Thomas A. Dickerson
In City Trading Fund. v. Nye, 2018 NY Slip Op 28030 (N.Y. Sup. Feb. 8, 2018) (City Funding II), the Supreme Court (J. Kornreich) denied final approval to a proposed pre-certification settlement wherein “the parties settled for a ‘peppercorn and a fee’. In other words, they entered into a ‘disclosure-only’ settlement that provides no monetary relief to the stockholders, but which calls for a significant payment of attorney’s fees to plaintiffs’ counsel (here, $500,000). The ‘supplemental disclosures’ are the gravamen of the settlement (which) are supposed to help the shareholders make a more informed decision on the merger by providing them with additional useful information about the deal. They do not … . The Company and its shareholders are net losers here.” This opinion is the second time Justice Kornreich has evaluated the subject proposed settlement and comes after three years of much deliberation by several Supreme Court Justices and the Appellate Division First Department regarding the factors to be considered in evaluating the merits of a disclosure-only settlement and the benefits to be derived therefrom by shareholders and the Corporation.
Criticism of Disclosure-Only Settlements
As we noted last year (Dickerson, “Disclosure-Only Settlements in State Courts,” N.Y.L.J. (Sept. 14, 2017), “Disclosure only” settlements also known as “strike suits,” “deal litigation,” and “merger tax,” have been strongly criticized. In her initial review of the subject proposed settlement (City Trading Fund v. Nye, 46 Misc.3d 1206 (N.Y. Sup. 2015) (City Trading I), rev’d 144 A.D.3d 595 (1st Dept. 2016)), Justice Kornreich 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.”
