In Re Pacer International, Inc.

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

May 3, 2016 Session

IN RE PACER INTERNATIONAL, INC.

Appeal from the Chancery Court for Davidson County

No. 1439IV Russell T. Perkins, Chancellor

___________________________________

No. M2015-00356-COA-R3-CV – Filed June 30, 2017

___________________________________

In this class action, stockholders sued to prevent a proposed merger alleging that the

company’s board of directors had breached their fiduciary duty. After expedited

discovery, the stockholders agreed to settle in consideration for disclosure of additional

information that could affect approval of the merger. The court preliminarily approved

the proposed settlement and ordered the company to notify all potential class members of

the proposal. Only one class member objected to the proposed settlement. After a

fairness hearing, the chancery court approved the settlement and denied the objector’s

request for access to discovery materials obtained during the litigation. The objector

appeals, arguing that the chancery court erred in denying it access to discovery and in

approving the proposed settlement. Upon review, we conclude that the chancery court

did not abuse its discretion. Accordingly, we affirm.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed

W. NEAL MCBRAYER, J., delivered the opinion of the court, in which RICHARD H.

DINKINS and THOMAS R. FRIERSON, II, JJ., joined.

Greg Oakley, Nashville, Tennessee, and James D. Shields and Bart Higgins, Addison,

Texas, for the appellant, Black Oak Investments, LLC.

Britt K. Latham and Jamie L. Brown, Nashville, Tennessee, and James P. Smith III and

John E. Schreiber, New York, New York, for the appellees, Pacer International, Inc.,

Daniel W. Avramovich, Dennis A. Chantland, J. Douglass Coates, P. Michael Giftos,

Robert J. Grassi, Robert D. Lake, and Robert F. Starzel.

L. Webb Campbell II and John L. Farringer IV, Nashville, Tennessee, and Rachelle

Silverberg and A. J. Martinez, New York, New York, for the appellees, Acquisition Sub,

Inc., and XPO Logistics, Inc.

Douglas S. Johnston, Jr., Timothy L. Miles, and Scott P. Tift, Nashville, Tennessee, Jerry

E. Martin and Christopher M. Wood, Nashville, Tennessee, and Randall J. Baron and

David T. Wissbroecker, San Diego, California, for the appellees, Adnan Mahmutagic,

Roger Blackwell, Mark Frazier, Michael Iseman, and Joe Weingarten.

OPINION

I.

This case began as a challenge to a proposed merger between Pacer International,

Inc. and a wholly-owned subsidiary of XPO Logistics, Inc. After Pacer and XPO jointly

announced the proposed merger, individual Pacer stockholders filed five class action

lawsuits, which were ultimately consolidated into the present case, seeking to enjoin the

merger.

The class actions were based on allegations that Pacer’s Board of Directors

breached its fiduciary duty to the stockholders, and Pacer and XPO aided and abetted the

breach.1 Specifically, Plaintiffs alleged that Pacer’s Board breached its fiduciary duty by

(1) allowing Pacer’s senior management and its financial advisor, Morgan Stanley & Co.

LLC, significant involvement in the sales process in spite of alleged conflicts of interest;

(2) accepting an inadequate price for Pacer stock; (3) agreeing to unreasonable deal

protection measures in the merger agreement; and (4) failing to disclose material

information in the proxy statement.2 Defendants maintained that Pacer’s Board fulfilled

its duty to the stockholders.

A. THE MERGER PROCESS

As part of their duties, Pacer’s Board periodically evaluated the company’s

strategic business plan with input from senior management and Morgan Stanley. At the

July 2013 board meeting, Morgan Stanley presented the results of a preliminary analysis

1

Plaintiffs sued Pacer, the individual members of Pacer’s Board, XPO, and the XPO subsidiary

created for the merger, seeking primarily equitable relief: a declaratory judgment that Pacer’s Board had

breached its fiduciary duty and an injunction preventing consummation of the merger. In the event the

merger took place before an injunction was issued, Plaintiffs asked for rescission and appropriate

rescissory damages.

2

Before Pacer’s Board could solicit approval of the proposed merger from stockholders, the

company was required to send all stockholders a proxy statement with sufficient information to allow

them to cast an informed vote. 15 U.S.C.A. § 78n (West, Westlaw through P.L. 115-40); see generally 69

Am. Jur. 2d Securities Regulation—Federal §§ 607, 670, Westlaw (database updated May 2017).

2

of potential strategic alternatives available to the company, which included a sale of the

whole business. As part of the analysis, Morgan Stanley, in conjunction with senior

management, identified 28 potential buyers that might have interest in acquiring Pacer.

Based on the information presented, Pacer’s Board agreed that Morgan Stanley could

conduct further analysis to ascertain whether the group contained “potential strategic

partners for Pacer.”

