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In re Hatteras Financial, Inc. Shareholder Litigation

United States District Court, M.D. North Carolina

December 19, 2017


         MASTER FILE


          Thomas D. Schroeder United States District Judge.

         These consolidated cases (the “Consolidated Actions”) came before the court for a hearing (the “Settlement Hearing”) on November 8, 2017, pursuant to this court's Order of Preliminary Approval of Settlement, Form and Manner of Notice, and Scheduling of Settlement Hearing dated July 3, 2017 (the “Preliminary Approval Order”) (Doc. 40), and upon a Stipulation and Agreement of Settlement dated May 4, 2017 (the “Stipulation”) (Doc. 46-1), which is incorporated herein by reference.[1] The parties were represented by their attorneys of record, following due notice of the Settlement Hearing given in accordance with the Preliminary Approval Order.

         The court has heard and considered evidence in support of the motion for final approval of the proposed settlement (the “Settlement”) (Doc. 44) set forth in the Stipulation. All persons requesting to be heard in accordance with the Preliminary Approval Order were given the opportunity to do so. No shareholder filed an objection with Hatteras Financial, Inc. (“Hatteras”), according to the procedures set forth in this court's Preliminary Approval Order. However, one shareholder mailed a letter directly to the court, describing the additional disclosures obtained by Plaintiffs as “trivial information” and objecting to the requested $700, 000 in attorneys' fees as a “totally extravagant amount.” The court shared the letter with all counsel. At the November 8 hearing, co-lead Plaintiffs' counsel (“Lead Counsel”) advised the court it could consider the letter, and no other counsel objected.

         After full consideration of all matters of record, and upon finding that notice to the Class was adequate and sufficient, and considering the entire matter of the proposed Settlement:



         Settlement and Class Certification

         The Consolidated Actions challenged the information about a proposed merger between Hatteras and Annaly Capital Management, Inc. (“Annaly”), as described in Hatteras's Schedule 14D-9 Recommendation Statement filed with the Securities Exchange Commission, as required by federal law. Plaintiff James Wilson filed the first of these Consolidated Actions on May 11, 2016, and on May 20, 2016, moved to enjoin the proposed transaction for alleged failure to provide material disclosures. On May 26, 2016, Plaintiff William Friedman filed an action in this court as well, and the actions were subsequently joined as the Consolidated Actions. Two other actions against Hatteras were filed in Maryland: Bushansky v. Hatteras Financial Corp., case no. 1:16CV1621-RDB, pending in the U.S. District Court in Maryland; and Twiss v. Hatteras Financial Corp., case no. 24-C-16-2862, pending in the Circuit Court for Baltimore City. They are not part of these Consolidated Actions.

         The parties engaged in immediate negotiations and limited discovery, culminating in a negotiated revised 14D-9 schedule that was filed on July 1, 2016, some 11 days before the tender offer closed on July 11, 2016. The transaction closed the next day, July 12. No shareholder of Hatteras, or anyone else for that matter, opposed the transaction.

         On July 3, 2017, the court preliminarily certified the Class defined as anyone who held Hatteras common stock at any time from April 10, 2016, to July 12, 2016, and approved the Notice of Pendency and Proposed Settlement of Class Action Shareholder Litigation, Settlement Hearing, and Right to Appear (the “Notice”), which has been provided pursuant to and in the manner directed by the Preliminary Approval Order. Proof of dissemination of the Notice was filed with the court; and full opportunity to be heard has been offered to all members of the Class. The form and manner of the Notice is hereby determined to have been the best notice practicable under the circumstances to all persons entitled to such notice of the Settlement Hearing and the proposed Settlement, and to have met the requirements of Rule 23(c)(2)(A) of the Federal Rules of Civil Procedure and of due process. It is further determined that all members of the Class are bound by this Order and Final Judgment.

         For purposes of settlement only, the court hereby certifies the Class as a non-opt-out class pursuant to Rules 23(a), 23(b)(1) and 23(b)(2) of the Federal Rules of Civil Procedure. The Class consists of any and all Persons who were record holders or beneficial owners of any share(s) of the common stock of Hatteras at any time during the period beginning on and including April 10, 2016, and ending on and including July 12, 2016, including any and all of their respective successors in interest, predecessors, representatives, trustees, executors, administrators, heirs, assigns or transferees, immediate and remote, and any person or entity acting for or on behalf of, or claiming under any of them, excluding the Defendants and the members of the immediate families of the Directors. The court finds, for purposes of settlement only, that each of the requirements of Rules 23(a), 23(b)(1) and 23(b)(2) of the Federal Rules of Civil Procedure have been satisfied, in that (i) the Class is so numerous that joinder of all members is impracticable, (ii) there are questions of law and fact common to the Class, (iii) the claims or defenses of the representative parties are typical of the claims or defenses of the Class, (iv) the Plaintiffs and their counsel are adequate representatives of the Class, (v) the prosecution of separate actions by members of the Class would create a risk of inconsistent or varying adjudications with respect to the individual members of the Class that would establish incompatible standards of conduct for Defendants and/or adjudications with respect to individual members of the Class that would as a practical matter be dispositive of the interests of members of the Class or substantially impair or impede their ability to protect their interests, and (vi) and Defendants have acted on grounds that apply generally to the Class.

