In a January 22, 2016 Delaware Court of Chancery decision that likely will prove to be significant because of the light it sheds on the future of disclosure-only settlements in merger objection lawsuits in Delaware, Chancellor Andre Bouchard rejected the proposed settlement in the litigation arising out of Zillow’s acquisition of Trulia, saying that because the “none of the supplemental disclosures were material or even helpful to Trulia’s stockholder,” the proposed settlement “does not afford them meaningful consideration to warrant providing a claim release.”
In reaching these conclusions, Bouchard reviewed the dynamics that have led to the “proliferation of disclosure settlements” and the problems these kinds of settlements present. Bouchard also offered his perspective on the ways that remedial disclosure assertions in deal litigation could optimally be litigated. At a minimum, Bouchard’s opinion represents a warning to the plaintiffs’ bar that to the extent they continue to pursue disclosure settlements, they can “expect that the Court will be increasingly vigilant in scrutinizing the ‘give’ and the ‘get’ of such settlements to ensure that they are genuinely fair and reasonable to the absent class members.” Chancellor Bouchard’s January 22, 2016 opinion in the Trulia case can be found here.
In July 2014, Trulia and Zillow announced a stock-for-stock merger transaction in which Zillow would acquire Trulia. The value of the transaction at the time of closing was $2.5 billion. After the merger was announced, four plaintiffs filed complaints objecting to the merger. The four cases were later consolidated. Following the hearing on the plaintiffs’ motion for a preliminary injunction, the defendant companies filed an amended joint proxy statement containing additional disclosures. Shortly thereafter the parties entered in to an agreement to settle the litigation.
The Stipulation of Settlement contained what Chancellor Bouchard called “an extremely broad release” encompassing, among other things, a release of “unknown claims. The Stipulation also included proviso that the defendants would not object to plaintiffs’ counsel’s request of attorneys fees not to exceed $375,000. Following Bouchard’s request for supplemental briefing (about which refer here), the parties modified the release language in the settlement stipulation to remove the reference to “unknown claims.” The amended release still encompassed “any claims arising under federal, state, statutory, regulatory or common law, or other law or rule.”
After Bouchard asked for supplemental briefing, he agreed to allow Fordham Law Professor Sean Griffith to intervene as an amicus curiae. Griffith had previously appeared in Delaware Chancery Court proceedings to object to disclosure only settlements in merger objection cases (as discussed here).
The January 22 Opinion
Before addressing the question of whether or not he should approve the proposed settlement, Bouchard examined the dynamics that have fueled the growth of deal litigation. He noted that while on “relatively infrequent” occasions this type of litigation has generated “meaningful economic benefits” for shareholders, “far too often such litigation serves no useful purpose for stockholders” but instead “serves only to generate fees for certain lawyers who are regular players” in this game, which is characterized by “hastily drafted complaints” and results in quick settlements.
Bouchard noted that given the Chancery Court’s “historical practice of approving settlement” even when supplemental deal disclosures were not particularly material, “providing supplemental disclosures is a particularly easy ‘give’ for defendants to make in exchange for a release.” The Court’s willingness to approve these kinds of deals has “caused deal litigation to explode in the United States beyond the realm of reason.” Both scholars and members of the Chancery court have criticized the kinds of disclosure-only settlement in which these cases often are resolved.
Accordingly, Chancellor Bouchard said, “the Court’s historical predisposition toward approving disclosure settlements needs to be reexamined.” For starters, he warned, “practitioners should expect that disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission.”
In his view, the “optimal means” by which disclosure claims in deal litigation should be adjudicated is outside the context of a proposed settlement, so that the Court’s consideration of the merits of the disclosure claims can occur in an adversarial process, where the defendants’ desire to secure a release does not motivate them to hold back.
Bouchard suggested that this more adversarial process could occur in the context of a preliminary injunction motion, or when plaintiffs’ counsel apply to the court for a fee award after defendants voluntarily decide to supplement their proxy material with one or more of the disclosures the plaintiff requests, thereby mooting some or all of their claims. Bouchard noted that one option for the parties in the mootness fee scenario is for the parties to resolve the fee application privately without obtaining court approval.
