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After an announced proposed merger or acquisition, shareholder class actions may be filed alleging breach of fiduciary duty by corporate officers in, inter alia, failing to disclose necessary information to shareholders and/or failing to achieve a greater purchase price and seeking to enjoin the merger. Shortly thereafter, a settlement may be proposed which, in exchange for a general release to the corporations and their officers, the defendant will disclose additional information to allow shareholders to make a more informed decision in approving or disapproving the proposed merger or acquisition. As with coupon settlements (see Dickerson, “Designing a Coupon Settlement to Maximize Its Value,” New York Law Journal, June 30, 2017; see also Dickerson, “Class Actions: The Law of 50 States, §9.01[3][c], Law Journal Press (2017)), the courts should carefully scrutinize disclosure-only settlements. See In re Walgreen Co. Stockholder Litigation, 2016 WL 4207962 (7th Cir. 2016) (court disapproved a proposed disclosure-only settlement citing and adopting the standard in In re Trulia, 129 A.3d 884, 894 (Del. Ch. 2016)); compare In re Subway Footlong Sandwich Marketing and Sales Practices Litigation, __F.3d__ (7th Cir. Aug. 25, 2017) (injunctive relief settlement “utterly worthless”).

Where Is the Benefit?

These “disclosure-only” settlements, also known as strike suits, deal litigation, and merger tax, have on occasion been strongly criticized. For example, in Delaware, the court in In re Trulia Stockholder Litigation noted: “The proposed settlement is of the type often referred to as a ‘disclosure settlement’. It has become the most common method of quickly resolving stockholder lawsuits that are filed routinely in response to the announcement of virtually every transaction involving the acquisition of a public corporation … . If approved the settlement will not provide Trulia’s stockholders with any economic benefits. The only money that would change hands is the payment of a fee to plaintiffs’ counsel … . I conclude that … none of the supplemental disclosures were material or even helpful to Trulia’s stockholders and thus the proposed settlement does not afford them any meaningful consideration to warrant providing a release of claims to the defendants.” In re Trulia, 129 A.3d 884; see also In re Xoon Corporation Stockholder Litigation, 2016 WL 4146425 (Del Ch. 2016) (“Here, I find that the Supplemental Disclosures worked a modest benefit on the stockholders”).

Downright Frivolous

In New York, the court in City Trading Fund v. Nye, 46 Misc.3d 1206 (N.Y. Sup. 2015), rev’d 144 A.D.3d 595 (1st Dept. 2016) noted: “In sum, when the original alleged omissions and supplemental disclosures are closely scrutinized, it is clear that they are not only immaterial, they are grossly immaterial. None of the supplemental disclosures ‘significantly altered the total mix of information made available’ … the ubiquity and multiplicity of merger lawsuits, colloquially known as a ‘merger tax’, has caused many to view such lawsuits with a certain degree of skepticism. The lawsuits are filed only a relatively short time before the shareholder vote, and all it takes is a remote threat of injunction or delay to rationally incentivize settlement, even if defendants firmly and rightfully believe the lawsuit has no merit … . The defendant corporation’s cost-benefit calculus almost always leads the company to settle. Even a slight (chance) of an adverse outcome will induce a company to rationally settle given the costs … . Yet, notwithstanding the current climate of merger litigation, this case still stands out. It stands out for its downright frivolity.” See Gordon v. Verizon Communications, 2014 N.Y. Misc. LEXIS 5642 (N.Y. Sup.) (“An increasing body of commentary has decried the tsunami of litigation and attendant suspect disclosure-only settlements, associated with public acquisitions today … . A body of law meant to protect shareholder interest from the absence of due care by the corporation’s managers has been turned on its head to diminish shareholder value by divesting them of valuable rights via broad releases.”), rev’d 148 A.D.3d 146 (1st Dept. 2017); Matter of Allied Healthcare Shareholders Litigation, 2015 WL 6499467 (N.Y. Sup. 2015) (“In summary this proposed settlement offers nothing to the shareholders except that attorneys they did not hire will receive a $375,000 fee and the corporate officers who were accused of wrongdoing will receive general releases … . Putting aside any concerns of collusion (and there are many) … this practice of compensating class counsel no matter how meaningless the result is, creates the impression … that these actions are brought merely for the purpose of generating legal fees”).

