Omission of Material Information Sufficient to Invalidate Class Action Stipulation of Settlement Involving the Merger of Saks Incorporated and Hudson’s Bay Company

• Posted on: Feb 18 2019

It is well settled that stipulations of settlement are favored by the courts. Hallock v. State, 64 N.Y.2d 224, 230 (1984). Stipulations of settlement not only serve the interests of efficient dispute resolution but also are essential to the management of court calendars and integrity of the litigation process. Id.  For these reasons, stipulations of settlement are not lightly cast aside. Id. See also Matter of Galasso, 35 N.Y.2d 319, 321 (1972). Notwithstanding, a stipulation of settlement will be invalidated, and a party relieved from the consequences of the agreement, when there is evidence of, inter alia, fraud, collusion, mistake or accident.  Hallock, 64 N.Y.2d at 230; Matter of Frutiger, 29 N.Y.2d 143, 149-150 (1971).

Recently, the Appellate Division, First Department, reversed the denial of a motion to invalidate a settlement agreement and allowed an amendment to a class action complaint on the grounds that the plaintiffs sufficiently alleged, among other things, a breach of fiduciary duty by the defendants. Cohen v. Saks, Inc., 2019 N.Y. Slip Op. 01162 (1st Dept. Feb. 14, 2019) (here).

Cohen v. Saks Incorporated

Cohen arose from the 2013 acquisition of Saks, Inc. (“Saks”) by defendant Hudson’s Bay Company (“Hudson’s Bay”) (the “Merger”).

[Ed Note: The factual discussion below comes from the motion court’s decision (here).]

The Merger was jointly announced by Hudson’s Bay and Saks on July 29, 2013. Pursuant to the merger agreement, Hudson’s Bay agreed to acquire all the outstanding shares of Saks for $16 per share. In connection with the Merger, Goldman Sachs & Co. (“Goldman”), the financial advisor for Saks, issued a fairness opinion dated July 28, 2013, stating that, in its opinion, the Merger was fair and reasonable to Saks’ shareholders.

Shortly after the announcement, shareholders of Saks (the “Shareholders”) filed suit against Saks’ individual directors (the “Saks Parties”) for breach of fiduciary duty and against Hudson’s Bay and Harry Acquisition, Inc. for aiding and abetting the breach of fiduciary duty, alleging that they received grossly inadequate consideration in connection with the Merger.

On October 22, 2013, the Shareholders and the Saks Parties executed a settlement stipulation in the action (the “Settlement Stipulation”). In the Settlement Stipulation, the parties agreed to mutual releases of any and all claims arising from the subject matter of the action.

Thereafter, the Shareholders conducted discovery to confirm the fairness and reasonableness of the settlement (“Confirmatory Discovery”). During these proceedings, Goldman testified that the fairness material used in the Merger did not contain any valuation of Saks’ real estate.

The Merger closed in November 2013. At that time, Saks operated 41 Saks Fifth Avenue stores, including its flagship store at 611 Fifth Avenue (the “Flagship Store”). The Flagship Store had not been appraised prior to the Merger.  Because the Saks’ board of directors (the “Board”) did not have an up-to-date appraisal of its real estate prior to the Merger, the Shareholders alleged that they breached their fiduciary duty in connection with the transaction.

On February 3, 2014, approximately three months after the settlement, Goldman presented a real estate portfolio overview to Hudson’s Bay that provided an updated valuation of Saks’ real estate. In pertinent part, the presentation stated: “[m]anagement preliminary portfolio valuation of [approximately] $7.7bn with heavy concentration in Saks Fifth Avenue, New York ((approximately) $4bn).”

On November 22, 2014, more than one year after the Merger, the news media were reporting that Hudson’s Bay purchased Saks for too low a price. Subsequently, the Shareholders moved to compel the Saks Parties to produce additional discovery to examine the substance of the news reports; the motion was subsequently withdrawn.

The Shareholders sought to rescind the settlement and amend the complaint to pursue additional claims against the Saks Parties and Goldman. The Shareholders argued that the Saks Parties and Goldman procured the Settlement Stipulation by providing information to the shareholders they knew or should have known to be false at the time of execution, and alleged that Goldman misrepresented the true value of the Flagship Store and misled the Board in the transaction.

The Shareholders maintained that they were not aware of the fact that Saks’ real property in New York City exceeded the total price of the transaction by approximately $1 billion until the publication of the newspaper article and the newly disclosed information was inconsistent with the testimony given during the discovery prior to the execution of the Settlement Stipulation.

The Shareholders contended that Goldman misled the Board to believe that Saks’ real estate was worth only between $1 and $1.2 billion because Goldman intended Hudson’s Bay to be a future client, while an appraisal revealed that the Flagship Store itself was worth $4 billion.

