del1One of the great curses of the corporate litigation environment in recent years has been the proliferation of merger objection suits, the incidence of which has gotten to the point that now just about every large merger deal draws at least one lawsuit, and sometimes several. However, if recent developments in the Delaware Chancery Court are any indication, the courts are as appalled by this seemingly undifferentiated mass of litigation as are the parties to the transactions. Two recent decisions may suggest that the Delaware courts, at least, are no longer willing simply to accept the standard “disclosure only” settlements that typically resolve these kinds of cases, which in turn may mean that the cases could become less attractive to the plaintiffs’ lawyers that bring these cases.


As detailed in an interesting July 10, 2015 post on her On the Case blog (here), Alison Frankel discusses two recent actions by Chancellors in the Delaware court in which they refused to accept disclosure only settlements.


First, in a July 8, 2015 decision in Acevedo v. Aeroflex Holding Corp., Vice Chancellor Travis Laster rejected an unopposed motion for a final settlement and attorneys’ fees in a case challenging Cobham PLC’s $1.5 billion acquisition of the microelectronics company Aeroflex. The parties had proposed to settle the case based on the defendants’ agreement to supplement the deal disclosures, some changes to the brake up fee, as well as other procedural deal terms.


However, as reflected on the transcript of the July 8, 2015 settlement hearing (here), Laster, while noting that settlements of this type “have long been approved on a relatively routine basis,” refused to approve the settlement. He questioned whether the plaintiffs’ attorneys’ negotiation of the additional terms merited the $825,000 fee they sought. He also concluded that the relief obtained was insufficient to support the “intergalactic” settlement release the defendants sought, noting that it provided a “broad class-wide release” that extinguished all claims against the defendants. The Wiley Rein law firm has a good summary of Laster’s holding in a July 14, 2015 post on its Executive Summary Blog (here).


As Frankel noted in her post, on the same day as Laster’s ruling in the Aeroflex Holding case, Vice Chancellor John Noble withheld his approval of a shareholder settlement in a merger objection lawsuit arising from Roche’s $8.3 million acquisition of InterMune. According to reports, Noble, who took the proposed settlement under advisement, was also concerned about the scope of the releases the defendants received in exchange for modest consideration.


In a very interesting July 8, 2015 post thatdiscusses Vice Chancellor Laster’s decision in the Aeroflex Holding Corp. case and that puts it into appropriate context (here), The Chancery Daily describes Laster’s ruling as “tectonic,” adding that it places Laster’s ruling as approximately five on the open-ended Richter scale.


In a July 12, 2015 post on his Delaware Corporate and Commercial Litigation Blog about the two recent Delaware court rulings, Francis Pileggi said that “These two judicial events may signal a sea change to the extent they may be a sign that proposed class action settlements (and the attorneys’ fees that come with them) may not be approved in the same manner as they have been in the past – perhaps as part of a judicial effort to discourage the filings of lawsuits in over 90% of the major deals.” The challenge for the Delaware courts as they go down this court, Pileggi said, is to make sure that they don’t “’throw the baby out with the bathwater,’ and discourage meritorious suits as well.” As Laster said in the hearing on the Aeroflex settlement, “We want to be in the business of seeing good cases litigated, and we don’t want people to file junky cases.”


If the Delaware courts are indeed poised to crack down on these cases, it certainly cannot be accused of acting too soon. All too often these cases merely impose costs on the transaction parties with little or no benefit to anyone except the plaintiffs’ lawyers involved.


During the hearing on Aeroflex settlement, Laster referred to a 2015 research paper by U.Penn. Professor Jill Fisch, Berkeley Law Professor Stephen Davidoff, and Fordham Law Professor Sean Griffith entitled “Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform” (here). In their paper, the authors considered whether the additional disclosure associated with “disclosure only” settlements in merger objection cases produced value for the affected investors. The authors assumed that if the additional disclosure was meaningful, it would affect shareholder voting. The authors found, however, that the additional disclosure does not affect voting, leading them to conclude that supplemental disclosures do not in fact constitute a shareholder benefit and therefore should not serve as the basis for the payment to the plaintiffs’ attorneys of their fees in a merger objection lawsuit settlement.


As Frankel points out, however, there may be implications for the defendants as well as for plaintiffs in the recent judicial developments in Delaware. Defendants prefer litigating in Delaware because the courts are efficient and the defendants know they can count on relatively speedy resolution. If, however, the Delaware courts are inclined to refuse a lawsuit settlement because the defendants’ release is too broad, “corporations may prefer to litigate elsewhere.”


But the real question, as Frankel points out, is that if the plaintiffs’ lawyers cannot count on a quick settlement and the payment of their attorneys’ fees, “will plaintiffs’ lawyers stop filing suits after every deal announcement?”


While we will have to wait and see what these recent events portend for the future frequency of merger objection litigation, it is clear that activists will continue to agitate to try to encourage the courts to resist the payment of plaintiffs’ attorneys’ fees in disclosure only settlements of merger objection cases.


As Frankel discusses in a separate July 14, 2015 post (here), Professor Griffith, one of the authors of the paper cited above, has been taking affirmative steps by filing settlement objections in M&A lawsuits, in an effort to provoke a debate about disclosure only settlements. Griffith is concerned that all too often, the interests of the plaintiffs’ counsel and defense counsel are too closely aligned in connection with merger objection settlements, without sufficient consideration whether shareholders’ interests are being served. Griffith apparently intends to make a campaign of these issues on other deals as well.


If the courts are indeed inclined to scrutinize these kinds of settlements, and if objectors continue to press against the deals, plaintiffs’ lawyers could indeed be discouraged from filing these kinds of suits, as the opportunities to make a quick buck diminish. Which for everyone except the attorneys involved in litigating these cases would be a very good thing.