Disclosures Must Be Meaningful

Notwithstanding that recent empirical work (see Fisch, Griffith & Solomon, “Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform,” 93 Tex. L. Rev. 557. 561. 582-91 (2015)) suggests that disclosure-only settlements rarely, if ever, have any meaningful impact upon shareholder behavior, leading, perhaps, to the unfortunate conclusion that the only thing of any value which is exchanged is a general release running to defendants (see Gordon v. Verizon Communications, 2014 N.Y. Misc. LEXIS 5642 (N.Y. Sup.) (“A body of law meant to protect shareholder interest from the absence of due care by the corporation’s managers has been turned on its head to diminish shareholder value by divesting them of valuable rights via broad releases that plaintiffs have fashioned at the demand of concerned defendants and their counsel and imposing additional gratuitous costs, i.e., attorneys’ legal fees on the corporation.”), rev’d 148 A.D.3d 146 (1st Dept. 2017)), there are circumstances under which such settlements may be viable. In fact, recently, several courts in New York, North Carolina and Delaware have carefully reviewed proposed disclosures and found them sufficiently material to warrant approval of a proposed disclosure-only settlement.

An Enhanced Standard

In Gordon v. Verizon Communications, 148 A.D.3d 146 (1st Dept. 2017), the First Department, after noting that “more than two decades of mergers and acquisitions litigation … have been informative as to the need to curtail excesses not only on the part of corporate management, but also on the part of overzealous litigating shareholders and their counsel,” reviewed the proposed settlement before it in light of the five factors set forth in Matter of Colt Industries Shareholders Litigation, 155 A.D.2d 154, 160 (1st Dept. 1990), mod’d on other grounds 77 N.Y.2d 185 (1991)(likelihood of success, the extent of support from the parties, the judgment of counsel, the presence of bargaining in good faith and the nature of the issues of law and fact) and added two more factors.

Benefit to Stockholders

First, the agreed-upon disclosures, corporate governance reforms and any other forms of nonmonetary relief should be in the interests of the class of shareholders. After reviewing the benefits of each of four proposed disclosures, the First Department noted: “The most beneficial aspect of the proposed settlement to the shareholders … was the inclusion of a fairness opinion requirement (regarding the potential sale or spin-off of assets) … . This prospective corporate governance reform provided a benefit to Verizon shareholders in mandating an independent valuation, without restricting the flexibility of directors in making a pricing determination.” See Seinfeld v. Robinson, 246 A.D.2d 291 (1st Dept. 1998) (significance of corporate reforms in assessing a proposed settlement).

Benefit to Corporation

Second, is the proposed settlement in the best interests of the corporation, notwithstanding the absence of a “quantifiable benefit”? The First Department held that the proposed settlement would reflect Verizon’s “direct input into the nature and breadth of the additional disclosures … and corporate governance reform” and Verizon would not have to incur additional legal fees and expenses of a trial. “[W]e find that the proposed settlement meets the enhanced standard we announce here.”

Subsequent Decisions

In Roth v. Phoenix Cos., 2017 N.Y. Misc. LEXIS 1050 (N.Y. Sup.), the trial court, following the new enhanced standards announced in Gordon found the proposed remedial disclosures “outstanding. It provides for expeditious beneficial relief for the class that affords them material remedial disclosures without the need for protracted costly litigation … . [T]he gravamen of plaintiff’s complaint is a challenge to the disclosure implications of the merger … . The terms of the settlement sufficiently remedy plaintiff’s concerns.”

