The fact that these days virtually every public company M&A transaction draws at least one merger objection lawsuit has provoked concern from many quarters. As I noted in a prior post, it recently became clear that among those concerned are the judges on the Delaware Court of Chancery. Based on developments last week, including in particular Vice Chancellor Sam Glasscock III’s September 17, 2015 opinion in the Riverbed Technology merger objection lawsuit (here), the days when merger objection suits in Delaware’s courts may be resolved through a disclosure-only settlement in which plaintiffs’ counsel gets their fees paid and the defendants get an “intergalactic” claim release may be over. As Alison Frankel put it in a September 18, 2015 post on her On the Case blog (here), last week’s Delaware Chancery Court developments may represent “a turning point in M&A shareholder litigation in Delaware Chancery Court.”
Readers may recall that the Riverbed Technology merger objection lawsuit had received significant attention because Fordham Law Professor Sean Griffith, having bought shares in Riverbed after its $3.6 billion acquisition by Thoma Bravo was announced, had sought (through counsel) to intervene in the case as an objector to the lawsuit’s proposed settlement. Griffith’s academic writing includes a recent article he co-authored that argues that the supplemental disclosures in disclosure-only merger objection lawsuit settlements do not constitute a shareholder benefit and therefore should not serve as the basis for the payment of plaintiffs’ attorneys fees.
In his ruling in the Riverbed Technology case, Vice Chancellor Glasscock found, over the parties’ objections, that Griffith had standing to appear as an objector. Glasscock expressly considered Griffith’s objections, finding one of Griffith’s concerns to be “serious.”
Of particular note in his recognition of Griffith’s right to appear and object was Glasscock’s lengthy dissection of the “agency problems” associated with the settlement in these kinds of class action cases. Specifically, Glasscock noted that the interests of the class members may be subordinated to the interests of plaintiffs’ counsel to obtain a quick fee without further litigation, as well as to the interests of the defendants to get the case wrapped up quickly and to move on.
However, notwithstanding his concerns about the settlement itself and about the “agency problems,” Glasscock approved the settlement. At the same time, however, he made it clear that the days when parties can assume that these kinds of settlements will be approved may be just about over.
The specific concern Griffith had raised that Glasscock found to be serious was the objection that in exchange for what Glasscock found to be “tangible, although minor” additional disclosures, the defendants were receiving a comprehensive release of “valuable unknown claims.” Glasscock was sufficiently troubled by this objection that he commented that “in another factual scenario it might well carry the day.” In explaining his decision to approve the settlement notwithstanding this concern, he noted that the parties had negotiated the settlement in good faith “with the reasonable expectation that the very broad, but hardly unprecedented, release” would be approved by the court.
However, in a warning to present and prospective Delaware Chancery Court merger objection lawsuit litigants, Glasscock added portentously about the parties’ reasonable assumption in negotiating the settlement, the assumption, “while it bears some equitable weight here, will be diminished or eliminated going forward in light of this Memorandum Opinion and other decisions of this Court.” He also said that in the future “the interests of the Class might merit rejection of a settlement encompassing a release that goes far beyond the claims asserted and the results achieved.” Glasscock also reduced the plaintiffs’ requested fee award from $500,000 to about $330,000.
Glasscock issued his memorandum opinion in the Riverbed Technology case one day after a settlement hearing in the separate case in which shareholders of Trulia had filed a lawsuit in connection with the company’s merger with Zillow. As reflected in a transcript of the September 16, 2015 Delaware Chancery Court settlement hearing in the Trulia case (here, hat tip to Alison Frankel for a copy of the transcript), Chancellor Andre Bouchard declined to approve the settlement but instead took the matter under advisement while asking for further briefing on two issues: whether or not the additional disclosures in a disclosure-only settlement must be “material”; and why it would be appropriate for a court to approve a comprehensive claim release that included the release of unknown claims, in exchange for conceding additional disclosures that Bouchard characterized as “marginal.”
In a colloquy during the Trulia hearing, Bouchard asked why the settlement’s release provisions included the release of unknown claims, to which the plaintiffs’ counsel basically said that the unknown claims release provisions (included their reference to California Civil Code Section 1542) were standard. In response, Bouchard said, “It’s easy to go back to ‘it’s standard,’ and I’m not faulting you for that. I would be hard pressed to disagree that it’s in almost every one of these I see, if not every one. But then again, when I started practicing, very few people sued on every deal, and we never dealt with the kind of volume of this stuff that we see nowadays. And it just can’t be that this is socially useful.”