Thereafter, Pacer’s Board authorized Morgan Stanley to contact 14 potential

buyers.3 Of the 14 parties approached, 11 expressed preliminary interest. Pacer

exchanged limited private information with the interested parties under confidentiality

agreements. Ultimately, three parties submitted written, non-binding indications of

interest to acquire Pacer. XPO was among the three.

Pacer’s Board held a special meeting on October 7, 2013, to discuss the three

potential bidders. After discussion, the determination was made to move forward.

During a regular board meeting conducted later that month, Morgan Stanley advised

Pacer’s Board of its prior relationships with each of the potential bidders. After these

disclosures, Pacer’s Board agreed it would be necessary to engage a second financial

advisor to give an additional fairness opinion if XPO became the leading bidder in light

of Morgan Stanley’s relationship with XPO. In the meantime, representatives of Pacer

and the three bidders began conducting due diligence.

From October to November of 2013, the market price of Pacer’s common stock

increased without explanation from $6.98 to $8.95 per share. XPO became the sole

potential bidder when the two others withdrew, citing Pacer’s rising stock price as a

concern. At a special board meeting in November, Morgan Stanley discussed the

possibility that the unexplained increase in the stock price was due to a leak concerning

the merger talks.

Apparently unfazed by the rising stock price, XPO offered to purchase Pacer for

$9.00 per share, payable in cash and shares of XPO common stock. Pacer’s Board

discussed XPO’s offer and Pacer’s other strategic alternatives at two separate meetings in

November and December with Morgan Stanley and senior management. At the

conclusion of these discussions, Pacer’s Board instructed Morgan Stanley to negotiate a

more favorable proposal from XPO. Specifically, Pacer’s Board requested a higher

purchase price, a greater percentage of cash consideration, and changes in other

provisions of the proposed merger agreement. Pacer’s Board also authorized the

retention of a second financial advisor.

3

Pacer’s Board, with input from Morgan Stanley and senior management, narrowed the original

group of 28 potential bidders to 14 based on factors such as previous industry investment expertise,

perceived ability to recognize the value of Pacer’s business, potential synergies, financial capability to

complete a transaction, and likelihood of execution.

3

XPO submitted a revised bid on December 5, 2013. While not increasing the

overall purchase price, the revised bid included a different consideration mix and

protections related to the value of XPO’s stock. Pacer’s Board discussed the revised bid

and directed Morgan Stanley to continue to seek an increased purchase price from XPO.

The Board also directed Morgan Stanley to approach one of the potential bidders that had

withdrawn to gauge interest in making an offer in light of a recent decline in Pacer’s

stock price.4 At this stage, the Board engaged Houlihan Lokey Financial Advisors, Inc.

to provide an additional fairness opinion.

On December 12, 2013, a previously unknown entity, having heard rumors of a

merger, contacted Morgan Stanley and expressed interest in “taking a look” at Pacer.

Morgan Stanley reported the contact to Pacer’s Board. But, based on the advice of

Morgan Stanley and Houlihan Lokey, Pacer’s Board declined to enter into negotiations

with the new potential bidder.

Negotiations between Pacer and XPO resulted in a number of changes to the

merger agreement and a firm offer of $9.00 per share, with Pacer stockholders to receive

$6.00 in cash and a fraction of a share of XPO common stock equal to $3.00 for each

share of Pacer stock. Throughout the month, negotiations on the details of the stock

component and potential employment agreements with key members of Pacer

management continued.

On January 5, 2014, Pacer’s Board met and reviewed the documentation and terms

of the proposed merger. Morgan Stanley and Houlihan Lokey advised Pacer’s Board that

the proposed consideration was fair, from a financial point of view, to stockholders.

Pacer’s Board unanimously adopted and approved the merger agreement. Both Pacer and

XPO executed the merger agreement that same day.

On January 6, 2014, Pacer and XPO announced the proposed merger. The class

actions followed within days after the merger announcement. Pacer and XPO filed a

proxy statement detailing information about the merger with the Securities and Exchange

Commission on January 29, 2014.

B. THE CLASS ACTIONS

On February 20, 2014, the Chancery Court for Davidson County, Tennessee,

appointed lead counsel for Plaintiffs with authority to conduct discovery and settlement

negotiations (“Lead Counsel”). The parties negotiated the terms of a protective order and

agreed to conduct expedited, limited discovery. Pacer produced internal business

documents, and Plaintiffs deposed Pacer’s chief executive officer, an outside member of

4

The bidder remained uninterested.

4

Pacer’s Board, and a representative of Morgan Stanley. Plaintiffs also retained their own

financial consultant to provide another fairness opinion on the proposed merger.