North Carolina

In Nakatsukasa v. Furiex Pharmaceuticals, 2015 WL 4069818 (N.C. Super. 2015), the court, in valuing the disclosures in the proposed settlement found “Plaintiffs obtained significant additional disclosures concerning the merger with Forest including additional detailed information about the financial analysis performed by BAML … . Again, courts have acknowledged the value of such information to shareholders considering a proposed sale … . The disclosures also clearly were material … . The value of the DADW waivers and supplemental disclosures perhaps explains the lack of any objection by class members to the Settlement.” In In re Harris Teeter Merger Litigation, 2014 WL 4748566 (N.C. Super. 2014) the court determined that “Plaintiffs’ counsel reasonably concluded that the best interests of the Settlement Class were to pursue a settlement based on their claims for supplemental disclosures without further monetary recovery based on other claims … . Having elected to concentrate on disclosure claims, Plaintiffs’ counsel was required to assess the strength of those claims in considering whether the bargained-for supplemental disclosures were adequate consideration for the Settlement.”

Reduction in Legal Fees Award

Lastly, the court may find the proposed disclosures marginally acceptable and of little benefit to the class and nonetheless approve the settlement but substantially reduce the legal fees awarded to class counsel. In In re Newbridge Bancorp Shareholder Litigation, 2016 WL 6885882 (N.C. Super. 2016) the court concluded that the “Supplemental Disclosures were of only marginal benefit to the Class, a finding which is supported by the lack of substantial evidence that any of the (disclosures) were significant to a reasonable shareholder’s decision in voting for the Proposed Transaction.” As a consequence, the court found class counsel’s fee request of $274,537.12 “excessive” and awarded $135,000 in fees. And in Matter of Medical Action Industries Shareholder Litigation, 48 Misc.3d 544 (N.Y. Sup. 2015), the court approved a disclosure-only settlement but reduced the proposed class counsel’s legal fees of $925,000 to a combined award of fees and expenses of $250,000. See also In re Subway Footlong Sandwich Marketing and Sales Practices Litigation, __F.3d__ (7th Cir. Aug. 25, 2017) (“Because the settlement yields fees for class counsel ($520,000) and ‘zero benefits for the class’, the class should not have been certified and the settlement should not have been approved.”).

After an announced proposed merger or acquisition, shareholder class actions may be filed alleging breach of fiduciary duty by corporate officers in, inter alia, failing to disclose necessary information to shareholders and/or failing to achieve a greater purchase price and seeking to enjoin the merger. Shortly thereafter, a settlement may be proposed which, in exchange for a general release to the corporations and their officers, the defendant will disclose additional information to allow shareholders to make a more informed decision in approving or disapproving the proposed merger or acquisition. As with coupon settlements (see Dickerson, “Designing a Coupon Settlement to Maximize Its Value,” New York Law Journal, June 30, 2017; see also Dickerson, “Class Actions: The Law of 50 States, §9.01[3][c], Law Journal Press (2017)), the courts should carefully scrutinize disclosure-only settlements. See In re Walgreen Co. Stockholder Litigation, 2016 WL 4207962 (7th Cir. 2016) (court disapproved a proposed disclosure-only settlement citing and adopting the standard in In re Trulia, 129 A.3d 884, 894 (Del. Ch. 2016)); compare In re Subway Footlong Sandwich Marketing and Sales Practices Litigation, __F.3d__ (7th Cir. Aug. 25, 2017) (injunctive relief settlement “utterly worthless”).

Where Is the Benefit?

These “disclosure-only” settlements, also known as strike suits, deal litigation, and merger tax, have on occasion been strongly criticized. For example, in Delaware, the court in In re Trulia Stockholder Litigation noted: “The proposed settlement is of the type often referred to as a ‘disclosure settlement’. It has become the most common method of quickly resolving stockholder lawsuits that are filed routinely in response to the announcement of virtually every transaction involving the acquisition of a public corporation … . If approved the settlement will not provide Trulia’s stockholders with any economic benefits. The only money that would change hands is the payment of a fee to plaintiffs’ counsel … . I conclude that … none of the supplemental disclosures were material or even helpful to Trulia’s stockholders and thus the proposed settlement does not afford them any meaningful consideration to warrant providing a release of claims to the defendants.” In re Trulia, 129 A.3d 884; see also In re Xoon Corporation Stockholder Litigation, 2016 WL 4146425 (Del Ch. 2016) (“Here, I find that the Supplemental Disclosures worked a modest benefit on the stockholders”).

