Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 1 of 26 PageID #: 410
`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF DELAWARE
`
`
`IN RE ZYNERBA PHARMACEUTICALS,
`INC. DERIVATIVE LITIGATION
`
`
`Lead Case No. 20-cv-557-CFC
`
`
`
`BRIEF IN SUPPORT OF PLAINTIFFS’ UNOPPOSED
`MOTION FOR PRELIMINARY APPROVAL OF SETTLEMENT
`
`
`
`Dated: May 7, 2021
`
`Of Counsel:
`
`Garam Choe
`BRAGAR EAGEL & SQUIRE, P.C.
`810 Seventh Avenue, Suite 620
`New York, NY 10019
`Telephone: (212) 355-4648
`
`Timothy Brown
`THE BROWN LAW FIRM, P.C.
`240 Townsend Square
`Oyster Bay, NY 11771
`Telephone: (516) 922-5427
`
`Co-Lead Counsel for Plaintiffs
`
`
`
`P. Bradford deLeeuw (#3569)
`DELEEUW LAW LLC
`1301 Walnut Green Road
`Wilmington, DE 19807
`Telephone: (302) 274-2180
`
`Brian E. Farnan (#4089)
`Michael J. Farnan (#5165)
`FARNAN LLP
`919 N. Market St., 12th Floor
`Wilmington, DE 19801
`Telephone: (302) 777-0300
`
`Co-Liaison Counsel for Plaintiffs
`
`
`
`
`
`
`
`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF DELAWARE
`
`
`IN RE ZYNERBA PHARMACEUTICALS,
`INC. DERIVATIVE LITIGATION
`
`
`Lead Case No. 20-cv-557-CFC
`
`
`
`BRIEF IN SUPPORT OF PLAINTIFFS’ UNOPPOSED
`MOTION FOR PRELIMINARY APPROVAL OF SETTLEMENT
`
`
`
`Dated: May 7, 2021
`
`Of Counsel:
`
`Garam Choe
`BRAGAR EAGEL & SQUIRE, P.C.
`810 Seventh Avenue, Suite 620
`New York, NY 10019
`Telephone: (212) 355-4648
`
`Timothy Brown
`THE BROWN LAW FIRM, P.C.
`240 Townsend Square
`Oyster Bay, NY 11771
`Telephone: (516) 922-5427
`
`Co-Lead Counsel for Plaintiffs
`
`
`
`P. Bradford deLeeuw (#3569)
`DELEEUW LAW LLC
`1301 Walnut Green Road
`Wilmington, DE 19807
`Telephone: (302) 274-2180
`
`Brian E. Farnan (#4089)
`Michael J. Farnan (#5165)
`FARNAN LLP
`919 N. Market St., 12th Floor
`Wilmington, DE 19801
`Telephone: (302) 777-0300
`
`Co-Liaison Counsel for Plaintiffs
`
`
`
`
`
`
`
`
`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 2 of 26 PageID #: 411
`
`TABLE OF CONTENTS
`
`
` NATURE AND STAGE OF THE PROCEEDINGS ...................................... 1
`I.
`II. STATEMENT OF FACTS .............................................................................. 3
`A.
`Factual Background and Procedural History of the
`Derivative Matters ................................................................................. 3
`Settlement Negotiations ........................................................................ 6
`B.
`Terms of the Settlement ........................................................................ 8
`C.
`III. THE PROPOSED SETTLEMENT WARRANTS PRELIMINARY
`APPROVAL .................................................................................................. 11
`A.
`The Role of the Court in the Approval of a Derivative Settlement .... 11
`B.
`The Settlement Falls Within the Range of Possible Approval ........... 12
`i.
`The Settlement Confers Substantial Benefits
`Upon Zynerba ........................................................................... 13
`The Complexity, Expense, and Likely Duration of
`Continued Litigation ................................................................. 14
`The Stage of the Proceedings and Discovery ........................... 15
`The Risks of Establishing Liability and Damages and the
`Reasonableness of the Settlement in Light of the Risks and
`the Best Possible Recovery ....................................................... 16
`IV. THE COURT SHOULD APPROVE THE FORM AND MANNER OF
`NOTICE ......................................................................................................... 18
`PROPOSED SCHEDULE OF EVENTS ....................................................... 19
`V.