Settlement negotiations began in March. The parties orally agreed to settle if

Defendants disclosed additional information about the merger before the stockholder

vote. Defendants filed supplemental disclosures with the SEC on March 18, 2014. On

March 27, 2014, Pacer stockholders approved the proposed merger, and the merger was

consummated on March 31, 2014.

On August 6, 2014, Plaintiffs moved for preliminary approval of the settlement.5

The court preliminarily approved both the settlement and notice of settlement on October

14, 2014, set December 31 as the deadline for class members to file any objections, and

scheduled a fairness hearing for January 15, 2015. Ultimately, 6,306 potential class

members were notified of the proposed settlement.

On December 23, 2014, the parties moved for final approval of the proposed

settlement. In a sworn declaration filed with the court, Lead Counsel opined that the

proposed settlement would be the most beneficial result for the class. Lead Counsel

described the discovery and settlement negotiation process and explained the basis for his

determination that any claim for monetary compensation lacked significant value. An

exculpatory clause in Pacer’s charter shielded Pacer’s Board from liability for money

damages as a result of any breach of the duty of care, and discovery failed to uncover any

evidence of a breach of the duty of good faith or loyalty. As a result, settlement

negotiations focused on obtaining additional disclosures about the merger process to

enable stockholders to make an informed decision about the proposed merger. Lead

Counsel also certified that the supplemental disclosures made as part of the settlement

were accurate and provided sufficient information for stockholders to cast an informed

vote on the proposed merger.6

C. OBJECTION TO THE PROPOSED SETTLEMENT

On December 31, 2014, Black Oak Investments, LLC filed written objections to

the proposed settlement and certification of the settlement class. Black Oak owned

approximately three percent of Pacer’s stock, making it one of Pacer’s largest

stockholders. Black Oak was the only class member to object to the proposed settlement.

5

The parties executed a written settlement agreement on July 28, 2014.

The supplemental disclosures included additional information about Morgan Stanley’s

6

compensation arrangement in connection with the merger, the methodology and financial data used by

Morgan Stanley and Houlihan Lokey in their fairness opinions, and the financial projections of senior

management.

5

Black Oak contended that Pacer’s Board breached its fiduciary duty to Black Oak

“by not entertaining all credible offers to get a bid over XPO Logistic’s bid of $9.00 per

share.” Black Oak also claimed that $9.00 per share was below market value at the time

of the transaction and that Black Oak would have paid a higher price per share for Pacer,

“if warranted after receiving the necessary information and documents to properly value

and evaluate the transaction.”

Black Oak requested that the court order the parties to share all discovery

materials acquired during the litigation. Without the requested documents, adequate time

to review those documents, and “potentially discover[] and develop evidence on its own,”

Black Oak claimed it would be denied its right to meaningfully participate in the fairness

hearing. Nevertheless, Black Oak objected7 to the lack of monetary compensation for the

class and the breadth of the released claims and contended that the settlement was not

negotiated at arm’s length.

At the fairness hearing, Black Oak argued that the stockholders were releasing a

valuable claim for monetary damages without receiving a commensurate benefit. Based

on its “extensive industry knowledge,” Black Oak claimed that it realized in 2012 that

Pacer stock was undervalued. Since Black Oak already owned stock in HIG Capital, a

Pacer competitor, Black Oak began to purchase stock in Pacer with an eye toward

merging the two companies to further increase shareholder value. Black Oak also

claimed that it induced HIG Capital to make an offer to acquire Pacer for $7.50 per share

in 2012, which represented a premium over the share price. Pacer’s Board, however,

rejected the offer and notified HIG Capital that it was not interested in further discussions

at that time.

According to Black Oak, Pacer stock was still undervalued in 2013.8 And it noted

that XPO’s offer was not significantly higher than the market price. Black Oak argued

that Pacer’s Board should have realized that HIG Capital would have made a higher offer

based on its 2012 bid. Thus, according to Black Oak, the court could assume that Pacer’s

Board failed to obtain the highest possible price.

7

Black Oak’s written objection included a number of additional grounds, including objections to

the non-opt out structure of the proposed settlement, certification of the class, and inadequacy of the

representative plaintiffs and their counsel. Although Black Oak originally appealed the court’s

certification of a non-opt-out class, Black Oak’s counsel informed the court at oral argument that his

client was abandoning that issue.

8

XPO’s stock price increased after the merger, and according to Black Oak, the rise in XPO’s

stock price indicated the market’s perception that Pacer had been acquired at a bargain price.

6

D. THE CHANCERY COURT’S DECISION

After a lengthy fairness hearing during which both the settlement proponents and

the objector were allowed to present their views, the court issued its memorandum and

final order denying Black Oak’s objections on January 27, 2015. The court specifically

found:

The Court appointed lead plaintiffs and their counsel at a contested

hearing. Plaintiffs’ counsel has an established track record in the litigation

of merger-related cases. Plaintiffs aggressively prosecuted this case. Black

Oak has presented the Court with no basis to conclude that plaintiffs were

inadequate representatives.