Downright Frivolous

In New York , the court in City Trading Fund v. Nye , 46 Misc.3d 1206 ( N.Y. Sup. 2015 ) , rev’d 144 A.D.3d 595 ( 1st Dept. 2016 ) noted: “In sum, when the original alleged omissions and supplemental disclosures are closely scrutinized, it is clear that they are not only immaterial, they are grossly immaterial. None of the supplemental disclosures ‘significantly altered the total mix of information made available’ … the ubiquity and multiplicity of merger lawsuits, colloquially known as a ‘merger tax’, has caused many to view such lawsuits with a certain degree of skepticism. The lawsuits are filed only a relatively short time before the shareholder vote, and all it takes is a remote threat of injunction or delay to rationally incentivize settlement, even if defendants firmly and rightfully believe the lawsuit has no merit … . The defendant corporation’s cost-benefit calculus almost always leads the company to settle. Even a slight (chance) of an adverse outcome will induce a company to rationally settle given the costs … . Yet, notwithstanding the current climate of merger litigation, this case still stands out. It stands out for its downright frivolity.” See Gordon v. Verizon Communications , 2014 N.Y. Misc. LEXIS 5642 (N.Y. Sup.) (“An increasing body of commentary has decried the tsunami of litigation and attendant suspect disclosure-only settlements, associated with public acquisitions today … . A body of law meant to protect shareholder interest from the absence of due care by the corporation’s managers has been turned on its head to diminish shareholder value by divesting them of valuable rights via broad releases.”), rev’d 148 A.D.3d 146 ( 1st Dept. 2017 ) ; Matter of Allied Healthcare Shareholders Litigation, 2015 WL 6499467 (N.Y. Sup. 2015) (“In summary this proposed settlement offers nothing to the shareholders except that attorneys they did not hire will receive a $375,000 fee and the corporate officers who were accused of wrongdoing will receive general releases … . Putting aside any concerns of collusion (and there are many) … this practice of compensating class counsel no matter how meaningless the result is, creates the impression … that these actions are brought merely for the purpose of generating legal fees”).

Disclosures Must Be Meaningful

Notwithstanding that recent empirical work (see Fisch, Griffith & Solomon, “Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform,” 93 Tex. L. Rev. 557. 561. 582-91 (2015)) suggests that disclosure-only settlements rarely, if ever, have any meaningful impact upon shareholder behavior, leading, perhaps, to the unfortunate conclusion that the only thing of any value which is exchanged is a general release running to defendants (see Gordon v. Verizon Communications , 2014 N.Y. Misc. LEXIS 5642 (N.Y. Sup.) (“A body of law meant to protect shareholder interest from the absence of due care by the corporation’s managers has been turned on its head to diminish shareholder value by divesting them of valuable rights via broad releases that plaintiffs have fashioned at the demand of concerned defendants and their counsel and imposing additional gratuitous costs, i.e., attorneys’ legal fees on the corporation.”), rev’d 148 A.D.3d 146 ( 1st Dept. 2017 ) ), there are circumstances under which such settlements may be viable. In fact, recently, several courts in New York , North Carolina and Delaware have carefully reviewed proposed disclosures and found them sufficiently material to warrant approval of a proposed disclosure-only settlement.

An Enhanced Standard

In Gordon v. Verizon Communications , 148 A.D.3d 146 ( 1st Dept. 2017 ) , the First Department, after noting that “more than two decades of mergers and acquisitions litigation … have been informative as to the need to curtail excesses not only on the part of corporate management, but also on the part of overzealous litigating shareholders and their counsel,” reviewed the proposed settlement before it in light of the five factors set forth in Matter of Colt Industries Shareholders Litigation , 155 A.D.2d 154, 160 (1st Dept. 1990), mod’d on other grounds 77 N.Y.2d 185 (1991)(likelihood of success, the extent of support from the parties, the judgment of counsel, the presence of bargaining in good faith and the nature of the issues of law and fact) and added two more factors.