`VI. CONCLUSION .............................................................................................. 20
`
`
`
`iii.
`iv.
`
`ii.
`
`i
`
`
`
`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 3 of 26 PageID #: 412
`
`TABLE OF AUTHORITIES
`
`
`Cases
`In re AOL Time Warner S’holder Derivative Litig.,
`2006 WL 2572114 (S.D.N.Y. Sept. 6, 2006) ........................................................ 14
`In re AT & T Corp.,
`455 F.3d 160 (3d Cir. 2006) .................................................................................. 17
`Bell Atl. Corp. v. Bolger,
`2 F.3d 1304 (3d Cir. 1993) .................................................................................... 12
`Bushansky v. Armacost,
`No. 12-CV-01597-JST, 2014 WL 2905143 (N.D. Cal. June 25, 2014) ............... 19
`In re Caremark Int’l Inc. Derivative Litig.,
`698 A.2d 959 (Del. Ch. 1996) ............................................................................... 17
`Cohn v. Nelson,
`375 F. Supp. 2d 844 (E.D. Mo. 2005) ................................................................... 14
`Gates v. Rohm & Haas Co.,
`248 F.R.D. 434 (E.D. Pa. 2008) ............................................................................ 12
`Girsh v. Jepson,
`521 F.2d 153 (3d Cir. 1975) ............................................................... 12, 13, 16, 18
`In re GMC Pick-Up Truck Fuel Tank Prods. Liab. Litig.,
`55 F.3d 768 (3d Cir. 1995) .................................................................................... 11
`In re Johnson & Johnson Derivative Litig.,
`900 F. Supp. 2d 467 (D.N.J. 2012) ................................................................ 12, 16
`Kamen v. Kemper Fin. Servs.,
`500 U.S. 90 (1991) ................................................................................................ 17
`Maher v. Zapata Corp.,
`714 F.2d 436 (5th Cir. 1983) ................................................................................. 15
`Mills v. Electric Auto-Lite Co.,
`396 U.S. 375 (1970) .............................................................................................. 14
`
`ii
`
`
`
`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 4 of 26 PageID #: 413
`
`Mullane v. Cent. Hanover Bank & Tr. Co.,
`339 U.S. 306 (1950) .............................................................................................. 18
`Pfeiffer v. Toll,
`989 A.2d 683 (Del. Ch. 2010) ............................................................................... 17
`In re Rambus Inc. Derivative Litig.,
`No. C 06-3513 JF (HRL), 2009 WL 166689 (N.D. Cal. Jan. 20, 2009) .............. 19
`In re Sch. Asbestos Litig.,
`921 F.2d 1330 (3d Cir. 1990) ................................................................................ 15
`Shlensky v. Dorsey,
`574 F.2d 131 (3d Cir. 1978) .................................................................................. 13
`TBK Partners, Ltd v. W. Union Corp.,
`675 F.2d 456 (2d Cir. 1982) .................................................................................. 15
`Tenuto v. Transworld Sys., Inc.,
`No. Civ. A 99-4228, 2001 WL 1347235 (E.D. Pa. Oct. 31, 2001) ............... 12, 14
`Thomas v. NCO Fin. Sys., Inc.,
`No. 00–5118, 2002 WL 1773035 (E.D. Pa. July 31, 2002) .................................. 12
`Unite Nat’l Ret. Fund v. Watts,
`2005 WL 2877899 (D.N.J. Oct. 28, 2005) ............................................................ 16
`Vinh Du v. Blackford,
`No. 17-cv-194, 2018 WL 4691046 (D. Del. Sept. 28, 2018) ........................ 13, 15
`Other Authorities
`“Use of Electronic Media for Delivery Purposes,”
`SEC Release No. 33-7233, 60 Fed. Reg. 53458, 53459 (Oct. 6, 1995) ............... 19
`7C CHARLES ALAN WRIGHT, ARTHUR R. MILLER & MARY KAY KANE,
`FEDERAL PRACTICE AND PROCEDURE: CIVIL 3D §1839 (2007) ............................ 11
`
`Manual for Complex Litigation
`§23.14 (4th ed. 2019) ............................................................................................ 12
`
`iii
`
`
`
`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 5 of 26 PageID #: 414
`
`Plaintiffs Phillip Quartararo (“Quartararo”) and Dmitry Itkis (“Itkis”)
`
`(together, the “Derivative Plaintiffs”) in the above-captioned action respectfully
`
`submit this Brief in support of Plaintiffs’ Unopposed Motion for Preliminary
`
`Approval of the Settlement (the “Motion”).1 Defendants do not oppose the relief
`
`sought in the Motion, but any analysis and characterizations in this Motion of the
`
`litigation and of the Settlement that are beyond facts taken from the record of this
`
`action are provided only on behalf of Plaintiffs and do not necessarily reflect the
`
`views of Defendants.