Instead, Black Oak asserts that the settlement terms themselves

somehow show inadequacy of representation. But Black Oak has identified

no term of the settlement that deviates from common practice or violates

any rule of law. The settlement is fair, reasonable, and adequate.

To begin with, the consideration in this settlement was appropriate

and in line with relevant precedent. It consisted of numerous supplemental

disclosures that addressed plaintiffs’ allegations that defendants failed to

disclose adequate information about the merger. Courts routinely recognize

that “[i]mproved disclosures may certainly prove beneficial to class

members and may constitute consideration of a type which will support a

settlement of claims.” In re FLS Holdings, Inc. S’holders Litig., [No.

CIV.A.12623,]1993 WL 104562, at *5 (Del. Ch. Apr. 2, 1993). And the

parties submitted numerous orders entered by Tennessee courts approving

settlements of merger cases where, like here, the consideration consists of

additional disclosures. See Exhibits to Defendants’ Memorandum. The

consideration here was fair because the settlement gave Pacer’s

stockholders access to information that they did not have and could not

otherwise have obtained to evaluate the transaction.

(internal footnote omitted).

With regard to any potential claim for money damages, the court was

satisfied that Lead Counsel adequately investigated any damages claim and

determined that such a claim would not be viable under the circumstances. The

court concluded:

In short, Black Oak has provided the Court with no basis in fact or

law to second-guess the investigation of the Court-appointed class

representatives or their judgment that the settlement provided the class with

7

substantial consideration in view of the weakness of the claims. There is no

basis to reject the settlement, which is fair, reasonable, and adequate.

The court denied Black Oak’s request for access to previously discovered

materials and to conduct its own discovery into settlement negotiations. The court

determined that Black Oak had no right to discovery before it filed its objections and,

after filing, was entitled to discovery only if it presented a colorable claim that the

settlement should be disapproved. The court denied Black Oak’s request for discovery of

settlement negotiations because it had not produced any evidence of collusion.

II.

Black Oak argues that the trial court erred in approving this class action settlement

and in denying it access to discovery materials. We review both decisions for an abuse of

discretion. UAW v. Gen. Motors Corp., 497 F.3d 615, 625 (6th Cir. 2007); see also

Denver Area Meat Cutters & Emp’rs Pension Plan v. Clayton, 209 S.W.3d 584, 590

(Tenn. Ct. App. 2006). A court abuses its discretion when it applies an incorrect legal

standard, reaches an unreasonable result, or bases its decision on a clearly erroneous

assessment of the evidence. Lee Med., Inc. v. Beecher, 312 S.W.3d 515, 524 (Tenn.

2010).

Tennessee Rule of Civil Procedure 23.05 does not specify the legal standard for

trial court approval of a class action settlement, and our case law provides scant guidance.

Tenn. Civ. P. 23.05 (“A certified class action shall not be voluntarily dismissed or

compromised without approval of the court.”). We have directed trial courts to consider

various factors, such as “the ‘risk and likely return to the class of continued litigation’,

the range of possible outcomes and probability of each, [and] whether class counsel’s

fees are proportional to the incremental benefits conferred on the class members.” Posey

v. Dryvit Sys., Inc., No. E2004-02013-COA-R9-CV, 2005 WL 17426, at *2 (Tenn. Ct.

App. Jan. 4, 2005) (quoting Reynolds v. Beneficial Nat’l Bank, 288 F.3d 277, 280 (7th

Cir. 2002)). We have also focused on the level of investigation of the plaintiffs’ claims,

whether settlement negotiations were at arm’s length, the number of objectors, the

objectors’ access to information, and the experience of the parties’ counsel. In re High

Pressure Laminate Antitrust Litig., No. M2005-01747-COA-R3-CV, 2006 WL 3681147,

at *4-5 (Tenn. Ct. App. Dec. 13, 2006). In the only published Tennessee opinion, we

focus on the fairness of the proposed settlement. Denver Area Meat Cutters & Emp’rs

Pension Plan, 209 S.W.3d at 591. And we indicated that “[t]he most important

consideration [in determining whether a settlement is fair] is the strength of plaintiffs’

case on the merits weighed against the amount offered in settlement.” Id. (quoting In re

Agent Orange Product Liab. Litig., 597 F. Supp. 740, 762 (E.D.N.Y. 1984)).

8

The parties urge us to apply the standard used in federal court for approving class

action settlements. See Fed. R. Civ. P. 23(e).9 Under the Federal Rules of Civil

Procedure, when a proposed settlement is binding on all class members, the “court may

approve it only after a hearing and on finding that it is fair, reasonable, and adequate.”

