Stating his belief that the merger objection litigation dynamic represents a “systemic” problem that has resulted in a “misshapen legal system,” Delaware Chancery Court Vice Chancellor Travis Laster rejected the proposed disclosure-only settlement of litigation that had been filed objecting to Hewlett-Packard’s $2.7 billion acquisition of Aruba Networks. In an October 9, 2015 settlement hearing in the case, Laster cited the “inadequacy of the representation” of plaintiffs’ counsel for the shareholder class as the basis for his rejection of the settlement, as well as for the outright dismissal of the case. Liz Hoffman’s October 10, 2015 Wall Street Journal article about Laster’s ruling can be found here.
As readers of this blog know, in recent years it has become standard for just about every merger transaction to attract at least one lawsuit in which a shareholder objects to the proposed merger. These cases frequently settle based upon the provision of supplemental disclosures about the merger and defendants’ agreement to pay the plaintiffs’ attorneys’ fees, in exchange for which the defendants receive a broad release. The proliferation of this type of litigation – and in particular, the prevalence of disclosure only settlements– has drawn significant criticism, and, indeed, the judiciary of Delaware’s courts has previously shown their concern about the litigation as well.
As discussed here, Vice Chancellor Laster rejected the proposed disclosure-only settlement of lawsuits filed in connection with Cobham PLC’s $1.5 billion acquisition of the microelectronics company Aeroflex. In addition, at the roughly same time, 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. More recently, as discussed here, Chancellor Vice Chancellor Sam Glasscock III reluctantly approved the settlement in the lawsuit filed in connection with Riverbed Technology’s $3.6 billion acquisition by Thoma Bravo.
The October 9 Ruling
As I said at the time following Glasscock’s rulings in the Riverbed Technology case, it would only be a matter of time before a judge at the Delaware Court of Chancery rejected a settlement on the basis that the value the plaintiff shareholders’ received in a disclosure only settlement was insufficient to support the breadth of the release that the defendants received in exchange. That is exactly what happened in connection with the proposed settlement of the H-P/Aruba Networks merger objection lawsuit.
In rejecting the proposed settlement, Vice Chancellor Laster cited a number of factors. First, he said that he didn’t believe that the case “was meritorious when filed,” identifying a number of reassuring features that negated potential concerns about the merger deal.
Next, he said that the record of the discovery that the plaintiffs’ lawyers took was “weak.” He was particularly critical of the representations plaintiffs’ counsel had made in their briefs in support of the settlement that discovery in the case had been “extensive” and that counsel had “consulted extensively” with financial “experts,” when in fact plaintiffs’ counsel had taken only two depositions and consulted with only a single financial expert.
While critical of the extent of discovery taken in the case, Laster did acknowledge that through discovery plaintiffs’ counsel did learn — and there subsequently were supplemental disclosures to Aruba shareholders — that H-P had offered Aruba’s CEO a new employment contract earlier than H-P has said in its regulatory filings. Laster said that that information might have been the basis for a full-fledged damages claim, rather than the supplemental disclosures only.
Third, Laster also had concerns about the scope of the release the plaintiffs proposed to extend to the defendants in exchange for the supplemental disclosures. In explaining his concerns with the release, Laster stated that “we have reached the point where we have to acknowledge that settling for disclosure only and giving the type of expansive release that has been given has created a real systemic problem.” He said further that the “repeat-process phenomenon” that has developed with respect to these kinds of cases and settlements has resulted in a “misshapen legal regime.”
Laster was particularly concerned that his only basis to evaluate the proposed release was the representations of plaintiffs’ counsel in a “one-sided” presentation. He noted his concerns that the representations to the court about the settlement potentially could have been affected by the fact that the only way the plaintiffs’ counsel can collect their fees is to reassure him sufficiently to allow him to accept the settlement.
He said that if the release had extended only to disclosure claims, he might have been prepared to approve the settlement, but because it extended to other claims and to unknown future claims and was given only in exchange for additional disclosures, the proposed settlement does not involve “an adequate get for the give,” and therefore the settlement not only “falls outside the range of reasonableness” but also raises “a question about the adequacy of representation.” Accordingly, Laster declined to certify a class and dismissed the case as to the named plaintiffs.
Laster offered some parting shots to conclude his ruling, stating that he said that the case looked like a “harvesting-of-a-fee opportunity,” because there wasn’t a basis to file in the first place, and further, that even thought he plaintiffs’ counsel had something “fall into [their] lap,” it was just dealt with through the disclosure and the fee. He suggested to plaintiffs’ counsel that while he was rejecting their proposed settlement and their requested fee, he was at least given them the benefit of his disclosures, “so you’ve gotten now what you got for the class.”