`
`I.
`
`NATURE AND STAGE OF THE PROCEEDINGS
`Derivative Plaintiffs’ claims brought on behalf of Zynerba Pharmaceuticals,
`
`Inc. (“Zynerba” or the “Company”) arise from alleged breaches of fiduciary duty,
`
`unjust enrichment, waste of corporate assets, and violations of Sections 14(a) of the
`
`Securities Exchange Act of 1934 (the “Exchange Act”), and seek contribution under
`
`Sections 10(b) and 21D of the Exchange Act. On April 28, 2021, after extensive,
`
`arm’s-length negotiations overseen by a nationally reputed mediator, Michelle
`
`Yoshida of Phillips ADR (the “Mediator”), the Parties reached a Settlement in the
`
`Derivative Action resolving Derivative Plaintiffs’ claims. The Settlement also
`
`
`1 Unless otherwise defined herein, all capitalized terms have the same meaning as
`those set forth in the Stipulation and Agreement of Settlement dated April 28, 2021
`(the “Stipulation”) attached as Exhibit 1 to the Declaration of Brian E. Farnan in
`support of the Motion.
`
`
`1
`
`
`
`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 6 of 26 PageID #: 415
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`resolves the related claims of Shareholder Rainer Machek (the “Shareholder,”
`
`together with the Derivative Plaintiffs, “Plaintiffs”).2 As a result, the Derivative
`
`Plaintiffs now seek an order from the Court: (1) preliminarily approving the terms
`
`and conditions of the Settlement as set forth in this Stipulation; (2) directing that
`
`Notice be provided to Current Zynerba Shareholders; and (3) scheduling a
`
`Settlement Hearing to consider whether the Settlement and Fee and Expense
`
`Amount should be finally approved.
`
`The Settlement provides a substantial benefit to Zynerba, on behalf of which
`
`the Derivative Action was brought. Pursuant to the terms of the Settlement,
`
`Zynerba’s Board of Directors (the “Board”) has agreed to implement, for a period
`
`of at least five years, corporate governance reforms designed to strengthen internal
`
`controls, improve compliance policies and reporting procedures, and enhance the
`
`independence and accountability of the Board (collectively, the “Reforms”).
`
`Zynerba and its Board acknowledge that the filing, prosecution, and resolution of
`
`the Derivative Action was a material precipitating factor in the Board’s adoption,
`
`implementation, and maintenance of the Reforms, that the Reforms confer
`
`substantial material benefits on the Company and its shareholders, and that the
`
`Reforms would not have been enacted at this time but for the efforts of counsel for
`
`
`2 The Shareholder, who served a document inspection demand pursuant to 8 Del. C.
`§ 220 on Zynerba and participated in the settlement process leading to the executed
`Stipulation, joins in Plaintiffs’ Motion.
`
`2
`
`
`
`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 7 of 26 PageID #: 416
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`Plaintiffs. Only after the Reforms were agreed to in principle did negotiations
`
`concerning the Fee and Expense Amount commence.
`
`At the preliminary approval stage, the Court need only conclude that the
`
`proposed Settlement is within the range of resolutions that might ultimately be found
`
`to be fair, reasonable, and adequate, such that notice of the Settlement should be
`
`provided to Current Zynerba Shareholders, and that the Settlement Hearing should
`
`be scheduled. Derivative Plaintiffs respectfully submit that the Settlement easily
`
`meets this standard and that the Court should preliminarily approve the Settlement.
`
`II.
`
`STATEMENT OF FACTS
`A.
`Factual Background and Procedural History of the Derivative
`Matters
`Zynerba is a specialty pharmaceutical company that develops and produces
`
`transdermal cannabinoid therapies for rare and near-rare neuropsychiatric disorders.
