Case 2:06-cv-03731-GHK -SH Document 402 Filed 01/18/12 Page 1 of 6 Page ID #:13496

E-Filed UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES - GENERAL Case No. Title CV 06-3731-GHK (SHx) Jim Brown v. Brett C. Brewer, et al. Date January 18, 2012

Presiding: The Honorable Beatrice Herrera Deputy Clerk Attorneys Present for Plaintiffs: None

GEORGE H. KING, U. S. DISTRICT JUDGE N/A Court Reporter / Recorder N/A Tape No.

Attorneys Present for Defendants: None

Proceedings:

(In Chambers) Order re: (1) Plaintiffs Revised Plan of Allocation; (2) Trafelet & Companys Proposal Re Plan of Allocation; (3) Plaintiffs Motion to Strike Trafelet & Companys Proposal Re Plan of Allocation or, in the Alternative, Response Thereto

On September 29, 2011, we rejected the proposed plan of allocation (Initial Plan) as not fair, adequate, and reasonable because it did not allow shareholders who held stock on July 18, 2005, but sold before September 30, 2005 (Sold Shares), to share in the proceeds, yet the Settlement Agreement required them to release their claims. On October 28, 2011, Lead Plaintiff Jim Brown (Plaintiff) submitted his Revised Plan of Allocation (Revised Plan). On October 31, 2011, purported Class Member Trafelet & Company LLC (Trafelet) filed its Proposal Re Plan of Allocation, which we deem to be Trafelets objections to the Revised Plan (Proposal or Objections). On November 7, 2011, Plaintiff filed a Motion to Strike Trafelet & Companys Proposal Re Plan of Allocation or, in the Alternative, Response Thereto (Motion to Strike). We held oral argument in this matter on January 12, 2012. At oral argument we DENIED Plaintiffs Motion to Strike and REJECTED Plaintiffs Revised Plan. Additionally, we informed Trafelet that we would issue rulings on each of its purported objections. We now set forth our findings and conclusions. As the Parties are familiar with the facts of this case, we will repeat them only as necessary. I. Plaintiffs Motion to Strike

Plaintiff moves to strike Trafelets Proposal on the ground that our September 29, 2011 Order did not invite Trafelet to submit its own plan of allocation. We note that because Trafelet is not a representative of the Class, it may not submit a plan of allocation on behalf of the Class. However, having reviewed Trafelets Proposal, we deem it to be a series of objections to the fairness of Plaintiffs Revised Plan. Because we have an independent duty to assess the fairness of any plan of allocation, we choose to entertain Trafelets Proposal. Accordingly, Plaintiffs Motion to Strike is DENIED.

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E-Filed UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES - GENERAL Case No. Title CV 06-3731-GHK (SHx) Jim Brown v. Brett C. Brewer, et al. Date January 18, 2012

II.

Legal Standard Governing Approval of a Plan of Allocation

Assessment of a plan of allocation of settlement proceeds in a class action under Federal Rule of Civil Procedure 23 is governed by the same standards of review applicable to the settlement as a whole the plan must be fair, reasonable, and adequate. Class Plaintiffs v. City of Seattle, 955 F.2d 1268, 1284-85 (9th Cir. 1992). As numerous courts have held, a plan of allocation need not be perfect. In re Giant Interactive Grp., Inc. Sec. Litig., No. 07 Civ. 10588(PAE), 2011 WL 5244707, at *8 (S.D.N.Y. Nov. 2, 2011). Instead, [a]n allocation formula need only have a reasonable, rational basis, particularly if recommended by competent class counsel. In re WorldCom, Inc. Sec. Litig., 388 F. Supp. 2d 319, 344 (S.D.N.Y. 2005). Moreover, [a] plan of allocation that reimburses class members based on the extent of their injuries is generally reasonable. In re Oracle Sec. Litig., No. C-09-0931-VRW, 1994 WL 502054, at *1 (N.D. Cal. June 18, 1994). It is also reasonable to allocate more of the settlement to class members with stronger claims on the merits. Id. III. Plaintiffs Revised Plan

