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3 Transactions: Tenn. J. Bus. L. 38 (2001-2002)
Court Denies Corporate Representation by Current Shareholder in Class Action Settlement of Alleged Securities Violations. In re Cendant Corp. Litig., 264 F.3d 286 (3d Cir. 2001)

handle is hein.journals/transac3 and id is 40 raw text is: Tranz[ac~lc[z: THE TENNESSEE JOURNAL OF BUSINESS LAW conduct sufficient to invalidate a previously negotiated Stock Purchase Agreement (SPA). Instead, a fair value approach to the valuation of the plaintiffs stock was imposed as the measure of damage. In Hayes, plaintiff Dan Hayes was an employee, of- ficer, director, and shareholder of Olmsted & Associ- ates, Inc. (0 & A), a food brokerage firm. Hayes was terninated a year before his planned retirement date, and offered a severance package that included the pur- chase of his shares at $64 per share. Hayes filed suit against 0 & A for judicial dissolution and other rem- edies, alleging oppressive conduct, misapplication of corporate assets, breach of fiduciary duty, and interfer- ence with prospective economic advantage. A settle- ment agreement provided for the purchase of Hayes' shares at a value to be determined by the court. Although the trial court found that Hayes had been the victim of oppressive conduct, this had little effect on its judgment as to the value of the shares. A previ- ously negotiated SPA provided that the parties would set the share value of the stock at least annually. The value was set at $64 per share three years prior to Hayes' termination, and had not been updated since. At trial, Hayes argued that the price per share should be set at $171.35 per share, which his expert witness testified was the fair value of the stock. The trial court rejected Hayes' argument, valuing the shares at $67 per share, and finding that the SPA was a fair basis for valu- ing the stock since it took into account the interests of all parties involved. On appeal, the Court of Appeals upheld the trial courts finding of a breach of fiduciary duty constituting op- pressive conduct. The Court of Appeals observed that among the remedies available under Oregon law to a victim of oppressive conduct is a court order requiring the corporation to purchase the minority shareholder's stock at a fair and reasonable price, based upon case- specific factual inquiries. The Court of Appeals, there- fore, reversed the trial court on the measure of damages and held that Hayes' formula for fair market value was the correct approach, stating that the SPA was not an accurate measure of the stock's fair value because the agreement reflected a contractual compromise between the interests of the shareholders and the corporation. The agreement obviously did not take into account share- holder oppression. Courts have great latitude when faced with fact-spe- cific inquiries as to what constitutes oppressive conduct and fair value. The opinion in this case carefully avoids bright-line rules, leaving future courts the ability to de- cide these issues on a case-by-case basis. CourtDenies Corporate RepresentationbyCurrent Shareholder in Class Action Settlement of Alleged Secuiiies Violations. In re Cendant Cop. Litig., 264 E3d 286 (3d Cir. 2001). By Scott P. Dll The Third Circuit Court of Appeals (the Court) upheld a district court's approval of a class action settle- ment for alleged securities violations. The Court princi- pally held that a current shareholder of the defendant corporation could not object to the settlement because he was not a member of the class and his claims were best addressed in a shareholder derivative suit. On December 17, 1997, CUC International, Inc. (CUC), merged with HFS, Inc. (HFS), to form Cendant Corporation (Cendant). After a four-month investigation into CUC accounting irregularities, Cendant reported to the SEC that CUC had materially misstated revenue and income in 1995, 1996, and 1997. Over this four-month investigation, Cendant's stock dropped 67 percent. Consequently, former shareholders of CUC, HFS, and Cendant sued, seeking damages for violations of the Securities Act and the Securities Exchange Act. The lawsuits were consolidated in a class action lawsuit and transferred to the U.S. District Court for the District of New Jersey. The plaintiffs included any person or entity that purchased or acquired certain CUC or Cendant securities from May 31, 1995, to August 28, 1998. The defendants included Cendant, 12 former officers and directors of CUC, and former officers and directors of HFS (the HFS Individual Defendants). On March 29, 2000, the District Court granted pre- liminary approval of a settlement agreement. Under the settlement, Cendant would pay $2.85 billion to the class and make certain changes to its corporate governance. In addition, Cendant and the HFS Individual Defen- dants would pay 50 percent of their recovery from caims brought against Ernst & Young, CUC's independent pre- merger accountant. Cendant would lose its contribution claims available through the Private Securities Litigation Reform Act (Reform Act) and any federal or state law, but it would keep the right to assert claims against any defendant in future litigation. Marvin Deutch objected to the settlement. Although he was not a class member, he moved to intervene as a current shareholder and a derivative action plaintiff. When the District Court rejected Deutch's objections E l Pgo m

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