`
`The Derivative Plaintiffs allege that between March 11, 2019 and September 17,
`
`2019, Defendants failed to disclose adverse events observed during a clinical trial of
`
`the Company’s sole drug product, ZYN002 (“Zygel”). The Derivative Plaintiffs
`
`generally allege that the Individual Defendants breached their fiduciary duties by
`
`making or permitting the making of materially false statements or omissions, causing
`
`the Company to fail to maintain internal controls, and committing other violations
`
`of state and federal law. Stipulation, §I, A.
`
`On April 24, 2020 Plaintiff Quartararo filed an action against the Individual
`
`3
`
`
`
`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 8 of 26 PageID #: 417
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`Defendants in this Court, captioned Quartararo v. Anido, et al., Case No. 1:20-cv-
`
`00557-CFC (D. Del.), asserting claims for breaches of fiduciary duty, waste of
`
`corporate assets, and violations of Section 14(a) of the Exchange Act derivatively
`
`on behalf of Zynerba (the “Quartararo Matter”) (D.I. 1).
`
`On May 29, 2020, the parties to the Quartararo Matter stipulated to stay the
`
`proceedings pending resolution of a motion to dismiss in a related securities class
`
`action pending in the United States District Court for the Eastern District of
`
`Pennsylvania, captioned Whitely v. Zynerba Pharmaceuticals, Inc., et al., Case No.
`
`2:19-cv-02959-NIQA (E.D. Pa.) (the “Securities Class Action”). The Court so-
`
`ordered the stipulation on June 1, 2020 (D.I. 13).
`
`On November 25, 2020, the Pennsylvania court denied the motion to dismiss
`
`in the Securities Class Action.
`
`On December 4, 2020, Plaintiff Itkis filed an action against the Individual
`
`Defendants in this Court, captioned Itkis v. Anido, et al., Case No. 1:20-cv-01657-
`
`CFC (D. Del.), asserting claims for breaches of fiduciary duty, unjust enrichment,
`
`waste of corporate assets, violations of Sections 14(a) of the Exchange Act
`
`derivatively on behalf of Zynerba, and seeking contribution under Sections 10(b)
`
`and 21D of the Exchange Act (the “Itkis Matter”) (Itkis Matter, D.I. 1).
`
`On December 7, 2020, the Court entered a Joint Stipulation and Order in the
`
`Quartararo Matter to continue the stay of proceedings in the action pending a motion
`
`4
`
`
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`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 9 of 26 PageID #: 418
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`for reconsideration filed in the Securities Class Action. (D.I. 14).
`
`On December 17, 2020, the Court entered a Joint Stipulation and [Proposed]
`
`Order (1) consolidating the Quartararo Matter and the Itkis Matter into the
`
`Derivative Action under the caption In re Zynerba Pharmaceuticals, Inc. Derivative
`
`Litigation, Lead Case No. 1:20-cv-00557-CFC, (2) appointing The Brown Law
`
`Firm, P.C. and Bragar Eagel & Squire, P.C. as Co-Lead Counsel in the Derivative
`
`Action and Farnan LLP and deLeeuw Law LLC as Co-Liaison Counsel, and (3)
`
`staying the Derivative Action pursuant to the terms of the stay in the Quartararo
`
`Matter. (D.I. 16).
`
`On December 22, 2020, the Company received a letter from the Shareholder
`
`stating that he was a Zynerba shareholder and making a demand pursuant to 8 Del.
`
`C. § 220 to inspect certain books and records of Zynerba (the “Demand,” and
`
`together with the Derivative Action, the “Derivative Matters”). Counsel for
`
`Defendants responded by letter on January 18, 2021, objecting to the scope of the
`
`Demand and proposing a meet and confer with the Shareholder’s counsel. See
`
`Stipulation §I, B.
`
`On February 16, 2021, after the Pennsylvania court denied the motion to
`
`reconsider in the Securities Class Action, the parties to the Derivative Action entered
`
`into a Joint Stipulation regarding scheduling, designating the complaint filed in the
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`Itkis Matter (the “Complaint”) as the operative complaint and scheduling dates for
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`5
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`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 10 of 26 PageID #: 419
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`the parties’ respective responses. (D.I. 17). The Court so-ordered the scheduling
`
`stipulation on February 18, 2021. (D.I. 18).
