In prior posts (for example here), I noted that a series of Delaware court decisions culminating in the Court of Chancery’s January 2016 opinion in the Trulia case signaled the state’s courts’ hostility to disclosure-only settlements in merger objection lawsuit, which in turn has encouraged merger objectors to file their lawsuits in other jurisdictions. The Trulia line of cases is in fact only one of several recent judicial developments in Delaware that constrain shareholder claimants. So is stockholder litigation in trouble in Delaware? In a March 22, 2018 post on the Delaware Business Litigation Report (here), Edward McNally of the Morris James law firm take a look at this question, discussing where things stand while Delaware’s courts look to find the proper balance.
In asking the question about Delaware shareholder litigation, the author refers to three lines of cases. The first of these relates to the Delaware Chancery Court’s January 2016 court decision in the In re Trulia Shareholder litigation (here). In the Trulia case, Chancellor Andre G. Bouchard refused to approve the disclosure-only settlement of a lawsuit a shareholder had filed objecting to the disclosures accompanying Zillow’s acquisition of Trulia. The Trulia decision, and the relatively high standards Chancellor Bouchard deployed in rejecting the settlement, basically meant the end of the easily approved settlement of merger objection lawsuits in which the defendants agreed to make additional disclosures and pay the plaintiffs’ attorneys’ fees, in exchange for a comprehensive release.
The second line of cases to which the author refers relates to the Delaware Supreme Court’s 2015 decision in Corwin v. KKR Financial Holdings LLC (here). In the Corwin decision, the Delaware Supreme Court, in an opinion by Chief Justice Leo E. Strine, Jr. dismissed a shareholder’s challenge to a merger transaction. The Court held that as a result of the shareholder vote approving of the proposed merger, the business judgment rule was applicable to the directors’ conduct in approving the merger. The applicability of the deferential business judgment rule means that directors’ decisions would not be second-guessed by the courts. As one commentator puts it, Corwin held that “an informed shareholder vote to approve a deal ‘cleansed’ it of many fiduciary duty claims.”
The third line of cases has to do with appraisal cases. As discussed here, in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd, and in other cases, the Delaware courts have strongly reinforced the concept of the merger price as the best indication of appraisal value. As McNally notes in his blog post, the upshot of this development is that in appraisal cases, “plaintiffs (and their lawyers) lost millions of dollars in those suits, in terms of legal and expert witness fees and in some cases failing to receive even the merger price for their stock.”
As a result of these developments, more than one commentator has asked whether deal litigation in Delaware is done. Plaintiffs’ lawyers certainly have noted their concerns. As lawyers from one leading plaintiffs’ firm put it in a guest post on this blog, these Delaware developments “may result in under-enforcement of fiduciary duties through representative litigation, and may unintentionally entice increasingly aggressive behavior.” Just the same, McNally notes that “while these developments are of understandable concern to the plaintiffs bar, their actual impact is yet to be seen outside of the decline of merger objection litigation.”
McNally cites three reasons why he thinks “shareholder litigation will continue in Delaware.”
First, he notes that the Delaware courts have continued to insist full disclosure is necessary to obtain the benefits of “Corwin protection.” McNally cites recent Delaware Supreme Court authority where the Court held that Corwin did not apply when key information was not disclosed to shareholders. At a minimum, the case law shows that Corwin protection is not automatic.
Second, notwithstanding the case law developments noted above, Delaware continues to permit broad stockholder rights of inspection of corporate records. The requisite showing of a proper purpose in order to trigger the inspection right involves what the courts have called the “lowest possible burden of proof.” Broad inspection rights “may permit litigants to adequately plead enough facts to support a stockholder’s rights to litigate claims in Delaware.
Third, and notwithstanding the above-described cases, Delaware law on stockholder litigation “still provides favorable treatment for many claims,” including requiring “close scrutiny of transactions involving conflicted directors.”
Ultimately, McNally says, the Delaware Supreme Court “will resolve the proper role of stockholder litigation in Delaware corporation law.” The Court may conclude that reliance on stockholder action, in the form of voting for a transaction or merger, is preferable to the uncertainty of litigation – “after all, litigation in itself is not a desirable way to balance competing interests when the parties involved are able to do it themselves.” But where there is no other way to protect stockholder interests, “then stockholder litigation has its proper place.” The Delaware Supreme Court is “on its way to figuring out that balance.”
There obviously have been some significant recent developments in the field of shareholder litigation in Delaware. As I noted above, prior commentators have questioned whether as a result of these developments shareholder suits are on the way out in Delaware. Moreover, while McNally quickly bypasses the point, the fact is that merger objection litigation at least has shifted almost entirely away from Delaware to the courts of other jurisdictions (primarily federal courts). It is not too much to think that the Corwin and Dell lines of cases also might further encourage litigants to seek to pursue their claims outside of Delaware – or perhaps even discourage the claims altogether?
While this line of analysis might lead one to think that Delaware’s courtrooms are empty and its judges are sitting idle, that is not what is happening. As two commentators noted in a Law 360 article at year end 2017 (here), the Delaware Court of Chancery is “busier than ever.” The decrease in merger objection suits has been offset at least in part by “other types of litigation in Delaware — including private company cases, governance and post-closing contract disputes, and appraisal claims.”
McNally’s article highlights the fact that there are still good reasons for shareholder claimants to pursue their claims in Delaware. Along with the grounds on which he relies, I would add the fact that there is the Delaware courts have attracted a very sophisticated plaintiffs’ bar. These lawyers will continue to advise their clients and to counsel them in connection with strategic pursuit of remedies and redress in Delaware courts. While there is no doubt that as a result of recent case law developments in Delaware, the way the deal litigation game is played in Delaware has changed, but – perhaps other than the kind of merger objection suits that have now shifted to federal courts – the game will continue to be played there.
As McNally noted in an earlier blog post, “Delaware is a chosen forum for many reasons. Principally, its rich precedent and the sophisticated and well-versed jurists serving on its specialized business court ensure a level of outcome predictability for intra-corporate disputes. Moreover, the importance of the judicial treatment afforded to the litigants and the matters presented, both to Delaware and the larger shareholder-corporation enterprise, is not lost on those privileged to sit as a Chancellor or Vice Chancellor of the Court of Chancery. In short, the Court will take you and your case seriously and give you its fullest attention. In addition, Delaware courts will not let a good case go stale.” Not many courts, he noted, can match these advantages.
On a related note, appraisal litigation often leads to D&O insurance coverage questions. For a recent post discussing the insurance issues that appraisal litigation presents, please refer here.