Benefit to Stockholders

First, the agreed-upon disclosures, corporate governance reforms and any other forms of nonmonetary relief should be in the interests of the class of shareholders. After reviewing the benefits of each of four proposed disclosures, the First Department noted: “The most beneficial aspect of the proposed settlement to the shareholders … was the inclusion of a fairness opinion requirement (regarding the potential sale or spin-off of assets) … . This prospective corporate governance reform provided a benefit to Verizon shareholders in mandating an independent valuation, without restricting the flexibility of directors in making a pricing determination.” See Seinfeld v. Robinson , 246 A.D.2d 291 ( 1st Dept. 1998 ) (significance of corporate reforms in assessing a proposed settlement).

Benefit to Corporation

Second, is the proposed settlement in the best interests of the corporation, notwithstanding the absence of a “quantifiable benefit”? The First Department held that the proposed settlement would reflect Verizon’s “direct input into the nature and breadth of the additional disclosures … and corporate governance reform” and Verizon would not have to incur additional legal fees and expenses of a trial. “[W]e find that the proposed settlement meets the enhanced standard we announce here.”

Subsequent Decisions

In Roth v. Phoenix Cos., 2017 N.Y. Misc. LEXIS 1050 (N.Y. Sup.), the trial court, following the new enhanced standards announced in Gordon found the proposed remedial disclosures “outstanding. It provides for expeditious beneficial relief for the class that affords them material remedial disclosures without the need for protracted costly litigation … . [T]he gravamen of plaintiff’s complaint is a challenge to the disclosure implications of the merger … . The terms of the settlement sufficiently remedy plaintiff’s concerns.”

North Carolina

In Nakatsukasa v. Furiex Pharmaceuticals, 2015 WL 4069818 (N.C. Super. 2015), the court, in valuing the disclosures in the proposed settlement found “Plaintiffs obtained significant additional disclosures concerning the merger with Forest including additional detailed information about the financial analysis performed by BAML … . Again, courts have acknowledged the value of such information to shareholders considering a proposed sale … . The disclosures also clearly were material … . The value of the DADW waivers and supplemental disclosures perhaps explains the lack of any objection by class members to the Settlement.” In In re Harris Teeter Merger Litigation, 2014 WL 4748566 (N.C. Super. 2014) the court determined that “Plaintiffs’ counsel reasonably concluded that the best interests of the Settlement Class were to pursue a settlement based on their claims for supplemental disclosures without further monetary recovery based on other claims … . Having elected to concentrate on disclosure claims, Plaintiffs’ counsel was required to assess the strength of those claims in considering whether the bargained-for supplemental disclosures were adequate consideration for the Settlement.”

Reduction in Legal Fees Award

Lastly, the court may find the proposed disclosures marginally acceptable and of little benefit to the class and nonetheless approve the settlement but substantially reduce the legal fees awarded to class counsel. In In re Newbridge Bancorp Shareholder Litigation, 2016 WL 6885882 (N.C. Super. 2016) the court concluded that the “Supplemental Disclosures were of only marginal benefit to the Class, a finding which is supported by the lack of substantial evidence that any of the (disclosures) were significant to a reasonable shareholder’s decision in voting for the Proposed Transaction.” As a consequence, the court found class counsel’s fee request of $274,537.12 “excessive” and awarded $135,000 in fees. And in Matter of Medical Action Industries Shareholder Litigation, 48 Misc.3d 544 (N.Y. Sup. 2015), the court approved a disclosure-only settlement but reduced the proposed class counsel’s legal fees of $925,000 to a combined award of fees and expenses of $250,000. See also In re Subway Footlong Sandwich Marketing and Sales Practices Litigation, __F.3d__ (7th Cir. Aug. 25, 2017) (“Because the settlement yields fees for class counsel ($520,000) and ‘zero benefits for the class’, the class should not have been certified and the settlement should not have been approved.”).