`
`On March 22, 2021, the parties to the Derivative Action entered into a second
`
`Joint Stipulation regarding scheduling, informing the Court that a settlement in
`
`principle had been reached in the Derivative Action and extending the time for
`
`Defendants to file their response(s) to the Complaint. (D.I. 19). The Court so-ordered
`
`the scheduling stipulation on March 23, 2021. (D.I. 20).
`
`On April 15, 2021, purported shareholder Roland Davies (“Movant”) filed a
`
`motion to intervene for the limited purpose of seeking to temporarily stay the
`
`Derivative Action pending Movant’s own investigation following his 8 Del. C. § 220
`
`demand, or otherwise to limit the collateral estoppel effect of the Derivative Action’s
`
`final disposition. (D.I. 22.). Derivative Plaintiffs and Defendants filed their
`
`respective oppositions to this motion on April 28, 2021. (D.I. 25; D.I. 26).
`
`On April 23, 2021, the parties to the Derivative Action entered into a third
`
`Joint Stipulation regarding scheduling, informing the Court that the Parties had
`
`executed a settlement memorandum of understanding and extending the time for
`
`Defendants to file their response(s) to the Complaint. (D.I. 23) The Court so-ordered
`
`the scheduling stipulation on April 26, 2021. (D.I. 24).
`
`B.
`Settlement Negotiations
`In or around January 2021, the parties in the Derivative Action agreed to
`
`6
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`
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`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 11 of 26 PageID #: 420
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`participate in a private mediation session before the Mediator. In anticipation of the
`
`mediation, counsel for the Derivative Plaintiffs sent a settlement demand that
`
`included a proposal for extensive corporate governance reforms to Defendants’
`
`Counsel on January 29, 2021. Stipulation, §I, C. Shareholder made a settlement
`
`demand on February 1, 2021, requesting that, inter alia, significant governance
`
`reforms be enacted.
`
`On February 5, 2021, Defendants’ Counsel sent their mediation statement to
`
`Plaintiffs and the Mediator. On February 8, 2021, Plaintiffs’ Counsel submitted a
`
`joint mediation statement to Defendants and the Mediator. On February 16, 2021,
`
`Defendants’ Counsel submitted their reply to Plaintiffs’ mediation statement. Id.
`
`On February 22, 2021, the Parties engaged in a virtual, full-day mediation (the
`
`“Mediation”) with the Mediator to reach a resolution of the Derivative Matters. The
`
`Parties did not reach an agreement to settle this matter during the February 22, 2021
`
`mediation. However, the Parties continued to engage in arm’s-length settlement
`
`discussions over the next several weeks. The Parties’ negotiations culminated on
`
`March 15, 2021 in an agreement in principle on the Reforms to be instituted by
`
`Zynerba, the terms of which are set forth in Exhibit A to the Stipulation. On March
`
`25, 2021, the Parties executed a Memorandum of Understanding memorializing the
`
`principal terms of the settlement of the Derivative Matters. Id. On April 28, 2021,
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`the Parties executed the Stipulation.
`
`7
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`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 12 of 26 PageID #: 421
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`With substantial assistance from the Mediator and only after agreeing in
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`principle to the Reforms, the Parties began to negotiate at arm’s-length the Fee and
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`Expense Amount to be paid to Plaintiffs’ Counsel by the Insurer based upon the
`
`benefits conferred upon the Company by the Reforms. The Parties have yet to reach
`
`an agreement on the Fee and Expense Amount. See Stipulation, §IV, 5.1–5.2.
`
`C. Terms of the Settlement
`In consideration of the Settlement, Zynerba agreed to adopt and implement
`
`the Reforms, set forth in Exhibit A to the Stipulation, for a period of at least five (5)
`
`years. These Reforms include, inter alia, the following:
`
`Enhancements to the Disclosure Committee: The Disclosure Committee’s
`
`Charter shall be amended to provide that it is overseen by the Chief Executive
`
`Officer (“CEO”), Chief Financial Officer, and the Board’s Audit Committee. The
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`Disclosure Committee shall draft, review, and supervise the preparation of the
`
`Company’s public disclosures, including regarding the Company’s product
`
`candidates. The Disclosure Committee and the Compliance Officer shall review, and
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`amend as necessary, its Charter biannually to ensure best practices, and its Charter
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`shall be posted on the Company’s website.
