In a series of rulings that culminated in the January 2016 decision in the Trulia case, the Delaware courts evinced their hostility to the disclosure-only settlements that so often characterize the resolution of merger objection lawsuits. Since that time claimants have been filing the merger objection suits in courts outside Delaware. The question has been whether the other courts where the merger objection cases are now being filed would follow Delaware’s strict Trulia standard when reviewing disclosure-only settlements. In a ruling late last week, an intermediate appellate court in Florida expressly adopted Delaware’s Trulia standard. The Florida ruling does raise hopes that other courts might follow as well, which in turn could help stem the tide of proliferating merger objection litigation. The Florida District Court of Appeal, Second District’s July 13, 2018 decision in the Quality Distribution case can be found here.
In May 2015, Quality Distribution announced that it had entered an agreement to be acquired by Apax Partners. In June 2015, Richard Delman, a Quality Distribution shareholder, filed a class action lawsuit against Quality Distribution, its board, and Apax, alleging that Quality Distribution’s board had engaged in a flawed sales practice and agreed to an inadequate sales price. Delman also alleged that the proxy materials about the proposed transaction omitted material information.
In August 2015, the parties reached a settlement agreement. Under the settlement, Quality Distribution agree to make supplemental disclosures to its shareholders about potential conflicts of interest of Quality Distribution’s senior management (concerning their continued employment after the merger); a potential conflict of Quality Distribution’s investment banker; and about the sales process and alternatives to merger. The parties submitted the settlement to the court for approval.
While the settlement approval process was pending, Sean Griffith, a Fordham University Law School professor and activist investor who owns Quality Distribution shares, submitted an objection to the settlement. Griffith objected to the settlement on several grounds, including his contentions that the additional disclosures were not material; that the released claims had not been adequately investigated by plaintiffs’ counsel; and the plaintiffs’ fee request should be rejected because the litigation did not provide substantial benefit to the shareholders. Griffith urged the trial court to adopt the Delaware test under the Trulia decision for the review of disclosure only settlements. (Griffith has actively been fighting disclosure only settlements in various courts; indeed, he filed an amicus brief in Delaware in the Trulia case itself.)
The trial court ultimately approved the settlement, despite acknowledging that Trulia is “good law in Florida.” Among other things, the trial court ruled that the parties’ proposed release was “narrowly tailored to match the scope of issues in the case.” With respect to the supplemental disclosures, the trial court said that even if they were immaterial, the settlement is “the better choice among the alternatives,” citing the Florida courts’ strong interest favoring the resolution of cases. Griffith appealed.
The July 13, 2018 Opinion
In the July 13, 2018 opinion written by Judge Robert Morris for a unanimous three-judge panel, the Florida Court of Appeal reversed the trial court’s approval of the settlement. In reaching this ruling, the appellate court agreed with Griffith that the trial court had failed to adopt the full Trulia standard.
As part of its analysis, the appellate court fully reviewed the Trulia decision, noting that the Delaware court expressed concerns about the proliferation of disclosure-only settlements and the problems associated with court approval of these kinds of settlements. The appellate court noted the Delaware courts concern that court willingness to approve these kinds of settlements has “caused deal litigation to explode in the United States beyond the realm of reason.”
In recognition of these concerns, the appellate court noted, the Trulia decision articulated a heighted standard for court scrutiny of proposed disclosure only settlements, focusing particularly on the materiality of the supplement disclosures agreed to as part of the settlement. The appellate court also noted that the Seventh Circuit had expressly adopted this heightened standard of scrutiny in its decision the Walgreen case (about which refer here). The Seventh Circuit expressly recognized the Delaware courts’ expertise in merger litigation, a recognition that the Florida appellate court itself echoed.
The appellate court expressly adopted the Trulia standard, stating that when a Florida court is asked to approve a disclosure only settlement in a class action merger objection suit, in order for the settlement to “pass muster,” the supplemental disclosure “must address and correct a plainly material misrepresentation or omission.” The trial court, the appellate court said, had applied only part of the Trulia standard; the trial court focused only on the release of claims, but “failed to assess the value of the supplemental disclosures.”