Having set the stage for the future, Bouchard then reviewed the supplemental disclosures that the plaintiffs here claimed were sufficient to justify the release of claims and the payment of their counsel’s fees. Bouchard reviewed each of the four supplemental disclosures in detail, and concluded that “none of the plaintiffs’ Supplemental Disclosures were material or even helpful to Trulia’s stockholders.” From the perspective of Trulia’s stockholders, “the ‘get’ in the form of the Supplemental Disclosures does not provide adequate consideration to warrant the ‘give’ of providing a release of claims to defendants” and therefore, he concluded, the proposed settlement “is not fair or reasonable to Trulia’s stockholders.”
The January 26, 2016 Wall Street Journal article discussing Chancellor Bouchard’s ruling (here) quotes Professor Griffith as saying that the Trulia opinion is the “nail in the coffin” for many of the disclosure- only settlements in merger objection suits. Griffith is also quoted as saying that “this is really the end of the easy, automatically approved settlement.”
The elimination of the easy path to settlement undoubtedly means that fewer of these kinds of cases will be filed. As I had previously noted on this blog (most recently here), the number of merger objection lawsuits being filed in Delaware Chancery court had already started to decline in late 2015 as a result of earlier Delaware Chancery court rulings in other merger objection suits. Chancellor Bouchard’s ruling in the Trulia case will certainly reinforce this trend. It seems highly likely that there will be significantly fewer merger objection lawsuits filed in the months ahead, both in Delaware and elsewhere.
There has been some discussion (as Bouchard notes in his opinion) that perhaps merger objection cases will be filed in other jurisdiction’s courts. The fact that many companies have adopted forum selection clauses designating Delaware’s courts as the preferred forum for shareholder suits obviously would be an impediment to this approach. The speculation that some companies might decline to enforce the bylaw in order to allow a case to proceed in a forum where it may be more easily resolved is interesting, but given the increasingly hostile tone of the Delaware courts to these kinds of cases and to disclosure- only settlements, I wonder whether other courts will be influenced away from allowing what the Delaware court’s likely would not permit. No other court reading Bouchard’s words about the ills these kinds of cases and settlements have caused are going to be eager to allow what Delaware’s courts have made it clear they are not going to permit. Bouchard suggested as much in his opinion when he wrote “We hope and trust that our sister courts will reach the same conclusion if confronted with the issue.”
The interesting part about Bouchard’s opinion is the section in which he discusses how supplemental disclosure might still be examined in a procedural context that would ensure a more adversarial process. Whether or not plaintiffs might have the disclosures considered in, as Bouchard suggests, a preliminary injunction hearing context is interesting, but given the standard of materiality that Bouchard’s opinion sets, it might be very difficult for plaintiffs to persuade the courts that the supplemental disclosures matter, particularly in an adversarial context.
As Alison Frankel notes in her January 25, 2016 post on the On the Case blog (here), the more interesting possibility for the litigation of the materiality of the supplemental disclosure issues is in connection with a fee request in the “mootness” context. The difference between “mootness” context and the more traditional settlement context is that the defendants will not have obtained or be trying to preserve a claim release. The defendants in the mootness context might be much less willing to be silent when the plaintiffs claim the supplemental disclosures are material. The parties could, as Bouchard notes, work out an agreement on the fees in this context, but it seems likely, as Frankel suggests, that agreed fees would be substantially diminished from what plaintiffs’ counsel have been accustomed to in the past.
In any event, it is now clear beyond doubt that we have entered an entirely new merger objection litigation era. The pending will still have to be sorted out. But in the meantime, as I noted above, fewer of these cases will be filed. The members of the plaintiffs’ bar who had been taking tolls from deal parties will now have to diversify into a different product line.
A Break in the Action: I will be traveling out of the office on business for the next several days, so there will be a break in The D&O Diary’s usual publication schedule. The normal schedule will resume the week of Feb. 8.