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`Duties of Management: Zynerba’s management, under the supervision of the
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`Company’s President or another officer as necessary, shall oversee the Company’s
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`relationship and communications with regulators and shall oversee the Company’s
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`8
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`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 13 of 26 PageID #: 422
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`clinical trials. Management shall then, at least once per quarter, report to the Board
`
`and discuss with the Disclosure Committee any material information concerning
`
`these matters.
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`Enhancements to the Audit Committee: The Audit Committee shall oversee
`
`the Compliance Risk Analysis (defined below) which is part of the Compliance
`
`Officer’s duties under these Reforms.
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`Changes to the Board: The Board shall, going forward, maintain either an
`
`independent chairperson or, if the chairperson is not independent, a lead independent
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`director, as defined under NASDAQ Rule 5605. This director shall be responsible
`
`for numerous Board leadership and oversight functions, including scheduling Board
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`meetings, setting an agenda for Board meetings, ensuring adequate oversight of
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`management, coordinating
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`retention of consultants, evaluating with
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`the
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`Compensation Committee the CEO’s performance, and monitoring Company-wide
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`compliance. The Board will hold executive sessions, at least quarterly, led by the
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`independent chairperson or lead independent director, at which no employee
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`directors will be present. Board member attendance at shareholder meetings shall be
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`mandatory, absent unforeseen circumstances.
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`Change to Website Regarding Whistleblower Hotline: The Company shall
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`include the telephone number and webpage for its Whistleblower Hotline on the
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`“Corporate Governance – Documents and Charters” page of the Company website.
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`9
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`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 14 of 26 PageID #: 423
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`Executive Reports: Certain corporate officers shall be required to submit
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`quarterly reports to the Board concerning clinical developments, financial reports,
`
`and commercial and/or business developments. The general counsel shall provide
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`their own quarterly report to the Board on legal matters.
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`Enhancements to the Compliance Officer Duties: The Compliance Officer
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`shall have numerous additional duties including monitoring ethical and compliance
`
`program, implementing procedures for monitoring and evaluating the program’s
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`performance, overseeing employee compliance training, meeting with the Audit
`
`Committee and conducting an annual review of the Company’s internal policies and
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`controls related to Zynerba’s Code of Conduct (“Code”) and conducting an annual
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`compliance risk analysis (the “Compliance Risk Analysis”) concerning risks facing
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`the Company, reporting on the results of the Compliance Risk Analysis to the Board,
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`and reporting material violations of the Code and material disciplinary actions to the
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`Audit Committee Chair.
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`Employee Training: The Company shall conduct annual, mandatory
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`employee training on the Code, relevant Company policies, and applicable laws and
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`regulations regarding public disclosures. Each employee will certify in writing
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`his/her understanding of his/her obligations under the Company’s policies.
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`Director Education and Certification of Compliance with the Code:
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`Company directors must attend professional director education programs related to
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`10
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`
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`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 15 of 26 PageID #: 424
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`their service on Zynerba’s Board or a committee thereof. Each director will annually
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`certify in writing that s/he has read the Company’s Code of Conduct, complied with
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`it, and will continue to comply with it.
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`Defendants acknowledge that the Derivative Action was a material
`
`precipitating factor in the Board’s adoption, implementation, and maintenance of the
`
`Reforms, that the Reforms confer substantial material benefits on the Company and
`
`its shareholders, and that the Reforms would not have been enacted at this time but
`
`for the efforts of counsel for Plaintiffs. Stipulation, §IV, 2.1.
`
`III. THE PROPOSED SETTLEMENT WARRANTS PRELIMINARY
`APPROVAL
`A. The Role of the Court in the Approval of a Derivative Settlement
`A derivative action “may be settled . . . only with the court’s approval. Notice
`
`of a proposed settlement, voluntary dismissal, or compromise must be given to
`
`shareholders or members in the manner that the court orders.” Fed. R. Civ. P. 23.1(c).
`
`Settlements are especially favored “in class actions and other complex cases where
`
`substantial judicial resources can be conserved by avoiding formal litigation.” In re
`
`GMC Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 784 (3d Cir. 1995).