Id. The Sixth Circuit has directed federal district courts to consider several factors when

making a fairness determination: “(1) the risk of fraud or collusion; (2) the complexity,

expense and likely duration of the litigation; (3) the amount of discovery engaged in by

the parties; (4) the likelihood of success on the merits; (5) the opinions of class counsel

and class representatives; (6) the reaction of absent class members; and (7) the public

interest.” UAW, 497 F.3d at 631.

When Tennessee and federal procedural rules are identical, we view case law

construing the analogous federal rule as persuasive authority. Meighan v. U.S. Sprint

Commc’ns Co., 924 S.W.2d 632, 637 n.2 (Tenn. 1996). But the current federal

counterpart to Tennessee Rule 23.05 is markedly different.10 Even so, our previous

opinions have referenced federal case law in evaluating class action settlements. See

Denver Area Meat Cutters & Emp’rs Pension Plan, 209 S.W.3d at 591 (quoting In re

Agent Orange Product Liab. Litig., 597 F. Supp. at 762); Posey, WL 17426, at *2

(quoting Reynolds, 288 F.3d at 280). Thus, while we may consider federal law,

Tennessee’s common law must control the outcome of this case. See Vythoulkas v.

Vanderbilt Univ. Hosp., 693 S.W.2d 350, 358 (Tenn. Ct. App. 1985), superseded on

other grounds by Tenn. R. Civ. P. 26.02(4)(B) (explaining that any doubt concerning

9

Federal Rule of Civil Procedure 23(e) provides as follows:

(e)The claims, issues, or defenses of a certified class may be settled, voluntarily

dismissed, or compromised only with the court's approval. The following procedures

apply to a proposed settlement, voluntary dismissal, or compromise:

(1) The court must direct notice in a reasonable manner to all class members who

would be bound by the proposal.

(2) If the proposal would bind class members, the court may approve it only after

a hearing and on finding that it is fair, reasonable, and adequate.

(3) The parties seeking approval must file a statement identifying any agreement

made in connection with the proposal.

(4) If the class action was previously certified under Rule 23(b)(3), the court may

refuse to approve a settlement unless it affords a new opportunity to request exclusion to

individual class members who had an earlier opportunity to request exclusion but did not

do so.

(5) Any class member may object to the proposal if it requires court approval

under this subdivision (e); the objection may be withdrawn only with the court's

approval.

Fed. R. Civ. P. 23

10

In 2003, Federal Rule 23(e) was amended “to strengthen the process of reviewing proposed

class-action settlements.” See Fed. R. Civ. P. 23 advisory committee’s note to 2003 amendment.

9

“whether federal construction of the Federal Rules of Civil Procedure or Tennessee’s

common law controls a question of procedure should be resolved in favor of Tennessee’s

common law.”). Therefore, we review the fairness of the settlement in light of the

Tennessee common law.

A. FAIRNESS OF PROPOSED SETTLEMENT

Black Oak contends that the settlement was unfair because Plaintiffs did not

receive any monetary compensation, the supplemental disclosures did not include all the

allegedly omitted information, and Black Oak was not satisfied that the price XPO paid

for Pacer stock was adequate. As we address these objections, we bear in mind that

“[t]he law favors the settlement of disputes.” First Nat. Bank v. Union Ry. Co., 284 S.W.

363, 364 (Tenn. 1926); accord Denver Area Meat Cutters & Emp’rs Pension Plan, 209

S.W.3d at 590. A settlement is by its very nature a compromise. Leonhardt v.

ArvinMeritor, Inc., 581 F. Supp. 2d 818, 835 (E.D. Mich. 2008). The court must

determine, not whether the settlement represents the best outcome, but whether it falls

within the “range of reasonableness.” Id. (quoting IUE-CWA v. Gen. Motors Corp., 238

F.R.D. 583, 596 (E.D. Mich. 2006)).

In evaluating a class action settlement, both Tennessee and federal courts weigh

the “‘plaintiffs’ likelihood of success on the merits against the amount and form of the

relief offered in the settlement.’” UAW, 497 F.3d at 631 (quoting Carson v. Am. Brands,

Inc., 450 U.S. 79, 88 n.14, (1981)); see Denver Area Meat Cutters & Emp’rs Pension

Plan, 209 S.W.3d at 591. This class action is premised on alleged breaches of fiduciary

duty by Pacer’s Board in connection with the proposed merger of a publicly held

company. As such, this case would be relatively complex and expensive to take to trial,

involving issues of securities regulation and corporate governance. The court appointed

Lead Counsel for Plaintiffs with extensive experience in this type of litigation. In view of

the fact that Plaintiffs were seeking to stop the proposed merger, Lead Counsel acted

quickly to negotiate an agreed protective order and discover nonpublic documents and

key deposition testimony. Lead Counsel reviewed voluminous SEC filings and the

results of discovery before determining that any claim for breach of fiduciary duty had no

real monetary value.

