The Delaware Chancery court recently published a series of decisions scrutinizing the plaintiffs’ bar’s common practice of reflexively filing class action lawsuits to challenge almost every public company merger as purportedly unfair to shareholders, and then settling the suits in exchange for no more than additional disclosures to shareholders and payment of the plaintiffs’ counsel’s fees. Chancellor Bouchard’s January 22 decision in In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB (Del. Ch. Jan. 22, 2015), is the latest, and most fervent, disapproval of such disclosure-only settlements. Chancellor Bouchard’s opinion calls for a shift in both the way shareholder suits concerning deals are litigated and the way courts decide the outcome of these matters. This paradigm shift will likely create a new normal in the way that deal litigation unfolds. Corporations executing deals should expect fewer lawsuits, but more uncertainty in litigations that are filed because that disclosure-only settlements will not be approved with the frequency that has been relied upon in the past. Below are the key takeaways from the In re Trulia opinion that deal participants should keep in mind going forward.
All-Encompassing “Intergalactic” Releases Are Likely To Be Rejected
Chancellor Bouchard clarified that litigants should “expect that the Court will be increasingly vigilant in scrutinizing the ‘give’ and the ‘get’ of [disclosure-only] settlements to ensure that they are genuinely fair and reasonable to the absent class members.” The broad releases routinely approved in previous litigations will now be examined to ensure there has been sufficient investigation into the claims from which the defendant seeks release. For example, the In re Trulia Court found that none of the supplemental disclosures obtained by plaintiffs’ counsel were material or helpful to Trulia’s stockholders. In exchange, defendants would obtain a release from “‘any claims arising under federal, state, statutory, regulatory, common law, or other law or rule’ held by any member of the proposed class relating in any conceivable way to the transaction . . . .” Notably, the proposed release that the court rejected had already been narrowed to exclude a release of “Unknown Claims,” foreign claims, and claims arising under state or federal antitrust law. The court found that this broad release, despite its narrowing, was still a disproportionate give for a non-existent get.
Supplemental Disclosures Must Cure A “Plainly Material” Misrepresentation
Chancellor Bouchard’s unequivocal opinion advises practitioners to “expect that disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentationor omission, and the subject matter of the proposed release is narrowly circumscribed to encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process, if the record shows that such claims have been investigated sufficiently.” Chancellor Bouchard clarified that whether a misrepresentation was “plainly material” is not a close call – such a misrepresentation must change the total mix of information and be important to a reasonable investor in their decision on how to act. To the extent an alleged misrepresentation is not plainly material, the court may appoint an amicus curiae to aid the court’s evaluation of the alleged benefits to shareholders of any supplemental disclosures.
Resolution Of Deal Litigation Resulting From An Adversarial Process Will Be Favored
Perhaps the most revolutionary suggestion to improve the utility of deal litigation is for disclosure issues to be vetted under close scrutiny of courts in adversarial procedures such as preliminary injunction motions, as opposed to behind closed doors in settlement negotiations. Courts have consistently decried the lack of an adversarial process when disclosure-only settlements are presented, reasoning that once an agreement-in-principle for settlement has been reached, “[b]oth sides of the caption then share the same interest in obtaining the Court’s approval of the settlement.” The alignment of litigants means that a court must “become essentially a forensic examiner of proxy materials so that it can play devil’s advocate” to assess the “get” that is being exchanged for the “give.” As a result, shareholders are essentially left unrepresented as counsel seeks to achieve swift settlement to obtain fees.
Chancellor Bouchard believes “disclosure claims arising in deal litigation optimally should be adjudicated outside of the context of a proposed settlement so that the Court’s consideration of the merits of the disclosure claims can occur in an adversarial process without the defendants’ desire to obtain an often overly broad release hanging in the balance.” He proposes two alternatives to settlement: (1) preliminary injunction motions and (2) applications for fee awards after voluntary disclosures are made and the deficiencies identified in the complaint are mooted. Preliminary injunction motions would force plaintiffs to prove in court that the alleged misrepresentations are material, thereby assuring the claim is adequately briefed while the parties are still adverse. Fee awards for actions that have been mooted by voluntary disclosures would retain the incentive for plaintiffs’ firms to bring these shareholder suits, while obtaining additional disclosures for shareholders without preventing the possibility of future suits. In the mootness scenario, the parties could negotiate a fee commensurate to the value of the additional disclosure and resolve the matter without the need for court approval. Chancellor Bouchard noted that “mootness dismissal appears to be catching on” because “the Court has observed an increase in the filing of stipulations in which the disclosure claims have been mooted by defendants electing to supplement their proxy materials, plaintiffs dismiss their actions without prejudice to the other members of the putative class (which has not yet been certified) and the Court reserves jurisdiction solely to hear a mootness fee application.” While these alternatives may become the new normal for deal litigation, both foreclose a corporation’s ability to obtain an assurance that the deal is protected from all future litigation based on a broad release of claims by shareholders. Accordingly, the go-forward value of such suits to shareholders, corporations and the plaintiffs’ bar remains to be seen.
The author would like to thank Chelsea Corey, an associate in King & Spalding’s Business Litigation Practice Group, for her contribution to this piece.
The opinions expressed here are those of the author(s) and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
See, e.g., In re Riverbed Technology, Inc. Stockholders Litigation, C.A. No. 10484-VCG, 2015 WL 5458041 (Del. Ch. Sept. 17, 2015); In re Susser Holdings Corp. Shareholder Litigation, C.A. No. 9613-VCG (Del. Ch. Sept. 15, 2015) (TRANSCRIPT); Acevedo v. Aeroflex Holding Corp., C.A. No. 9730-VCL (Del. Ch. July 8, 2015) (TRANSCRIPT); In re Intermune, Inc. Shareholder Litigation, C.A. No. 10086-VCN (Del. Ch. July 8, 2015) (TRANSCRIPT).
 “Given the rapid proliferation and current ubiquity of deal litigation, the mounting evidence that supplemental disclosures rarely yield genuine benefits for stockholders, the risk of stockholders losing potentially valuable claims that have not been investigated with rigor, and the challenges of assessing disclosure claims in a non-adversarial settlement process, the Court’s historical predisposition toward approving disclosure settlements needs to be reexamined.” In re Trulia, C.A. No. 10020-CB (Del. Ch. Jan. 22, 2015) at 19.
Id. at 2.
Id. at 24.
Id. at 41.
Id. at 8.
Id. at 41.
Id. at 24 (emphasis added).
Id. at 13. See also Ginsburg v. Phila. Stock. Exch., Inc., 2007 WL 2982238, at *1 (Del. Ch. Oct. 9, 2007) (“When parties have reached a negotiated settlement, the litigation enters a new and unusual phase where former adversaries join forces to convince the court that their settlement is fair and appropriate.”).
In re Trulia, C.A. No. 10020-CB (Del. Ch. Jan. 22, 2015) at 15.
Id. at 2.
Id. at 20.
Id. at 21-22.