`
`The “general practice” in shareholder derivative suits is that the parties submit the
`
`settlement to the Court for its approval together with a request for a hearing on its
`
`propriety. See 7C CHARLES ALAN WRIGHT, ARTHUR R. MILLER & MARY KAY KANE,
`
`FEDERAL PRACTICE AND PROCEDURE: CIVIL 3D §1839 (2007).
`
`11
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`
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`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 16 of 26 PageID #: 425
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`At the preliminary approval stage, the Court is only required to determine
`
`whether the proposed Settlement discloses grounds to doubt its fairness or other
`
`obvious deficiencies and whether it appears to fall within the range of possible
`
`approval. See Thomas v. NCO Fin. Sys., Inc., No. 00–5118, 2002 WL 1773035, at
`
`*5 (E.D. Pa. July 31, 2002); Tenuto v. Transworld Sys., Inc., No. Civ. A 99-4228,
`
`2001 WL 1347235, at *1 (E.D. Pa. Oct. 31, 2001); see also Manual for Complex
`
`Litigation §23.14 (4th ed. 2019). The Court is not required on preliminary approval
`
`to make a final determination that the proposed Settlement is fair and reasonable.
`
`See Tenuto, 2001 WL 1347235, at *1. Preliminary approval is usually granted unless
`
`the settlement is “obviously deficient.” Gates v. Rohm & Haas Co., 248 F.R.D. 434,
`
`438 (E.D. Pa. 2008). The Settlement is within the range of possible approval, does
`
`not suffer from obvious deficiencies, and thus warrants preliminary approval.
`
`B.
`The Settlement Falls Within the Range of Possible Approval
`The touchstone for final approval of a derivative settlement is whether the
`
`settlement is “fair, adequate, reasonable, and proper and in the best interests of . . .
`
`the shareholders.” Bell Atl. Corp. v. Bolger, 2 F.3d 1304, 1310 (3d Cir. 1993). Courts
`
`in the Third Circuit rely upon the factors set forth in Girsh v. Jepson, 521 F.2d 153
`
`(3d Cir. 1975), to determine whether a proposed settlement is fair, reasonable, and
`
`adequate. In re Johnson & Johnson Derivative Litig., 900 F. Supp. 2d 467, 479
`
`(D.N.J. 2012). Consideration of these final approval factors at the preliminary
`
`12
`
`
`
`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 17 of 26 PageID #: 426
`
`approval stage further buttresses the conclusion that the Settlement warrants
`
`preliminary approval. See Vinh Du v. Blackford, No. 17-cv-194, 2018 WL 4691046,
`
`at *6 (D. Del. Sept. 28, 2018) (“[T]he Girsh factors . . . are relevant to guide the
`
`Court at the preliminary [approval] stage as well.”)
`
`The Girsh factors include: (1) the benefit achieved through the settlement; (2)
`
`“the complexity, expense, and likely duration of the litigation”; (3) “the stage of the
`
`proceedings and . . . discovery”; (4) “the risks of establishing liability”; (5) “the risks
`
`of establishing damages”; and (6) “the range of reasonableness of the settlement
`
`[agreement] in light of the best possible recovery” and “all the attendant risks of
`
`litigation[.]” Girsh, 521 F.2d at 157; Shlensky v. Dorsey, 574 F.2d 131, 147 (3d Cir.
`
`1978).3
`
`i.
`The Settlement Confers Substantial Benefits Upon Zynerba
`The most important factor in determining whether to grant preliminary
`
`approval of a derivative settlement is “the extent of the benefit to be derived from
`
`the proposed settlement by the corporation, the real party in interest.” Shlensky, 574
`
`F.2d at 147. Courts widely recognize that “a corporation may receive a substantial
`
`benefit from a derivative suit . . . regardless of whether the benefit is pecuniary in
`
`
`3 Because there is no monetary component to the Settlement, the ability of the
`defendants to withstand a greater judgment, another factor outlined in Girsh, is
`inapplicable. In addition, because the Notice provisions of the Settlement provide a
`formal mechanism for other shareholders to lodge their reactions with the Court prior
`to final approval, that factor will not be evaluated here as it is premature to do so.