Plaintiffs had a heavy burden to overcome to succeed on the merits. Tennessee

courts are loathe “to substitute their judgment for that of a corporation’s board of

directors.” Lewis ex rel. Sav. Bank & Trust Co. v. Boyd, 838 S.W.2d 215, 220 (Tenn. Ct.

App. 1992). “[W]e presume that a corporation’s directors, when making a business

decision, acted on an informed basis, in good faith, and with the honest belief that their

decision was in the corporation’s best interests.” Id. at 220-221. Discovery failed to

reveal evidence of bad faith or disloyalty, and Plaintiffs could not recover for a breach of

the duty of care in light of the exculpatory clause in Pacer’s charter. See Tenn. Code

Ann. § 48-12-102(b)(3) (Supp. 2016).

10

Black Oak argues, however, that once Pacer was “on the auction block,” Pacer’s

Board had one duty: to obtain the best possible price for the stockholders. See Bayberry

Assocs. v. Jones, 783 S.W.2d 553, 561 (Tenn. 1990). According to Black Oak, the failure

to obtain a higher price was a breach of the duty of loyalty. See Summers v. Cherokee

Children & Family Servs., Inc., 112 S.W.3d 486, 504 (Tenn. Ct. App. 2002) (“The

officers and directors of a for profit corporation are to be guided by their duty to

maximize long term profit for the benefit of the corporation and the shareholders.”) Even

so, Plaintiffs would bear the burden of proving that Pacer’s Board could have obtained a

higher price.11 Although Black Oak claims that HIG Capital would have made a higher

offer, on this record, that is pure speculation. Pacer’s Board accepted the highest offer it

received from a qualified bidder. Black Oak’s argument merely highlights the

evidentiary difficulties facing Plaintiffs in this litigation and is not convincing evidence

that Plaintiffs’ monetary claims had significant value.

Plaintiffs’ remaining claim was that the proxy statement omitted material

information. Although Defendants maintained that the proxy statement was not

misleading, they agreed to additional disclosures to avoid the expense of proceeding to

trial. The chancery court found that these disclosures provided information to the

stockholders that was previously unavailable. For instance, the supplemental disclosures

provided additional information about the methodology and financial information used by

both Morgan Stanley and Houlihan Lokey and the financial projections made by Pacer

management in October of 2013. Courts have held that supplemental disclosures can be

valuable to stockholders. See In re Xoom Corp. Stockholder Litig., No. CV 11263-VCG,

2016 WL 4146425, at *5 (Del. Ch. Aug. 4, 2016) (holding that the supplemental

disclosures “worked a modest benefit on the stockholders”).

We find Black Oak’s argument that the supplemental disclosures lacked sufficient

value because they did not address every alleged omission unavailing. As we stated

previously, settlements are the result of compromise. Leonhardt, 581 F. Supp. 2d at 835.

Thus, it is unsurprising that Plaintiffs settled for less than they requested. See Gordon v.

Verizon Commc’ns, Inc., 46 N.Y.S.3d 557, 567 (N.Y. App. Div. 2017) (“It would be

speculative, at best, to assume that plaintiff could have obtained any more helpful

disclosures from Verizon by proceeding to trial.”).

The court’s job in weighing the likelihood of Plaintiffs’ success is not to pick a

winner. “The question rather is whether the parties are using settlement to resolve a

11

Black Oak opined that Pacer stock was undervalued, and Pacer’s Board should have demanded

an offer that provided a significant premium to stockholders. The settlement proponents countered that,

in reality, Pacer stockholders received a premium because the Pacer share price was falsely elevated by

merger rumors, and the XPO offer included shares of XPO common stock, which have increased in value

since the merger.

11

legitimate legal and factual disagreement.” UAW, 497 F.3d at 632. This record lacks

evidence of collusion or improper behavior by Plaintiffs or Lead Counsel. See UAW, 497

F.3d at 628 (explaining that objectors must produce evidence to overcome the normal

presumption that Plaintiffs’ counsel “handled their responsibilities with the independent

vigor that the adversarial process demands”). While the settlement did not alter the

purchase price, the supplemental disclosures did provide value. Lead Counsel admitted

at the fairness hearing that, upon discovery, it became clear that Plaintiffs faced

substantial obstacles in obtaining a favorable judgment.

We recognize that disclosure-only settlements are disfavored in some courts.12

But, in this instance, when weighed against the relative weakness of Plaintiffs’ claims, we

conclude that the additional disclosures provided adequate consideration. See In re Cox

Radio, Inc. Shareholders Litig., No. CIV.A. 4461-VCP, 2010 WL 1806616, at *13 (Del.

