Business sales are often controversial affairs. With a publicly traded company, there may be shareholders dissatisfied with the board of directors’ decision to merge or sell the firm. In some cases this dissatisfaction turns into civil litigation.
Court of Appeals Rejects Settlement in Google Class Action
In August 2009, the board of directors of On2 Technologies agreed to a merger proposal from Internet giant Google. On2 produced a video-compression technology that Google wanted to incorporate into its existing YouTube platform. Under the deal, which was valued at approximately $107 million, each share of On2 stock was exchanged for 60 cents worth of Google stock. Google later increased its offer to include an additional 15 cents in cash per share, raising the total value of the deal to approximately $134 million.
At the time the deal was announced, On2’s directors and managers said there were no competing offers for the company, and a sale made sense given its limited cash reserves and increasing difficulty retaining skilled employees. Nevertheless, many shareholders believed that Google’s offer was too low. One shareholder filed a class action in New York State Supreme Court on behalf of himself and other shareholders. The class action complaint accused the directors of On2 of breaching their fiduciary duty to the shareholders by not seeking a higher bid for the company. A similar class action was also filed in Delaware, where On2 was incorporated.
Representatives for the New York and Delaware plaintiffs later agreed to a settlement that would cover the members of both classes. The agreement would release “any any all” claims arising from the On2-Google merger and would not permit any individual shareholder to opt-out. Approximately 200 shareholders objected to the settlement on those terms.
The Supreme Court, siding with the objectors, refused to approve the settlement. The judge held the agreement had to give out-of-state shareholders the right to opt-out of the deal and continue with the class action. Both the Appellate Division, Second Department, and the New York Court of Appeals affirmed the judge’s refusal to sign off on the settlement.
The Court of Appeals noted that the objecting shareholders have a “cognizable property interest” affected by the proposed settlement. Even though the class action complaint sought “predominantly equitable relief,” such as stopping the merger itself, the Court said the settlement encompassed “any damage claims relating to the merger by out-of-state class members. Those members have “constitutionally protected property rights” that entitle them to opt out of the proposed settlement.