The claims in this litigation are based on (a) violations of federal proxy laws, and (b) breach of fiduciary duty under Delaware law in connection with the merger agreement. Plaintiffs Revised Plan allocates sixty percent (60%) of the net settlement fund to the proxy claim and forty percent (40%) to the fiduciary duty. Under the Revised Plan, only shareholders who continuously held their shares from the announcement of the merger agreement on July 18, 2005 until the closing of the transaction on September 30, 2005 (Held Shares) may recover on the proxy claim. Held Shares, Sold Shares, Purchased Shares, and In-and-Out Shares are provided various recovery percentages within the fiduciary duty claim.1 Of the forty percent (40%) of the net settlement fund allocated to the fiduciary duty claim, Held Shares receive sixty percent (60%), Purchased Shares receive twenty-five percent (25%), Sold Shares receive ten percent (10%), and In-and-Out Shares receive five percent (5%). Thus, of the total Net Settlement Fund, Held Shares receive eighty-four percent (84%) on a pro-rata basis, Purchased Shares receive ten percent (10%) on a pro-rata basis, Sold Shares receive four percent (4%) on a prorata basis, and In-and-Out Shares receive two percent (2%) on a pro-rata basis. We REJECT Plaintiffs Revised Plan because it allows Purchased Shares and In-and-Out Under the Revised Plan, Held Shares are Intermix stock held by a member of the Settlement Class on July 18, 2005 and exchanged for Merger consideration on or after September 30, 2005. Purchased Shares are Intermix stock purchased by a member of the Settlement Class after July 18, 2005 and exchanged for the Merger Consideration on or after September 30, 2005. Sold Shares are Intermix stock held by members of the Settlement Class on July 18, 2005 and sold prior to September 30, 2005. In-and-Out Shares are Intermix stock purchased by a member of the Settlement Class after July 18, 2005 and sold prior to September 30, 2005. (See Dkt. No. 359-1).
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Shares to participate in the portion of the net settlement fund attributed to the fiduciary duty claim. Delaware law clearly holds that these shares do not have standing to pursue a breach of fiduciary duty claim in connection with a merger agreement. See Omnicare, Inc. v. NCS Healthcare, Inc., 809 A.2d 1163, 1169 n.11 (Del. Ch. 2002) (A stockholder-plaintiff is barred from bringing claims when she purchases stock after the board of directors has approved a transaction and the transaction has been publicly disclosed because public policy detests the purchase of a lawsuit.). Because Plaintiff has not pointed to, nor have we found, any authority to the contrary, we conclude that the Revised Plan lacks a rational basis insofar as it entitles Purchased Shares and In-and-Out Shares (both of whom purchased their shares after the merger agreement) to participate in the recovery allocated to the fiduciary duty claim. Indeed, Plaintiff has stated that he, too, recognized the likely problem with standing for shareholders with Purchased [or In-and-Out] Shares. (Dkt. No. 373, at 6). Additionally, no shareholders with Purchased or In-and-Out Shares objected to the Initial Plan, under which they would have received no portion of the net settlement fund. Moreover, during oral argument, Plaintiffs counsel acknowledged that he knew of no authority that conflicts with Omnicares holding that these shares do not have standing to assert the fiduciary duty claim.2 IV. Trafelets Proposal

We construe Trafelets Proposal to raise the following objections to Plaintiffs Revised Plan: (1) Purchased and In-and-Out Shares should not participate in the settlement proceeds; if they do participate, Purchased Shares should not participate at a greater rate than Sold Shares; (2) the Revised Plan fails to take into account that different rates of claim submissions may result in under- or overallocation to some shareholders; (3) the Revised Plan fails to account for the possibility that there are more Sold Shares than Purchased Shares; and (4) there is no basis to assign greater value to the proxy claim than the breach of fiduciary duty claim. Insofar as any of these objections may relate to any plan of allocation proposed in the future, we rule on them as follows. 1. Objection 1: Purchased and In-and-Out Shares should not participate in the settlement proceeds; if they do participate, Purchased Shares should not participate at a greater rate than Sold Shares

Because we have already rejected the Revised Plan on the ground that it allows Purchased

By contrast, in our September 29, 2011 Order, we noted that there is no clear authority on th[e] issue of whether Sold Shares lack standing to pursue the breach of fiduciary duty claim. Therefore, there is a rational basis to allow Sold Shares to participate in the recovery allocated to this claim, and thus we do not find the Revised Plan to be unfair, inadequate, or unreasonable on this basis. In sum, the only basis on which we find Plaintiffs Revised Plan to be insufficient is its inclusion of Purchased and In-and-Out Shares in the recovery attributed to the fiduciary duty claim.
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E-Filed UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES - GENERAL Case No. Title CV 06-3731-GHK (SHx) Jim Brown v. Brett C. Brewer, et al. Date January 18, 2012

Shares and In-and-Out Shares to participate in the settlement proceeds attributed to the fiduciary duty claim, Trafelets first objection is moot.

2.