The danger in focusing only on the release, as the trial court did, “is that a meritless action may be settled as long as the release is related to the claim.” This approach would permit plaintiffs “to prevail on any settlement and seek attorneys’ fees as a result, no matter how meager the consideration,” as long as the release was narrowly tailored. “This methodology,” the appellate court said, “contributes to the spawning of this type of litigation.” In any event, the trial court did not even consider whether the released claims “had been investigated sufficiently, as evidenced by the lack of findings on the issue.”
With respect to the supplemental disclosures to which Quality Distribution had agreed, the appellate court said in order for the settlement to be approved, those supplemental disclosures “must have contained information that corrected a misrepresentation or omission in the original disclosures and that information must have been of such a nature that a reasonable shareholder would likely have considered it important in deciding how to vote on the merger.” Because the trial court had not made these determinations in approving the settlement, the appellate court reversed the trial court’s decision approving the settlement and remanded the case for the trial court to conduct the approval review required under the full Trulia standard.
It is critical to understanding both the Trulia court’s decision and the Florida court’s adoption of the Trulia standard that both courts were expressly concerned that court approval of disclosure-only settlements had caused merger objection litigation to proliferate. Indeed, as the Florida court noted, in Trulia the Delaware court had expressed its concern that court approval of these kinds of settlements had caused deal litigation to explode in the United States “beyond the realm of reason.”
The courts are right to be concerned that approval of disclosure-only settlements has the baneful consequence of encouraging this kind of litigation. As I underscored in a recent post discussing a recent Chubb study on the costs associated with merger objection litigation this kind of litigation imposes enormous costs on the litigants and their D&O insurers. Even worse, as the Chubb study documented, the scale of these costs is growing at an enormous rate.
These kinds of lawsuits in effect operate as a tax on business transactions, a tax that in most instances produces no social, political, economic or legal benefit, or any other meaningful effect of any kind except the transfer of funds from companies and their insurers to the plaintiffs’ lawyers. The plaintiffs’ lawyers have managed to establish themselves as business transaction toll takers, and as long as the courts continue to approve disclosure-only settlements on some generalized notion that courts should encourage the resolution of cases, the courts are complicit in what Judge Richard Posner in the Walgreen decision called “no better than a racket.”
I wish I could report that the courts have been uniform in recognizing these problems and the dangers associated with judicial approval of disclosure-only settlements. However, in a 2017 decision (discussed here), a New York intermediate appellate court declined to disapprove a disclosure-only settlement in a merger objection lawsuit involving Verizon, in a ruling that Columbia Law School professor John Coffee scathingly criticized as establishing “that there is now a divine right to settle in New York without meaningful judicial oversight.” (In fairness, I should note that even under New York’s lower standard for approval of these kinds of settlements, earlier this year a New York trial judge rejected a proposed disclosure-only settlement as “utterly useless to shareholders.”)
The fact that courts have not been uniform in recognizing the dangers that judicial approval of disclosure-only settlements represents makes the ruling of the Florida appellate court in the Quality Distribution that much more important. The more courts that adopt the heightened standard of scrutiny articulated in Trulia for the approval of disclosure-only settlements, the closer we are to driving a stake into the heart of the merger objection lawsuit curse.
In recognition of his continued efforts to try to fight the problems associated with disclosure-only settlements, everyone here at The D&O Diary salutes Professor Griffith. He has written many law review articles about the problems with corporate merger litigation. But unlike many academics, he is not just writing scholarly papers, he is actively doing something about the problems he has identified. I am sure Professor Griffith was gratified by the Florida appellate court’s decision to reverse the trial court’s approval of the merger, but he was even happier about the appellate court’s reversal of the trial court’s ruling that Griffith was not entitled to recover his attorneys’ fees incurred in opposing the merger.