Milliken v. American Realty Capital Hospitality Advisors, LLC

Background

Tom Milliken filed a shareholder derivative action on behalf of Hospitality Investors Trust, Inc. (HIT). In a derivative action, a shareholder brings claims on a company’s behalf. The case followed two demand letters that Milliken sent to HIT’s board of directors. The court stayed the action while a special litigation committee investigated Milliken’s claims and claims raised by another shareholder, Dr. Stuart Wollman.

The special litigation committee reported that some, but not all, claims had merit and should be pursued. The committee issued a 147-page report. Between June 2019 and February 2020, Milliken’s counsel, HIT, the committee and its counsel, the defendants’ counsel, and the defendants’ insurers’ counsel negotiated a settlement. The negotiations included arms-length mediations, but not discovery in this action. The court said the settlement was largely driven by the committee’s determination that certain claims should proceed.

Settlement approval

The court approved the settlement under Federal Rule of Civil Procedure 23.1. The court found the settlement procedurally fair because it resulted from arms-length negotiations, involved experienced counsel and neutral mediators, and was informed by the committee’s investigation and factual findings.

The court also found the settlement substantively fair for HIT and its shareholders. The $15 million settlement represented 20% of the estimated maximum potential recovery of $73.5 million. The court identified litigation risks involving a mutual waiver and release dated March 31, 2017; the need to overcome the business judgment rule for certain board decisions; insurance coverage and limits; and an indemnity provision that could shift litigation costs to HIT. The court concluded that continuing the case would be lengthy and costly and would produce an uncertain outcome.

Shareholder objections

Dr. Wollman, who was represented by counsel, and Miriam Saul, who appeared without a lawyer, objected to the settlement. The court overruled both objections.

The court rejected Wollman’s argument that excluding him from settlement negotiations showed that the parties had engineered a reverse auction. It explained that he filed his lawsuit after negotiations ended, was not a necessary participant, and had no right to participate. The court also concluded that the settlement did not release viable direct claims because the released allegations and findings concerned derivative claims, and the parties represented at the settlement hearing that direct claims were not released.

The court rejected Wollman’s estimate that the maximum recovery could be $143 million or as much as $316 million. It found that estimate too optimistic and inconsistent with the significant obstacles identified in the committee’s report. The court also rejected Saul’s objection concerning direct claims and her objection that the settlement failed to account for claims based on conflicts of interest disclosed to prospective investors.

Order and judgment

The court found that notice to current HIT stockholders through a filing with the Securities and Exchange Commission, HIT’s investor-relations website, and publication through Business Wire was the best notice practicable and satisfied Rule 23.1 and due-process requirements. It also found that the requirements of Rule 23.1 were satisfied and that the derivative action had been properly maintained.

The court finally approved the settlement in all respects and ordered the parties to perform its terms. The final judgment states that the derivative action, all claims in it, and other settled claims were fully, finally, and forever compromised, settled, released, discharged, and dismissed on the merits and with prejudice as to all defendants. The judgment is binding on the parties and released persons and has preclusive effect in pending and future proceedings maintained by or on behalf of the parties or HIT stockholders.

The court approved a total fee award of $2,250,000. That amount included attorneys’ fees, reimbursement of reasonable litigation expenses, and a $2,500 contribution award to Milliken for his efforts in bringing the action. The court retained continuing jurisdiction to enter orders needed to carry out the settlement. Judge Valerie Caproni entered the judgment as final and appealable.