Robert B. Weiser, of the Weiser Law Firm, P.C., of Berwyn, Pennsylvania, for plaintiff/appellee/cross-appellant Monica Ross-Williams.

          Jennifer L. Berhorst, Sarah R. Holdmeyer, and W. Perry Brandt, of Bryan Cave LLP, of Kansas City, Missouri, for defendants/appellees Robert R. Bennett, Keith J. Bane, Gordon M. Bethune, Frank M. Drendel, Larry C. Glasscock, James H. Hance, Jr., Daniel R. Hesse, V. Janet Hill, Irvine O. Hockaday, Jr., Frank Ianna, William E. Kennard, Linda K. Lorimer, Sven-Christer Nilsson, William R. Nuti, Rodney O'Neal, and William H. Swanson.

          Mark W. McGrory, of Erise IP, P.A., of Overland Park, Scott D. Musoff, of Skadden, Arps, Slate, Meagher & Flom LLP, of New York, New York, and Jenness E. Parker, of the same firm of Wilmington, Delaware, for defendant appellees Mark E. Angelino, William G. Arendt, Timothy E. Kelly, Paul N. Saleh, Barry J. West, and nominal defendant Sprint Nextel Corporation.

          Before Arnold-Burger, C.J., Standridge and Bruns, JJ.

          Bruns, J.

         This is a derivative action filed in Johnson County District Court by Monica Ross-Williams on behalf of the Sprint Nextel Corporation. The action arises out of the 2005 merger of the former Sprint Corporation and Nextel Communications. In her verified petition, Ross-Williams asserted claims for monetary damages as well as for non-monetary relief against several officers and directors of the Sprint Nextel Corporation. In addition, the verified petition named the corporation as a nominal defendant. Three other shareholders filed similar derivative actions on behalf of the Sprint Nextel Corporation.

         Each of the derivative actions was stayed pending the resolution of a related shareholder class action lawsuit filed in the United States District Court for the District of Kansas. While the derivative actions were stayed, the SoftBank Group Corp. (SoftBank) and the Sprint Nextel Corporation merged to form a new corporation-also known as the Sprint Corporation-in Delaware. As a result, the Sprint Nextel Corporation became a wholly owned subsidiary of the new corporation.

         After the federal class action settled, the parties to the four derivative actions entered into a comprehensive proposed settlement agreement. Unlike the settlement in the federal class action, the proposed settlement in the derivative actions did not provide for any monetary relief to the corporation or its shareholders. Rather, the proposed settlement included non-monetary relief in the form of various changes in the governance structure and internal controls of the newly formed Sprint Corporation. The proposed settlement also included $4.25 million in attorney fees and expenses as well as $5, 000 incentive awards for each of the individual plaintiffs in the derivative actions.

         After the district court preliminarily approved the proposed settlement agreement, the parties provided notice to all owners of record-as well as to the beneficial owners- of common stock of the new Sprint Corporation. In response to the notice, one of the shareholders-Michael Hartleib-filed a timely objection to both the substantive portions of the proposed settlement as well as to the request for attorney fees and expenses. Ultimately, the district court approved the proposed settlement but awarded $450, 000 in attorney fees and expenses instead of the amount requested. The district court also approved the incentive awards for each of the plaintiffs in the derivative actions. Additionally, the district court denied Hartleib's request for an incentive award or expense reimbursement.

         In his capacity as an objector, Hartleib timely appeals from the district court's approval of the settlement as well as from the award of attorney fees and expenses. Moreover, Ross-Williams cross-appeals the district court's decision to reduce the amount of the attorney fees and expenses from the amount requested as part of the proposed settlement agreement. After reviewing the record and considering the legal arguments raised on appeal, we conclude that the district court did not abuse its discretion in approving the settlement or in awarding attorney fees and expenses. Finally, although we find that the objector performed a valuable service in this case, we conclude that neither the district court nor this court has the authority to grant Hartleib's request for an incentive award or expense reimbursement. Thus, we affirm.

         Factual and Procedural History

         Merger of Sprint Corporation and Nextel Communications

         In December 2004, the Sprint Corporation, then organized under the laws of the State of Kansas, announced that it would acquire Nextel Communications, Inc., which was organized under the laws of the State of Delaware. On August 12, 2005, the transaction-which was publicized as a "merger of equals"-was completed. On the same day, the Sprint Corporation filed documents with the Kansas Secretary of State's Office to officially change its name to the Sprint Nextel Corporation.

         Because the purchase price of $37.8 billion paid by the Sprint Corporation was $15.6 billion more than the fair market value of the assets of Nextel Communications, the Sprint Nextel Corporation booked the difference as goodwill. Evidently, the purchase price reflected the anticipated benefit of integrating the wireless networks of the two companies. However, subsequent efforts to integrate the two technologies proved to be unsuccessful. As a result, the Sprint Nextel Corporation began suffering substantial financial losses.