         On November 18, 2016, subject to further consideration at the Settlement Hearing, the court appointed the Plaintiffs in the Consolidated Actions as co-lead plaintiffs (“Lead Plaintiffs”) and their counsel as Lead Counsel. The court finds that, based on the record in the Consolidated Actions, Lead Plaintiffs and Lead Counsel have fairly and adequately protected and represented the interests of the Class.

         This court has jurisdiction over the subject matter of the Consolidated Actions, including all matters necessary to effectuate the Settlement and this Order and Final Judgment, and over all parties to the Consolidated Actions.

         The court hereby adopts and approves the Settlement - as to the relief obtained - as being in all respects fair, reasonable, adequate, just, in the best interest of the parties and the Settlement class, and in compliance with all applicable requirements of the United States Constitution (including the Due Process Clause), Rule 23 of the Federal Rules of Civil Procedure, and all other applicable laws. In making this determination, the court finds that the Settlement has been reached “as a result of good-faith bargaining at arm's length, without collusion, on the basis of (1) the posture of the case at the time settlement was proposed, (2) the extent of discovery that had been conducted, (3) the circumstances surrounding the negotiations, and (4) the experience of counsel in the area of securities class action litigation.” In re Jiffy Lube Sec. Litig., 927 F.2d 155, 158-59 (4th Cir. 1991). The court has found the Settlement to be adequate, having considered the following factors: (1) the relative strength of the Plaintiffs' case on the merits, (2) the existence of any difficulties of proof or strong defenses the Plaintiffs would likely encounter if the case went to trial, (3) the anticipated duration and expense of additional litigation, (4) the solvency of the Defendants and the likelihood of recovery on a litigated judgment, and (5) the degree of opposition to the settlement. Id. at 159. In considering the fairness and adequacy of the Settlement, the court has given weight to the fact that the Settlement has not been opposed by any shareholder but was objected to by one shareholder as obtaining additional disclosures that were “trivial information.” The parties to the Stipulation are hereby authorized and directed to comply with and to consummate the Settlement in accordance with the terms and provisions of the Stipulation.

         In making these conclusions, the court finds that: (1) Hatteras filed an amended 14D-9 with additional disclosures (the “Supplemental Disclosures”) as a result of Plaintiffs bringing this suit; (2) these Supplemental Disclosures, and this Settlement, are the result of extended arm's-length negotiations between the parties and their counsel; (3) these Supplemental Disclosures provided Hatteras's shareholders with technically material, yet previously undisclosed, information about the background of the merger including the presence of a standstill provision with Company A, financial information that Hatteras and Goldman, Sachs & Co. (Hatteras's financial advisor in this transaction) relied on in making their projections, which was available if shareholders sought to attain additional information as to tendering their shares and to more fully judge the credibility of the projections in the 14D-9, and financial projections for companies that were deemed similar to Hatteras; (4) Lead Counsel have engaged in discovery both before and after the Settlement; (5) Lead Counsel have extensive experience in the areas of securities litigation; (6) the probability of the Plaintiffs succeeding in litigation on any additional claims is low; and (7) the absence of any collusion or fraud in the Settlement. (Doc. 45 at 15-24.)

         In approving the settlement, the court does find that the Supplemental Disclosures were legally material. See In re Pure Res., Inc. S'holders Litig., 808 A.2d 421, 449 (Del. Ch. 2002) (noting the importance of valuation analysis that supports conclusions found in disclosure documents); Brown v. Brewer, No. CV06-3731-FHK SHX, 2010 WL 2472182, at *21 (C.D. Cal. June 17, 2010) (explaining that “[a] reasonable shareholder would have wanted to independently evaluate management's internal financial projections to see if the company was being fairly valued”); SEC v. Mayhew, 121 F.3d 44, 52 (2d Cir. 1997) (stating that material facts “include any fact ‘which in reasonable and objective contemplation might affect the value of the corporation's stock or securities'”). However, their practical benefit to the Class was marginal.

