Judge approves stock-for-class securities settlement, with tweaks

September 27, 2013

U.S. District Judge William Alsup of San Francisco has the instincts of a really great reporter. He is a skeptic who pushes for answers, even if that means hauling the CEOs of Google and Oracle into settlement talks or demanding that state pension funds disclose their lead counsel selection process. So when shareholders proposed an unusual settlement of their securities class action against Diamond Foods, in which nearly 90 percent of the class recovery would come in the form of new stock in the company, I was really curious to see what Alsup would make of the deal. If the judge thought class members were being rooked in this peculiarly structured settlement, he’d say so.

He doesn’t think that. On Thursday, Alsup granted preliminary approval of the settlement, in which class members will receive $11 million in cash – according to the brief in support of the deal, that’s pretty much everything left of the company’s D&O insurance coverage – and 4.45 million shares of newly-issued Diamond common stock, worth $85 million as of the date plaintiffs moved for approval of the settlement. Alsup said an all-cash deal would have been preferable, but that he’s convinced Diamond’s perilous finances preclude it. (For good measure, he refused to permit shareholders to file their expert witness report on Diamond’s balance sheet under seal, so you can see for yourself how very little cash the debt-laden company has.) “Given Diamond’s strained financial state and the uncertainty (over) lead plaintiff’s ability to collect on any judgment,” the judge wrote, the class’s decision to settle for a mostly stock deal is justified.

The judge did insist that Diamond and the Mississippi public pension fund leading the shareholders’ case narrow the scope of the release of class claims, which originally exceeded the class certification ruling. He also called for changes in the notice to class members. But as you can see from the supplemental brief on the amended deal filed by class counsel from Chitwood Harley Harnes and Lieff Cabraser Heimann & Bernstein, these are minor tweaks. On the big question of whether it’s OK to compensate allegedly deceived shareholders with more stock in the company that supposedly lied to them, Alsup answered with a reluctant yes.

Neither the settlement agreement nor Alsup’s preliminary approval addresses fees for class counsel, which will presumably be the subject of subsequent briefing. That’s going to be an interesting read. Class action activist Ted Frank of the Center for Class Action Fairness previously told me that lead counsel fees ought to be paid in the same cash-to-stock ratio as the class’s recovery, which would mean most of the payment to plaintiffs’ lawyers would be in Diamond stock. Knowing what they know about Diamond’s prospects, lawyers for the class probably aren’t thrilled about that. But considering who the judge is, they probably don’t have much of a choice.

I left phone messages for shareholder lawyer John Harnes of Chitwood and Diamond counsel Dean Kristy of Fenwick & West. Neither called me back.

(Reporting by Alison Frankel)

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