Plaintiff’s counsel said in response that the lawyers involved in Delaware M&A litigation are well aware of the Chancery Court’s growing concerns about these kinds of releases, but that while “there is some movement,” there is also “ a real reluctance on the part of defendants’ counsel, to give this up just on their own volition.”
Discussion
So, just to review, the standard components of these kinds of settlements include the following: in exchange for some additional disclosures and the agreement not to object to the plaintiffs’ attorneys’ fees, the defendants obtain a comprehensive release.
In their consideration of the settlements in the two cases discussed above, the Chancery Court judges made it unmistakably clear that going forward they and their colleagues are going to scrutinize all three of these components — the value of the additional disclosures will be very closely examined; the amount of plaintiffs’ attorneys’ fees will be questioned; and the breadth to the release the defendants will be actively scrutinized.
And the parties are also now on notice that if Professor Griffith appears in their case to object to their settlement, his objections will be heard and considered.
These developments present obvious problems for plaintiffs’ lawyers, because what had in the past looked like a pretty sweet line of business for them definitely does not look so great any more. The plaintiffs’ lawyers may well consider whether to file their cases somewhere other than in Delaware – although in many instances, their hands may be tied because many Delaware corporations have in recent years and in response to case law and statutory law developments adopted bylaws designating Delaware as the forum for shareholder litigation.
By the same token, the Chancellors’ concerns about the release of unknown claims pose a significant problem for defense counsel. Settled practices and engrained expectations make it very difficult for defense counsel to agree to a settlement that does not include a comprehensive release including the release of unknown claims. However, Chancellor Glasscock made it unmistakably clear in the Riverbed Technology case that litigants can no longer assume that the Chancery Court will approve a settlement agreement incorporating a release of unknown claims.
One can assume that as the Chancery Court’s skepticism of these kinds of settlement sinks in, fewer of these kinds of cases will be filed (at least in Delaware), but that change is not going to happen over night, and in any event, some cases are going to be filed notwithstanding the Delaware Court’s emerging skepticism. Moreover, there is a considerable backlog of existing cases that will have to be addressed and resolved. Based on the Chancery Court judges’ approaches in the two cases discussed above, it seems as if defendants seeking to put these cases to bed may have to be prepared to accept a narrower release that does not include a release of unknown claims. That necessity will pose a very significant dilemma for the defense lawyers involved.
In her blog post, Frankel wondered whether defense counsel might elect not to try to dismiss merger objection cases that are filed outside of Delaware, in order to have a way to get the merger objection litigation resolved through a settlement that includes the previously standard release of future claims. She quoted unnamed defense attorneys as having told her that they (the defense lawyers) expect the Delaware Chancellors are well aware that the parties may have incentives to litigate these cases elsewhere, and they expect that the Chancellors will “give defendants a reason to continue funneling cases to Delaware.”
There is no doubt that a significant element in all of this is the growing competition between the states to try to be a venue of choice for incorporations and even for shareholder litigation. I think the commentators Frankel quotes in her blog post are correct that the Delaware Chancery court judges are well aware of this competition and that the Chancellors’ actions are informed by that awareness. I wonder if it would be sufficient to help the defense lawyers out of this dilemma if one of the Chancery Court judges were to say outright that the court will not approve any disclosure-only settlement where the claim release contains a future claims release provision. In the Trulia settlement hearing, Vice Chancellor Brouchard expressed his belief that he did not have the authority tell the litigants how to frame their settlement agreement, and that his decision making authority was “binary” only – that is, he could only approve or reject the settlement, not try to shape it. However, he and the other Chancellors clearly have the ability to shape future settlements – and indeed already appear to be having precisely that impact on settlements.
My crystal ball is no better than anyone else’s, but I suspect that before too long we will see a combination of rulings in Delaware merger objection lawsuit settlement hearings in which, first, the presiding judge expressly rejects a merger objection lawsuit settlement on the ground that the disclosure-only settlement did not justify a release of future claims, and, second, the same judge more or less contemporaneously expressly approves of a disclosure-only settlement in a separate case in which the settlement agreement omits a future claims release provision.