In a series of rulings culminating in the January 2016 decision in Trulia (about which refer here), Delaware’s courts have evinced their hostility to the kind of disclosure-only settlement in which merger objection suits are frequently resolved. Since that time, plaintiffs’ lawyers increasingly have filed merger-objection lawsuits outside of Delaware, either in federal court or courts in other states. The question since then has been whether other jurisdictions’ courts would follow Delaware’s courts’ lead in rejecting disclosure-only settlements. Many courts have followed Delaware, but others have followed a different path. In particular, New York, in an intermediate appellate court decision in Gordon v. Verizon (about which refer here), set a lower standard than Delaware’s courts for accepting disclosure-only settlements.
However, the apparently more lenient New York standard did not stop New York Supreme Court Judge Shirley Werner Kornreich from rejecting a proposed disclosure-only settlement of a lawsuit challenging Martin Marietta’s 2014 acquisition of Texas Industries. In a scathing February 8, 2018 opinion (here), Judge Kornreich rejected the proposed settlement as “utterly useless to shareholders.” Her opinion shows that even under New York’s seemingly more lax standard, disclosure only settlements could face significant scrutiny and could be rejected where the additional disclosures do not provide benefits to shareholders.
In May 2014, a Martin Marietta shareholder filed an action seeking to block the company’s planned acquisition of Texas Industries. The shareholder contended that the company’s disclosures regarding the merger were inadequate. The company agreed to settle the action in a disclosure-only settlement and an agreement to pay the plaintiff’s counsel attorneys’ fees of $500,000.
In a January 2015 ruling, Judge Kornreich rejected the plaintiff’s motion for preliminary approval of the settlement, based on her analysis of the immateriality of the additional disclosures warranted refusal to approve the settlement. She also noted public policy concerns arising from “worthless disclosure-only settlements of strike suits.” The plaintiff appealed. In a November 2016 opinion, the intermediate appellate court reversed the court’s denial of preliminary approval on the grounds that the additional disclosures were “arguably beneficial” and remanded the case for further proceedings, including a fairness hearing.
On remand, several of the company’s institutional investors appeared to object to the settlement. No shareholders appeared in favor of the settlement.
The February 8, 2018 Opinion
In her February 8 opinion, Judge Kornreich noted that since her January 2015 ruling rejecting the proposed settlement, Delaware’s courts have “addressed worthless disclosure-only settlements,” and in Trulia, held that its courts would approved these settlements only where the additional disclosure was “plainly material.” However, in the Gordon v. Verizon case, a New York intermediate appellate court adopted what Judge Kornreich called a “more lenient approval standard” using a seven-factor test for approving class action settlements to determine whether the disclosures produced “some benefit” to shareholders.
Judge Kornreich noted that the intermediate appellate court’s decision had been sharply criticized. As Judge Kornreich noted, as discussed at length here, Columbia Law School Professor John Coffee said that the Gordon decision creates “a divine right to settle in New York without meaningful judicial oversight” adding that the appellate court’s decision is keeping the world safe for nuisance-value merger objection litigation in New York.
Judge Kornreich nonetheless duly took up the seven-part analysis required under the Gordon court’s standard. In taking up these issues, Judge Kornreich reviewed the supplemental disclosures on which the plaintiffs’ relied in support of the settlement, noting preliminarily that “this case is not a close call, adding that “all of the supplemental disclosures are utterly useless to the shareholders.” The supplemental disclosures, she said, “are utterly worthless – because they would not matter to any reasonable shareholder and provide no benefit to the class.”
In the course of her analysis, Judge Kornreich sharply criticized the plaintiff’s counsel, observing that “there is much wrong with the approach of the plaintiffs’ counsel.” While some court’s may have “countenanced” the plaintiff’s firms “tactics,” others have “taken issue” with the firm’s “frivolous tactics.” The frivolous nature of this case “cannot be overlooked.” Judge Kornreich was particularly critical of the plaintiff’s firms attempts to rely on case law relating to the value to shareholders of the disclosure of management’s projections in trying to argue that the additional disclosure of analysts’ projections were valuable to shareholders, calling this a “deceptive portrayal of the law,” adding that counsel is “admonished” for their “misleading citations to authority” noting that this conduct is “particularly egregious” here where there is no adversarial briefing.
While Judge Kornreich had little trouble concluding that the settlement produced no benefit for shareholders, she noted that these kinds of lawsuits do produce detriments. Shareholders are in fact victims of “worthless disclosure-only settlements of strike suits that seek to enjoin mergers of publicly traded corporations,” she said. Shareholders ultimately bear the cost of payments to plaintiffs’ lawyers, as well as the cost of the company’s counsel. The only beneficiaries, she noted, are “the lawyers,” adding that “This is not a controversial view. It is the view of the Delaware Court of Chancery, two Federal Circuit Courts of Appeal, and respected legal academics.”
As merger objection litigation has shifted from Delaware’s courts to the courts of other jurisdictions, the question of whether or not other courts would follow Delaware and reject disclosure-only settlements has taken on new urgency. The New York courts’ seemingly more lax approach in reviewing these kinds of settlements has been sharply criticized.
However, Judge Kornreich’s opinion makes it clear that even under New York’s more lenient standards, disclosure-only settlements that produce no value for shareholders will face sharp scrutiny. Indeed, as Anne Sherry noted in her February 13, 2018 post on Jim Hamilton’s World of Securities Regulation blog (here), Judge Kornreich’s “sometimes scathing” opinion “could serve as a primer for the policy-reasons against disclosure-only settlements.”
However, despite the forcefulness of Judge Kornreich’s opinion, her ruling represents only a trial court decision. It is worth noting that she rejected this settlement once before, only to have her ruling reversed by the intermediate appellate court. The plaintiffs’ lawyers may conclude they have little to lose by pursuing yet another appeal. How Judge Kornreich’s ruling will fare should the plaintiff’s counsel appeal remains to be seen.
Nevertheless, while Judge Kornreich’s opinion is only a trial-court decision and is subject to appellate review, it does represent a sharp and forceful statement that even under New York’s arguably more lenient standards, disclosure-only settlements that are found to produce no shareholder benefit will be sharply reviewed.
As Alison Frankel noted in a February 9, 2018 post on her On the Case blog about Judge Kornreich’s opinion, if you thought New York’s intermediate appellate court in its Gordon v. Verizon opinion “assured the future of the M&A plaintiffs’ bar,” you had “better read” Judge Kornreich’s “very emphatic” opinion.
The question of how disclosure-only settlements of merger objection lawsuits will fare in the courts outside Delaware still has a long way to go before the answer is clear. However, Judge Kornreich’s opinion makes it clear that at least some courts are and will continue to be very hostile to these kinds of settlements where they proponents cannot show that the settlement produced any value for shareholders. The critical factor is whether courts will demonstrate enough hostility that the plaintiffs’ lawyers are deterred from filing these kinds of suits.