The Trial Court Ruling

The trial court denied the motion, holding that the Shareholders failed to plead fraud with particularity (i.e., failed to plead the elements of fraudulent inducement to enter the Settlement Stipulation). (Citing Eurycleiz Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009)). In that regard, the court found that “[t]he additional discovery” taken by the Shareholders did “not reveal[] any evidence that either the Saks Parties or Goldman knowingly misrepresent[ed] a material fact, nor [did] it demonstrate that the Shareholders were induced by the alleged misrepresentation to settle the claim of inadequate consideration.” Characterizing the allegation as “[m]ere speculation,” the court held that simply because “Goldman may have known the value of Saks’ real property before the [Merger] was consummated” to be greater than presented, was “insufficient to establish fraudulent inducement.”

The court underscored the failure to satisfy the elements of fraud by noting that “[p]rior to consummation of the [Merger], … the Shareholders knew that the Board did not obtain an appraisal of its real estate since 2006.” Thus, the Shareholders could not claim there was a material misrepresentation or omission when they were apprised of the same information as the Board. As the court observed, “Goldman’s determination of the value of Saks’ real property only came after the [Merger] was consummated and the Settlement Stipulation was executed.”

“Thus,” held the court, “because the Shareholders fail[ed] to demonstrate sufficient cause to rescind the Settlement Stipulation, their proposed amended complaint fail[ed].”

An appeal followed.

The First Department’s Decision

The First Department reversed, holding that the Shareholders sufficiently alleged a breach of fiduciary duty against the Saks Parties “insofar as the sale price failed to account for the significant value of Saks’s flagship store in Manhattan” and aiding and abetting a breach of fiduciary duty against Goldman. Slip Op. at *1 (“The majority of plaintiffs’ proposed new allegations and claims are not palpably insufficient or clearly without merit under the law of Tennessee, where Saks was incorporated, and leave to amend is granted as to those allegations and claims.”). Consequently, the Court permitted an amendment on those grounds.

Although the Court declined to rule on the request to rescind the settlement, by its decision to allow the amendment, it effectively found that the Shareholders sufficiently alleged fraudulent inducement to cast aside the Settlement Stipulation. Id. at *2.

The Court rejected the argument that the releases in the Settlement Stipulation barred the amendment. Id.  The Court held that because the releases, though broad enough to cover the claims in the amendment, did not become effective until final approval of the settlement, there was no impediment to the requested amendment:

Although the releases in the parties’ stipulation of settlement are sufficiently broad to cover the new allegations and claims, they do not pose an independent basis for denying the motion to amend, because, while class action settlements may generally be binding on the named plaintiffs even before judicial approval, the terms of the instant stipulation make clear that the releases do not become effective until after court approval, which has not yet occurred.

Id.

The Court also rejected the argument that the Shareholders were contractually obligated to defend the settlement and the Settlement Stipulation. In so doing, the Court held that the obligation to defend was not enforceable. Id. The Court reasoned that the Shareholders “and their counsel owe fiduciary duties to absent class members and thus cannot be required to support a settlement that is contrary to the best interests of those class members.” Id. (citing Wyly v. Milberg Weiss Bershad & Schulman, LLP, 12 N.Y.3d 400, 412 (2009); Desrosiers v. Perry Ellis Menswear, LLC, 30 N.Y.3d 488, 497 (2017)).

Takeaway

Cohen is an important case because it shows how an alleged breach of fiduciary duty can be used to support an allegation of fraud, in particular, an alleged omission of material fact.

As noted, although not stated explicitly, the Court in Cohen essentially found that the Shareholders sufficiently alleged that they were fraudulently induced by an omission. See Eurycleia Partners, 12 N.Y.3d at 559 (“The elements of a cause of action for fraud [are] a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.”). While a duty to disclose material facts arises only under certain circumstances, such as under the ‘special facts’ doctrine where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair” (Jana L. v. W. 129th St. Realty Corp., 22 AD3d 274, 277 (1st Dept. 2005)), the courts will require such disclosure in the context of a fiduciary relationship. SNS Bank, N.V. v Citibank, N.A., 7 A.D.3d 352, 356 (1st Dept. 2004); Kaufman v. Cohen, 307 A.D.2d 113, 120 (1st Dept. 2003) (“where a fiduciary relationship exists, the mere failure to disclose facts which one is required to disclose may constitute actual fraud, provided the fiduciary possesses the requisite intent to deceive”) (citation and quotation marks omitted). In the corporate context, there is no question that a fiduciary relationship exists between corporate officers and directors and the corporation’s shareholders. E.g., Agostino v. Hicks, 845 A.2d 1110, 1122 n.54 (Del. Ch. 2004) (“it is beyond dispute that an officer or director of a Delaware corporation owes fiduciary duties to both the company and its shareholders”).

In light of the foregoing principles, it naturally followed that having concluded that the Shareholders adequately alleged a breach of fiduciary duty against the Saks Parties for amendment purposes, the Court would find that the Shareholders adequately alleged a claim of fraudulent inducement sufficient to cast aside the Settlement Stipulation. As such, Cohen teaches that the failure by a fiduciary to disclose material facts in breach of his/her fiduciary duty may constitute an actionable fraud (assuming the elements of the claim are satisfied) and support a motion to invalidate a settlement agreement.