         At the November 8, 2017, hearing, Lead Counsel characterized the Supplemental Disclosures in substance as follows: providing material GAAP financial forecasts relied on by the Hatteras board and Goldman Sachs to recommend the transaction; providing an illustrative pro forma accretion/dilution analysis; disclosing the companies Goldman Sachs reviewed (and their annualized dividend yield) in preparing its analysis to recommend the merger; providing price-to-book ratios that Goldman Sachs calculated in its analysis and in reaching the already-disclosed opinions in the 14D-9; providing information about the manner in which the banker determined equity value ranges, including the manner of calculating the discount rate; providing information about nondisclosure agreements and “other background to [the Hatteras] board's decisions to pursue a sales transaction”; and information as to Goldman Sachs's conflict check process (although no conflict was alleged or demonstrated).

         While the Supplemental Disclosures provided background information on the conclusions in the original 14D-9, as well as information about the standstill provision with Company A, and financial information and projections that Lead Counsel stress the value of, it is not at all clear that this information provided any real benefit to any Hatteras shareholder or actually influenced any Class member's decision to tender his shares. This is especially true given that the 14D-9 was provided to shareholders only eleven days before the merger closed.

         Specifically, the substance of the information added to the Supplemental Disclosures (including projected net income, projected dividends, additional information regarding analysis of selected comparable companies, and discount dividend analysis) served only to buttress conclusions that were already stated in the original 14D-9. While Lead Counsel argue that this information is vital to shareholders, as it allows them to weigh the credibility of the conclusions in the original 14D-9, the court is skeptical that any shareholder benefitted materially from this information, given that underlying conclusions were already present. Further, while the Supplemental Disclosures did include the statement that the merger between Hatteras and Annaly would be dilutive to the holders of shares of Hatteras common stock, the information most material to a shareholder's decision whether to tender his shares (the consideration for tendered shares, the present value of the shares, certain financial projections, and the fairness opinion) was present in the original 14D-9. (Doc. 46-2 at 7, 11-25.)

         Lastly, Lead Counsel urge that the disclosure of the standstill provision in the Supplemental Disclosures was material. (Doc. 45 at 28-29.) This is technically true, but its practical value to a shareholder deciding whether to tender his shares has not been demonstrated. A shareholder considering whether to tender his shares based on the original 14D-9 would have been in substantially the same position as a shareholder considering whether to tender his shares based on the amended 14D-9. So, while the court approves this settlement, it cannot overlook the fact that this case has the hallmarks of one that was sought out by counsel, subjected to technical challenges (including the filing of two other lawsuits in other jurisdictions and requests for preliminary, emergency injunctive relief) at a time when the parties to the proposed transaction were most vulnerable to delay, and resolved through agreed-upon modest technical changes that largely amplified information already present in the 14D-9.

         Courts assessing a settlement class action must be wary of any collusion between class counsel and a defendant. Here, Hatteras agreed to the settlement and has not filed a brief in opposition to Plaintiffs' briefing. But this is because it was a concession agreed upon as part of the Settlement. No direct collusion is apparent, yet the nature of the marginal relief obtained, combined with Plaintiffs' inability to identify any further grounds for objection following only three depositions and some limited written discovery, only reinforces the court's heightened concern about ensuring that the amount of the attorneys' fees awarded are justified by the benefit obtained for the Class.

         Therefore, except with regard to any award of attorneys' fees and expenses set forth below, the Consolidated Actions are hereby DISMISSED WITH PREJUDICE in their entirety as to Defendants and against Plaintiffs and all other Class Members and with each party bearing his, her, or its own costs.

         As provided in the Stipulation and pursuant to this Order and Final Judgment, each of the Plaintiffs, the other Class Members, and the Successors of all of the Class Members (collectively, the “Releasing Persons”) shall be deemed to have irrevocably, unconditionally, completely, fully, finally, and forever compromised, released, relinquished, discharged, extinguished and dismissed with prejudice, any and all Released Claims against Defendants and other Released Persons.

         As provided in the Stipulation and pursuant to this Order and Final Judgment, the Released Persons shall be deemed to have irrevocably, unconditionally, completely, fully, finally, and forever compromised, released, relinquished, discharged and extinguished, any claims, allegations, sanctions or petitions against the Plaintiffs, the other Class Members and the Plaintiffs' counsel arising as a result of the investigation, pleading, initiation, prosecution, litigation, settlement or resolution of the Actions; provided, however, that the Released Persons shall retain the right to enforce the terms of the Stipulation and the Settlement.

         The Releasing Persons are hereby permanently barred and enjoined from commencing, instigating, instituting, maintaining, prosecuting, asserting, or participating in any action or other proceeding in any court of law or equity, arbitration tribunal, or administrative forum, or other forum of any kind, whether individual, class, derivative, representative, legal ...

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