For some time now, a small, but vocal group of judges have written about the theoretical conflict inherent in many securities class actions - namely that when a case settles, current shareholders are paying damages to a class that includes former shareholders. See e.g. In re Seagate II Technology Sec. Litig., 843 F.Supp. 1341, 1362-64 (N.D.Cal.1994); In re Party City Sec. Litig., 189 F.R.D. 91, 108-10 (D.N.J.1999).

We will leave the legitimacy of the holder-seller conflict theory aside for now.

The $20.1 million tentative settlement in the Lumenis Ltd. securities class action announced yesterday has the ability to test whether investors care about this theoretical conflict, particularly when, as noted in the press release announcing the settlement, "the major portion would be paid on behalf of the defendants by the Company's insurers."

As noted in the press release, the company:

has scheduled a special general meeting of shareholders to seek approval and authorization, in accordance with the Israeli Companies Law, of a proposed settlement of the securities class action litigation that has been pending against the Company in the federal court in New York since 2002.

Though I am not licensed to practice law in Israel, and I did not stay at a Holiday Inn Express last night, it appears that the Israeli Companies Law requires shareholder approval of the settlement as it is considered an "extraordinary transaction."

A quick perusal of the 6-K filed by the company this week breaks the settlement down to a more granular level:

The Company has entered into separate confidential settlement agreements with its primary D&O Insurer, Genesis Insurance Company (“Genesis”), and the two excess D&O Insurers whose policies are immediately above the Genesis policy, Zurich American Insurance Company (“Zurich”) and Lumbermens Mutual Casualty Company (“Lumbermens”), as a result of which it is expected that Lumenis itself will directly contribute $2,736,000 toward the settlement of the Securities Class Action and the above-named D&O Insurers will collectively contribute the remaining $17,364,000, for a total of $20,100,000.

Thus the company will contribute about 13% of the total settlement.

Another interesting provision of the settlement, as detailed in the 6-K is the following:

After the filing of the Stipulation of Settlement, Lead Plaintiffs will file a Third Amended and Consolidated Class Action Complaint (“TAC”) naming the same defendants as are named in the SAC and which will incorporate additional allegations and claims based on those alleged in the SEC Civil Action. The TAC will amend and enlarge the class definition to include persons who purchased Lumenis securities at any time between October 2, 2000 and March 7, 2006 (the “Settlement Class Period”). Lumenis and the other defendants will not be required to respond to the TAC, by answer or by motion, unless and until the Court fails to give final approval to the settlement or it is otherwise terminated, and the Company and the individual defendants retain all of their defenses with respect to the TAC.

Thus, the class has grown quite a bit, having started at a mere seven weeks in the initial complaints, morphed to eight months or so in the amended complaints and now stretching nearly five and a half years, beyond even what the extended statute of limitations found in Sarbanes-Oxley would allow.

This poses an interesting philosophical question - is it reasonable to allow a settlement to extinguish claims that have yet to become time-barred - as the end of the enlarged class period is less than two years old. We'll save that one for another day as well.