         On January 18, 2008, the Sprint Nextel Corporation publicly disclosed that it suffered a net loss of 683, 000 prepaid subscribers during the fourth quarter of 2007. Then, on February 28, 2008, the Sprint Nextel Corporation publicly disclosed that it would be recording a non-cash goodwill impairment charge of $29.7 billion for the fourth quarter of 2007. The next day, the corporation filed its Annual Report for the 2007 fiscal year. The report revealed-among other things-the significant loss of subscribers as well as efforts made to extend credit to subscribers that were apparently inconsistent with previous statements made to shareholders.

         Commencement of Litigation in State and Federal Court

         On March 10, 2009, a securities class action was filed on behalf of shareholders against the Sprint Nextel Corporation in the United States District Court for the District of Kansas. See Bennett v. Sprint Nextel Corporation, Case No. 09-CV-2122-EFM-GEB. One year later, Robert B. Weiser of the Weiser Law Firm-at the time located in Wayne, Pennsylvania-sent a pre-suit demand letter on behalf of Ross-Williams to Daniel R. Hesse, President and Chief Executive Officer of the Sprint Nextel Corporation, pursuant to K.S.A. 60-223a. In the letter, Weiser alleged that certain officers and directors of the Sprint Nextel Corporation had breached their fiduciary duties of loyalty and good faith in various ways. Weiser demanded that the Board of Directors of the Sprint Nextel Corporation conduct an independent internal investigation into possible violations of the law and commence a civil action against the corporate officers and directors to recover the damages allegedly suffered by the corporation.

         In a letter dated November 15, 2010, the Sprint Nextel Corporation-through its legal counsel-notified Weiser that the Board of Directors had unanimously voted to reject the demand. A few months later, on February 25, 2011, Ross-Williams filed this derivative action on behalf of the Sprint Nextel Corporation against several officers and directors of the corporation in Johnson County District Court. Although Ross-Williams' attorneys called their initial pleading a "Verified Shareholder Derivative Complaint, " we will refer to it as a verified petition in this opinion to be consistent with Kansas law. See K.S.A. 2017 Supp. 60-223a(b). In the verified petition, counsel for Ross-Williams asserted claims for breach of fiduciary duty, unjust enrichment, abuse of control, and waste of corporate assets. The verified petition sought both monetary damages and nonmonetary relief in the form of corporate governance reforms. Furthermore, counsel for Ross-Williams asserted a claim for reasonable attorney fees and expenses.

         Three similar derivative actions arising out of events surrounding the merger of the Sprint Corporation and Nextel Communications were also filed in Johnson County District Court during 2009 and 2010. See Murphy v. Forsee, Case No. 09 CV 3132; Price v. Forsee, Case No. 11 CV 3257; Randolph v. Forsee, Case Nos. 10 CV 6261 and 12 CV 4447. The Murphy case was removed to the United States District Court of Kansas shortly after it was filed. See Murphy v. Forsee, Case No. 09-CV-2242-EFM-KMH. Although the four derivative actions were never officially consolidated, all of them would eventually become part of the comprehensive settlement approved by the district court in this case.

         Before the defendants filed responsive pleadings or commenced discovery, the parties agreed to stay each of the derivative actions until completion of discovery in the federal securities class action. Accordingly, no discovery was completed and no substantive motions were filed in the derivative actions prior to the parties entering into the proposed settlement agreement that is the subject of this appeal. Rather, as a result of an agreement between the parties, the attorneys representing the plaintiffs in the derivative action were given access to the discovery in Bennett v. Sprint Nextel Corporation, Case No. 09-CV-2122-EFM-GEB. According to counsel representing the various plaintiffs in the derivative actions, they received about 460, 000 documents- containing approximately 2.5 million pages-as a result of the agreement. Of these documents, the attorneys or their employees reviewed and coded about 103, 600 documents-or approximately 22.5% of the discovery documents produced.

         On December 11, 2012, plaintiffs' counsel sent a settlement demand letter to counsel for the defendants setting forth-among other things-claimed deficiencies in the governance policies and internal controls of the Sprint Nextel Corporation that were identified during the document review. The letter proposed several corporate governance reforms to help address the alleged deficiencies. Moreover, it appears that attorneys representing the plaintiffs began drafting an amended verified petition in June 2013, but it was never filed with the district court.

         Merger of SoftBank and Sprint Nextel Corporation

         On June 25, 2013, the shareholders of the Sprint Nextel Corporation voted to approve a merger in which SoftBank acquired around 70% of the corporation's stock. The merger-completed on July 10, 2013-involved several transactions and the filing of numerous documents with the Securities and Exchange Commission as well as with the State of Delaware and the State of Kansas. A new corporation-which ultimately became known as the Sprint Corporation-was organized in Delaware. In addition, the Sprint Nextel Corporation filed documents with the Kansas Secretary of State changing its name to Sprint Communications, Inc.