Objection 2: The Revised Plan fails to take into account that different rates of claim submissions may result in under- or over-allocation to some shareholders

Trafelet objects to the overall structure of the Revised Plan, which divides the settlement proceeds among the various categories of shares at the outset before any proofs of claims are submitted, and then permits the shares within each group to participate on a pro-rata basis with only other shares within the same category. Trafelet argues: This proposal would have the undesirable and inequitable effect of under-allocating or overallocating settlement proceeds to individual shares in the event there are differing rates of claims among the groups. For example, if Sold Shares submit claims at a greater rate than Held Shares (as compared to the total number of shares within each category), the per-share recovery for Held Shares would increase relative to the per-share recovery for Sold Shares. (Dkt. No. 367, at 5-6). Trafelet proposes an alternate point system structure, whereby each Held Share would receive two points (one for the proxy claim and one for the fiduciary duty claim), each Sold Share would receive one point (for the fiduciary duty claim), and each Purchased and In-and-Out Share would receive zero points. Trafelet then proposes that the settlement proceeds be allocated on a pro-rata basis according to the number of points obtained by each Class Member who submits a claim. This objection is OVERRULED. First, Trafelet has provided no basis for predicting that different share groups will submit claims at different rates. Additionally, it has provided no precedent to show that the rate of filings for proofs of claims should factor into how a plan of allocation is structured. Further, Trafelets proposed point system would also result in unintended and disproportionate distributions if Class Members within each category of share submit claims at different rates. For example, if Held Shares are given one point to compensate for the proxy claim and one point for the fiduciary duty claim, and Sold Shares are given one point for the fiduciary duty claim and no points for the proxy claim, class members with Held Shares could receive a disproportionately low allocation if class members with Held Shares file proofs of claim at a lower rate. In such a scenario, Sold Shares would receive a portion of the net settlement fund intended to compensate Held Shares for their proxy claim a claim which Sold Shares have no standing to assert. We perceive this to be a fundamental flaw because it would allow shareholders like Trafelet effectively to recover on a claim that they do not
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have standing to assert. 3. The Revised Plan fails to account for the possibility that there are more Sold Shares than Purchased Shares

Trafelet objects to the fact that the Revised Plan fails to account for the possibility that there are more Sold Shares than Purchased Shares. This objection is entirely speculative. Indeed, in articulating this objection Trafelet implicitly acknowledges that it is only a possibility that there are more Sold Shares than Purchased Shares. We fail to see why any revised plan of allocation should account for this possibility, when it is also a possibility that there are an even number of Sold and Purchased Shares. Nonetheless, because we have rejected the Revised Plan on the basis that it allows Purchased Shares to participate in the recovery, this objection is moot. 4. There is no basis to assign greater value to the proxy claim than the breach of fiduciary duty claim

Trafelet objects to the Revised Plans allocation of sixty percent (60%) of the net settlement fund to the proxy claim versus forty percent (40%) to the fiduciary duty claim. It argues that there is no basis to conclude that a reasonable jury is less likely to find that Defendants breached their fiduciary duties than it is to find that Defendants committed federal proxy violations. (Dkt. No. 367, at 10). Trafelet argues that each claim should be assigned equal weight. This objection is OVERRULED. An allocation formula need only have a reasonable, rational basis, particularly if recommended by experienced and competent cousel. In re Am. Bank. Note Holographics, 127 F. Supp. 2d 418, 429-30 (S.D.N.Y. 2001) (quoting White v. NFL, 822 F. Supp. 1389, 1420-24 (D. Minn. 1993), affd, 41 F.3d 402 (8th Cir. 1994)). Here, Plaintiff explains that the assessment that the federal proxy claim is stronger than the breach of fiduciary duty claim is plaintiffs counsel[s] professional judgment, based on the fact that plaintiffs counsel litigated this matter for years, during which time plaintiffs counsel analyzed thousands of pages of evidentiary documents, deposed numerous defendants and third parties, worked with several experts, and made (and won and lost) numerous legal arguments before the Court. (Dkt. No. 373, at 10). Moreover, Plaintiff explains that he believes the legal standard for succeeding on the fiduciary duty claim as opposed to the proxy claim is more difficult, because there are numerous affirmative defenses and raincoat provisions under Delaware law that could shield defendants from liability for the fiduciary duty claim. (Id.). We cannot say that this is not a rational basis for assigning greater value to the proxy claim. Indeed, it is reasonable to allocate more of the settlement to class members with stronger claims of the merits. In re Oracle, 1994 WL 502054, at *1.

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E-Filed UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA CIVIL MINUTES - GENERAL Case No. Title CV 06-3731-GHK (SHx) Jim Brown v. Brett C. Brewer, et al. Date January 18, 2012

V.

Conclusion

In sum, Plaintiffs Revised Plan is REJECTED because it allows Purchased Shares and In-andOut Shares to participate in the portion of the net settlement fund allocated to the fiduciary duty claim. Trafelets first and third objections are moot in light of this ruling. Insofar as Trafelets second and fourth objection would pertain to any plan of allocation proposed in the future, they are OVERRULED.

IT IS SO ORDERED.
-Initials of Deputy Clerk Bea : --

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