Monica Ross-Williams, derivatively, on behalf of Sprint Nextel Corporation, Plaintiff/Appellee/Cross-appellant,
Robert R. Bennett, et al., and Sprint Nextel Corporation, a Kansas corporation, Defendants/Appellees, Michael Hartleib, Objector/Appellant/Cross-appellee.
BY THE COURT
Although class actions and derivative actions are both types
of representative litigation and involve similar procedures,
they are separate and distinct causes of action.
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.
Kansas, derivative actions are controlled by K.S.A. 2017
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).
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.
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).
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).
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
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
Kansas appellate courts review a district court's
approval of a settlement in a derivative action under an
abuse of discretion standard.
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.
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.
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.
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
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
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.
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).
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.
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.
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.
from Johnson District Court; James F. Vano, judge.
Michael Hartleib, objector/appellant pro se/cross-appellee.
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
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.
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
Arnold-Burger, C.J., Standridge and Bruns, JJ.
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
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.
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.
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.
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.
and Procedural History
of Sprint Corporation and Nextel Communications
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.
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.
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.
of Litigation in State and Federal Court
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
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.
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.
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.
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.
of SoftBank and Sprint Nextel Corporation
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
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.
and Proposed Settlement of Derivative Actions
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.
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
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
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.
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
Approval of Settlement and Notice to Shareholders
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.
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 ...