In re Countrywide Corp. S’holders Litig., C.A. No. 3464-VCN (Del. Ch. August 24, 2009) (Noble, V.C.)

In this consolidated class action in which several Countrywide Financial Corporation (“Countrywide”) shareholders sought to enjoin a merger between Countrywide and Bank of America Corporation (“BOA”), the Court of Chancery rejected class member SRM Global Fund Limited Partnership’s (“SRM”) new objections, certified the action as a class action and approved the modified proposed settlement between the parties. The plaintiffs had originally negotiated a settlement with Countrywide and the individual defendants by which virtually all claims surrounding the proposed merger would have been released in exchange for the defendants providing supplemental disclosures in advance of a Countrywide shareholder vote on the merger, but no additional monetary consideration. SRM objected to this initial proposed settlement on the grounds that SRM would unfairly lose certain common law fraud claims arising out of certain public statements made by BOA’s Chief Executive Officer, Kenneth Lewis (the “Lewis Statements”). After the Court refused to approve the initial proposed settlement as long as those common law fraud claims were included within the scope of its accompanying release, the settlement proponents promptly modified the scope of the proposed settlement, expressly carving out common law fraud claims based on the Lewis Statements.

In the present action, SRM objected to the modified proposed settlement on three grounds: (1) the proposed settlement provided no monetary compensation to SRM and the class in exchange for the release of claims based on the Lewis Statements under federal securities laws; (2) money damage claims predominated, rendering a non-opt out class action impermissible; and (3) the general release provision of the modified proposed settlement was overbroad because SRM’s claims based on the Lewis Statements arose out of a different set of operative facts than those upon which the underlying action was based, and could not be released pursuant to the rule set forth in In re Philadelphia Stock Exchange, 945 A.2d 1123 (Del. 2008). The Court quickly dismissed SRM’s first contention. As the Court observed, past precedent clearly establishes that the absence of a monetary benefit is not automatically fatal to any proposed settlement. Given the fact that SRM would face great difficulty in demonstrating the Lewis Statements were false, material or made with scienter, SRM’s potential federal securities law claims possessed no obvious value and surrendering them in the context of the settlement was neither unfair nor unreasonable.

The Court just as easily dismissed SRM’s second objection. In previously refusing to approve the initial proposed settlement, the Court had found that the common law fraud claims which SRM objected to being included in the initial proposed settlement’s general release provision were uniquely individual in nature, requiring proof of individual reliance. Unlike those common law fraud claims, however, the federal securities law claims that SRM objected to being included in the general release provision of the modified proposed settlement were not uniquely individual in nature and did not require any proof of individual reliance. Given that both the United States and Delaware Supreme Courts have recognized the validity of executing a general release in the settlement of a state law class action that also encompasses possible federal claims, the Court found nothing objectionable with the modified proposed settlement’s inclusion of the federal securities law claims in its general release provision. Turning finally to SRM’s third objection, the Court observed that the BOA/Countrywide merger was the predicate event upon which the Lewis Statements were based. Thus, just as in In re Philadelphia Stock Exchange, both SRM’s claims surrounding the Lewis Statements and the Delaware Complaint arose out of the same common nucleus of facts. Because the Lewis Statements could not be characterized as unrelated or tangential to the conduct forming the basis for the specific claims for relief asserted, the Court, therefore, concluded that approving the parties’ inclusion of claims arising from them in the proposed settlement’s general release provision was not improper.

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