         Accordingly, as a result of the merger with SoftBank, Sprint Communications, Inc. f/k/a the Sprint Nextel Corporation became a wholly owned subsidiary of the newly formed Sprint Corporation of Delaware. In addition, according to public documents filed with the Securities and Exchange Commission, the newly formed Sprint Corporation became the "successor registrant" to the Sprint Nextel Corporation under Rule 12g-3 of the Securities Exchange Act of 1934. Furthermore, as part of the merger transaction, the former shareholders of the Sprint Nextel Corporation who did not sell their stock for cash received stock in the new Sprint Corporation in exchange.

         Mediation and Proposed Settlement of Derivative Actions

         On July 8, 2014, the parties to the four derivative actions participated in their first formal mediation session. Layn R. Phillips, a former judge from the United States District Court for the District of Oklahoma, conducted the mediation sessions in New York City. Apparently, former Judge Phillips also mediated the related securities class action filed in federal court, which settled for $131 million in 2015. Although the derivative actions did not settle at the first mediation session, a general structure for settlement negotiations was established.

         Subsequently, attorneys representing the plaintiffs in the derivative actions retained James Tompkins, Ph.D.-a Professor of Finance at Kennesaw State University in Georgia-as an expert witness to assist them in the area of corporate governance reform. On March 9, 2015, former Judge Phillips conducted a second mediation session in the derivative actions. Once again, the parties were unable to reach an agreement but they were able to make additional progress towards settlement. Over the next several months, the parties evidently continued to discuss settlement.

         At a third mediation session conducted by former Judge Phillips on December 11, 2015, the parties were finally able to reach an agreement on the material terms of a comprehensive settlement of the four derivative actions. Specifically, the parties agreed on several reforms in the corporate governance and internal control polices to be adopted by the new Sprint Corporation. Significantly, the proposed settlement agreement did not include a clawback provision or any monetary recovery from the defendants. The proposed settlement agreement did, however, include $4.25 million in attorney fees and expenses to be paid by the Sprint Corporation to counsel for the plaintiffs-subject to court approval-as well as incentive fees in the amount of $5, 000 for each of the individual plaintiffs.

         The parties executed a Stipulation and Agreement of Settlement on February 22, 2016, which set forth the terms of the proposed settlement and the procedures for implementing the settlement if approved by the district court. In addition, the Stipulation provided that the Weiser Law Firm would serve as the receiving agent of any attorney fees and expenses approved by the district court. Attached as Exhibit A to the Stipulation and Agreement of Settlement was a document entitled "Corporate Governance Reforms, " which set out the parties' agreement as to the reforms the Sprint Corporation would implement in its general corporate governance and internal controls. The proposed reforms fell under five subheadings: (1) General Corporate Governance, (2) Mergers & Acquisitions Activity, (3) Audit Committee, (4) Share Repurchase Policy, and (5) Other.

         According to Exhibit A, the Board of Directors of the Sprint Corporation agreed to "adopt resolutions, amend committee charters, and take other steps necessary to implement the reforms" within 30 days following the entry of an order by the district court approving the proposed settlement. In addition, the exhibit explained that the reforms would "remain in effect for three years following the date of the agreement to the proposals by [the Sprint Corporation]." Notwithstanding, the exhibit also indicated that the reforms could be modified or terminated by the Sprint Corporation's Board of Directors "[a]fter two years from the date of the agreement" so long as the Board provided "notice [of the modification or termination] on the Investor Relations page of Sprint.com."

         Preliminary Approval of Settlement and Notice to Shareholders

         On February 25, 2016, exactly five years after Ross-Williams had initially filed her verified petition in this derivative action, counsel for Ross-Williams filed in the Johnson County District Court a motion seeking preliminary approval of the proposed comprehensive settlement of the four derivative actions. A copy of the executed Stipulation and Agreement of Settlement was attached to the motion along with several other documents. On March 23, 2016, the district court issued an order granting preliminary approval to the proposed settlement, subject to further consideration at a final settlement hearing to be held on May 26, 2016. Moreover, the district court set a deadline for the filing of objections to the proposed settlement and required that the parties give notice of the proposed settlement to all record and beneficial owners of common stock of the Sprint Corporation as of February 22, 2016.

         On April 6, 2016, Susan Z. Haller-in her capacity as Vice President, Legal of the Sprint Corporation-filed a Form 8-K Current Report with the Securities and Exchange Commission. The report included the Notice of Pendency and Proposed Settlement of Stockholder's Actions as well as a brief summary of the proposed settlement. On the same day, the Sprint Corporation posted the Form 8-K Current Report on the Investor Relations page of its website. In addition, the Summary Notice was published in Investor's Business Daily on April 11, 2016. The following ...


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