It will be clear to anyone reading this transcript that it was a tough day at the office for the plaintiffs’ counsel involved. While Laster repeatedly tried to soften the blow by saying that he makes mistakes himself sometimes, it was clear that he was very concerned with the plaintiffs’ counsel’s representations to the court about their “extensive” discovery and “extensive” consultation with “experts” in the case. He was even more concerned with the representations about the release, particularly given that, as Laster noted, plaintiffs’ counsel could only collect their fee if Laster was sufficiently assured that the plaintiffs had investigated the potential claims that would have been released.
Laster did indicate that he might have had less of a problem with the release (and perhaps might even have been prepared to accept the settlement?) if the release had extended only to disclosure-related claims and did not extend to other claims and unknown claims. Of course, at that point, Laster’s analysis stops being a problem just for the plaintiffs’ counsel and becomes a problem for the defense counsel and their clients.
The fact is that these kinds of disclosure-only settlements don’t just benefit plaintiffs’ counsel eager to collect their fees. They also benefit the defendants, who want to bring an end to the litigation. 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. Laster acknowledged that defendants of course want “complete peace,” noting that “I want complete peace. I want peace in our time, without appeasement. But just because you want it doesn’t mean you get it.”
Laster also acknowledged in the hearing that because his concerns about these kinds of settlements are well known, that parties have started dismissing the merger objection cases pending in his court in order to enter settlements in other jurisdictions where perhaps there might not be as many questions asked. (He noted parenthetically that it was fine with him if the parties took these kinds of cases to other courts; he observed that “I actually don’t like dealing with junky things, and I would prefer to devote judicial resources to real litigation, not pseudo-litigation.”)
Laster delivered several messages for future litigants who want to have their disclosure-only settlements approved in his court. First, the papers filed in support of the settlement should accurately reflect the plaintiffs’ efforts in the case. Second, if the extent of discovery taken is an important support for to confirm the bona fides of the settlement, then the discovery actually taken must in fact provide sufficient reassurance to support the proposed settlement. Third, the release should extend only as far as the claims the plaintiffs litigated and not extend beyond to other claims.
While the plaintiffs’ lawyers may want to consider filing their cases in the courts of other jurisdictions, their hands may be tied owing to the fact that many companies have now adopted forum selection bylaws designating Delaware as forum for shareholder disputes and corporate litigation. Which in turn could mean that the days when just about every merger transaction draws at least one lawsuit could be coming to an end.
In the meantime, there is still an extensive backlog of merger objection lawsuits pending in Delaware. The message for the litigants in those cases seems to be that if they want their settlement approved in Delaware (as opposed to some other state court), the defendants are going to have to be prepared to accept a narrower release. Which, as I noted above, will be difficult for many defense attorneys.
Upcoming Webinar to Discuss Volkswagen Securities Litigation and Other Litigation Developments Involving Non-U.S. Companies: On Thursday October 15, 2015, I will be participating in a webinar entitled “Volkswagen and the Emergence of D&O Litigation Involving Non-US Companies.” The free one-hour webinar, which is being sponsored by Advisen, will take place at 11 am EDT. The webinar will focus on the issues raised by the investor lawsuit recently filed in the U.S. against Volkswagen, as well as by the efforts to launch investor claims against Volkswagen in the Netherlands and Germany. The webinar will also discuss investor litigation that has been filed both inside and outside the U.S. in the wake of scandals involving Petrobras, Tesco and Toshiba. The other speakers at the webinar will include Alexander Reus of the DRRT law firm (which has offices in the U.S. and in Germany); Albert Knigge, of the Houthoff Buruma law firm (Amsterdam); and Kimberly Cole of the Kobre & Kim law firm (New York). Jim Blinn of Advisen will moderate the panel. Information about the webinar, including registration instructions, can be found here.
Twentieth Anniversary of the PSLRA: On Friday, October 17, 2015, I will be participating as a panelist at a conference at the Loyola University Chicago Law School on the topic The Twentieth Anniversary of the Private Securities Litigation Reform Act: Taking Stock. I am honored to have been invited to participate in this conference, which includes among its other speakers Southern District of New York Judge Jed Rakoff, Nobel Prize-winning economist Eugene Fama, and author Bethany McLane. Information about the conference including the agenda and registration instructions can be found here.
Recognition, and Better Yet, A Cartoon Avatar!: I am pleased to report that the website FirstSiteGuide.com has named The D&O Diary as one of The Best Law Blogs to Follow in 2015 (here). While I am very pleased to have this recognition and to have my blog named as one of the twenty top law blogs, I am really jazzed about the cartoon avatar the website created to accompany my listing on the site. I am not sure why my avatar isn’t wearing glasses; it is true that following recent eye surgery I can now dispense with glasses for many purposes, but I still need them for some activities, so I continue to wear them in most situations. Perhaps my avatar has a vanity streak that my real self has managed to suppress. My thanks to the FirstSiteGuide.com website for the recognition for my blog.
Saturday Evening Wedding: Lake Erie Shoreline, The Shoreby Club, Bratenahl, Ohio, October 10, 2015.