Ch. May 6, 2010), aff’d, 9 A.3d 475 (Del. 2010), and aff’d, 9 A.3d 475 (Del. 2010)

(holding that the modest benefit of supplemental disclosures outweighed the cost of

releasing claims without significant value); In re Dr. Pepper/Seven Up Cos., Inc.

Shareholders Litig., No. CIVIL ACTION 13109, 1996 WL 74214, at *4 (Del. Ch. Feb. 9,

1996), aff’d 683 A.2d 58 (Del. 1996) (approving “meager” settlement when plaintiffs’

claims were admittedly weak and supplemental disclosures provided some tangible

benefit).

Black Oak was the only objector out of a class of over 6000. The small number of

objectors relative to the overall class size is strong evidence of the fairness of the

settlement. In re High Pressure Laminate Antitrust Litig., 2006 WL 3681147, at *5. The

chancery court found that Lead Counsel sufficiently investigated Plaintiffs’ claims and

negotiated the settlement at arm’s length and in good faith. After considering the

objectors’ arguments and the documentary evidence, the court determined that the

settlement was fair, reasonable, and adequate. We conclude that the court’s decision was

not an abuse of discretion.

12

Delaware courts have expressed concerns that disclosure-only settlements provide insufficient

benefit to stockholders. In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 898 (Del. Ch. 2016) (“To be

more specific, practitioners should expect that disclosure settlements are likely to be met with continued

disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or

omission, and the subject matter of the proposed release is narrowly circumscribed to encompass nothing

more than disclosure claims and fiduciary duty claims concerning the sale process, if the record shows

that such claims have been investigated sufficiently.”). The Delaware approach has been adopted in at

least one other jurisdiction. See In re Walgreen Co. Stockholder Litig., 832 F.3d 718, 725 (7th Cir. 2016);

but see Roth v. Phoenix Companies, Inc., 50 N.Y.S.3d 835, 838 n.4 (N.Y. Sup. Ct. 2017) (explaining that

New York has rejected the Trulia standard and adopted a “some benefit” approach).

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B. ACCESS TO DISCOVERY MATERIALS

Finally, Black Oak contends that its ability to demonstrate that the settlement was

unfair was “greatly diminished” by its lack of access to the discovery obtained by Lead

Counsel. Black Oak paints its request in broad strokes, seeking to review any and all

documents produced by Pacer, the deposition transcripts, and any information relied on

by Plaintiffs’ fairness expert, as well as the expert’s work product. Black Oak has made

little attempt to explain precisely how the requested materials would enhance its ability to

present its objections other than a vague claim that the discovery materials might contain

information on Pacer’s stock value. Defendants objected to revealing competitively

sensitive information to an objector who admitted to having an equity interest in a

competing entity. We conclude that it was not an abuse of discretion to deny Black Oak

access to discovery materials under the circumstances of this case.

As a class member, Black Oak had the right to object to the proposed settlement

and to participate in the fairness hearing. UAW, 497 F.3d at 635. But the trial court

retains “wide latitude” in controlling the nature of an objector’s participation. Id. Due

process is satisfied when an objecting party is allowed to “present evidence and have its

objections heard.” Tenn. Ass’n of Health Maint. Orgs., Inc. v. Grier, 262 F.3d 559, 567

(6th Cir. 2001) (quoting United States v. City of Hialeah, 140 F.3d 968, 989 n.12 (11th

Cir. 1998)). An objector is not entitled to “dictate to the court the precise manner in

which he is to be heard.” Rutter & Wilbanks Corp. v. Shell Oil Co., 314 F.3d 1180, 1187

(10th Cir. 2002) (quoting Jones v. Nuclear Pharm., 741 F.2d 322, 325 (10th Cir. 1984)).

Thus, the trial court “may limit the fairness hearing to whatever is necessary to aid it in

reaching an informed, just and reasoned decision” and need not endow objecting class

members with “the entire panoply of protections afforded by a full-blown trial on the

merits.” UAW, 497 F.3d at 635 (quoting Tenn. Ass’n of Health Maint. Orgs., 262 F.3d at

567).

Objectors are not “automatically entitled to discovery.” In re Gen. Tire & Rubber

Co. Sec. Litig., 726 F.2d 1075, 1084 n.6 (6th Cir. 1984). “While the court must extend all

objectors fair opportunity to challenge a proposed settlement, this does not translate in all

cases into unfettered access to an existing and voluminous discovery record.” Hershey v.

ExxonMobil Oil Corp., No. 07-1300-JTM, 2012 WL 4758040, at *1 (D. Kan. Oct. 5,

2012). Only if an objector makes “a colorable claim that the settlement should not be

approved” will the court consider an objector’s request for discovery. UAW, 497 F.3d at

635. Because the courts favor settlements, objectors are not entitled to thwart the

settlement process without “a clear and specific showing that vital material was ignored”

by the trial court. Id. (citing Geier v. Alexander, 801 F.2d 799, 809 (6th Cir. 1986)).

