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”).