`
`13
`
`
`
`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 18 of 26 PageID #: 427
`
`nature.” Mills v. Electric Auto-Lite Co., 396 U.S. 375, 395 (1970); see also In re
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`AOL Time Warner S’holder Derivative Litig., 2006 WL 2572114, at *4 (S.D.N.Y.
`
`Sept. 6, 2006) (non-monetary benefits alone can be “substantial enough to merit
`
`[settlement] approval”); Cohn v. Nelson, 375 F. Supp. 2d 844, 853 (E.D. Mo. 2005)
`
`(“Courts have recognized that corporate governance reforms such as those achieved
`
`here provide valuable benefits to public companies.”).
`
`Here, the Reforms, as described above, directly address the alleged
`
`misconduct regarding false and misleading statements made by the Company in
`
`relation to Zygel and its clinical trials as well as the Company’s alleged internal
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`control failures. The Reforms further improve the Company’s corporate governance
`
`going forward by strengthening oversight, reporting, and compliance procedures at
`
`the Company. Thus, Zynerba and its shareholders will reap a substantial, long-term
`
`benefit as the result of the Reforms. Moreover, the Company and the Board
`
`acknowledge that the Reforms confer substantial material benefits on the Company
`
`and its shareholders. Stipulation, §IV, 2.1.
`
`ii.
`
`The Complexity, Expense, and Likely Duration of Continued
`Litigation
`The complexity, expense, and likely duration of continued litigation also
`
`favors approval of the Settlement. Courts consistently hold that unless a proposed
`
`settlement is clearly inadequate, its acceptance and approval are preferable to the
`
`continuation of lengthy and expensive litigation with uncertain results. See Tenuto,
`
`14
`
`
`
`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 19 of 26 PageID #: 428
`
`2001 WL 1347235, at *1; see also TBK Partners, Ltd v. W. Union Corp., 675 F.2d
`
`456, 462–63 (2d Cir. 1982). As discussed, the Settlement is not inadequate, and in
`
`fact confers substantial benefits on the Company. While the Derivative Plaintiffs are
`
`confident in the merits of their claims, they acknowledge that continued litigation
`
`would be complex, expensive, and lengthy. Derivative litigation is “notoriously …
`
`unpredictable,” and therefore settlements of stockholder derivative actions and other
`
`complex litigation are “particularly favored” and are not to be lightly rejected by the
`
`courts. See Maher v. Zapata Corp., 714 F.2d 436, 455 (5th Cir. 1983); see also In re
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`Sch. Asbestos Litig., 921 F.2d 1330, 1333 (3d Cir. 1990) (approving a settlement in
`
`line with the Third Circuit “policy of encouraging settlement of complex litigation
`
`that otherwise could linger for years”). If the Derivative Action were to continue, the
`
`Derivative Plaintiffs would likely need to overcome a motion to dismiss, as an initial
`
`matter. Following that, the Parties would engage in further motion practice,
`
`discovery, and trial preparation; a process that could last for years. Derivative
`
`Plaintiffs submit that the likely prospect of continued expensive, disruptive, and
`
`uncertain litigation favors approval of the proposed Settlement. See Vinh Du v.
`
`Blackford, 2018 WL 6604484, at *6 (D. Del. Dec. 17, 2018) (“It would have been
`
`expensive to bring to trial and would not have provided significant additional
`
`relief. . . . This factor weighs in favor of settlement.”).
`
`iii. The Stage of the Proceedings and Discovery
`
`15
`
`
`
`Case 1:20-cv-00557-CFC Document 29 Filed 05/07/21 Page 20 of 26 PageID #: 429
`
`The stage of the proceedings and amount of discovery completed is a factor
`
`the Court may consider in determining the fairness, reasonableness, and adequacy
`
`of the proposed Settlement. Girsh, 521 F.2d at 157. Formal discovery need not be
`
`conducted if parties have enough information to make an informed decision to settle.
`
`“Even settlements reached at a very early stage and prior to formal discovery are
`
`appropriate where there is no evidence of collusion and the settlement represents
`
`substantial concessions by both parties.” Johnson & Johnson, 900 F. Supp. 2d at
`
`482–83.
`
`Here, the Settlement was reached after extended, arm’s-length negotiations,
`
`under the auspices of the Mediator, including a full-day Mediation. The Derivative
`
`Plaintiffs conducted thorou
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