While acknowledging the “colorable claim” standard would apply to a request to

conduct its own discovery, Black Oak maintains that it had an absolute right to review all

of the materials acquired under the agreed protective order based on the Sixth Circuit’s

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decision in Cohen v. Young, 127 F.2d 721, 724 (6th Cir. 1942). Black Oak’s reliance on

Cohen is misplaced.13 The objector in Cohen was not requesting access to discovery

materials but was seeking to present evidence at the fairness hearing. Id. at 724. The

Cohen court reaffirmed the trial court’s inherent discretionary authority over the

presentation of evidence at a fairness hearing but held that it was an abuse of discretion to

deny the objector the opportunity to present evidence. Id.

We find the remaining authority Black Oak cites equally unpersuasive. Simply

because the parties in other class actions chose to share discovery materials with

objectors does not create a right to access the requested materials. At best, these

authorities suggest a best practice for settlement proponents. See Hertzberg v. Asia Pulp

& Paper Co., 197 Fed. Appx 38, 41 (2d Cir. 2006) (holding that the trial court did not

abuse its discretion in denying objector additional discovery “in light of the fact that

OCM acknowledged . . . having failed to review the documents that had already been

produced.”); In re Prudential Ins. Co. Am. Sales Practice Litig. Agent Actions, 148 F.3d

283, 325 (3d Cir. 1998) (holding the district court did not abuse its discretion in denying

additional discovery when the objector “had ample opportunity to avail himself of the

substantial discovery provided to Lead Counsel but failed to do so, and that additional

discovery was unnecessary because [objector] focused primarily on legal issues.”); see

also Manual for Complex Litigation (Fourth) § 21.643 (2004) (“Parties to the settlement

agreement should generally provide access to discovery produced during the litigation

phases of the class action (if any) as a means of facilitating appraisal of the strengths of

the class positions on the merits.” (emphasis added)).

This is not a case in which Black Oak lacked sufficient information14 to determine

whether it had any objections to the settlement. To the contrary, Black Oak filed detailed

objections to the settlement and the class certification. At the fairness hearing, the court

allowed Black Oak to present all of its objections, including the basis of its theory that

the price XPO paid for the Pacer stock was too low, and respond to every argument

presented by the settlement proponents.

To access the confidential discovery materials obtained by Lead Counsel over the

objections of Defendants, Black Oak had to present a colorable claim. The need to be

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In spite of the fact that the objector was ready to proceed, the trial court “approved the

compromise upon the sole ground that it was recommended by the attorneys of record.” Cohen, 127 F.2d

at 724. The Sixth Circuit held that the trial court had improperly ceded its responsibility to the attorneys

for the parties. Id. at 726. Judicial discretion required the trial court to determine whether the proposed

settlement was fair, reasonable, and adequate, not the attorneys. Id.

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Black Oak had access to all materials in the court record including the settlement agreement,

the proxy statement, the supplemental disclosures, and the sworn declaration of Lead Counsel. The proxy

statement included the merger agreement, the fairness opinions provided by Morgan Stanley and

Houlihan Lokey, and the financial projections of Pacer’s senior management.

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personally assured that the settlement was reasonable is an insufficient reason. Robertson

v. Nat’l Basketball Ass’n, 72 F.R.D. 64, 70-71 (S.D.N.Y. 1976), aff’d 556 F.2d 682 (2d

Cir. 1977). Otherwise, “no class action would ever be settled, so long as there was at

least a single lawyer around who would like to replace counsel for the class and start the

case anew.” Geier, 801 F.2d at 809 (quoting City of Detroit v. Grinnell Corp., 495 F.2d

448, 449 (2d Cir. 1974), abrogated on other grounds by Goldberger v. Integrated Res.,

Inc., 209 F.3d 43 (2d Cir. 2000)).

Here, the settlement proponents submitted ample evidence to enable the court to

evaluate the proposed settlement, including the process Pacer’s Board followed to obtain

the best offer for the company and the criteria used to narrow the field of potential

bidders. A significant amount of financial data, such as the financial projections from

senior management and the values used by the two financial consultants in their fairness

opinions, was also provided. Lead Counsel, who had extensive experience in merger-

related litigation, provided the court with the basis for his conclusion that Plaintiffs’

claims had no significant monetary value and that the supplemental disclosures benefited

the class. All sides submitted voluminous legal memoranda and were allowed to argue

their positions at length. On this record, we cannot say that the chancery court ignored

vital information in approving this settlement.

III.

For the foregoing reasons, we affirm the chancery court decision approving the

class action settlement and denying the objector access to discovery materials.

_________________________________

W. NEAL MCBRAYER, JUDGE

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