M&A Litigation Update: Delaware Chancery Court Delivers Devastating Blow to Disclosure Settlements
A brand new decision makes obvious that parties should no more expect the Delaware Court of Chancery to approve broad settlements of M&A category actions according to supplemental proxy disclosures. Chancellor Andre Bouchard issued a 42-page opinion on Friday that rejected a suggested class settlement by which defendants acquired releases in return for supplemental disclosures, decried the ?°dynamics which have brought towards the proliferation of disclosure settlements,?± and admonished that such settlements is going to be met with ?°continued disfavor?± and will not be accepted with the exception of exceptional conditions. The choice is for certain to affect both the amount of future cases and the way they’re litigated.
The case at issue, In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB, followed a typical path: class actions were filed shortly after announcement of the $3.5 billion merger of Zillow, Inc. and Trulia, Inc.; plaintiffs obtained expedited discovery and filed a preliminary injunction motion; and, with that motion pending, the parties agreed to a settlement providing for supplemental disclosures to be made in exchange for a broad release of claims. While such settlements (usually accompanied by six-figure fee awards to plaintiffs’ counsel) have been routinely approved over the past several decades, they have been viewed with increasing skepticism by the Court of Chancery in recent months. The proposed Trulia settlement was rejected because the Court concluded that the agreed-upon supplemental disclosures—providing additional details underlying the analysis of Trulia’s financial advisor—were neither “material” nor “even helpful” to shareholders, and thus were inadequate to justify a release of claims. In reaching that result, and explaining why “the Court’s historical predisposition toward approving disclosure settlements needs to be reexamined,” Chancellor Bouchard noted the following:
Ubiquity of M&A litigation. In the last decade, M&A litigation has “explode[d]… past the arena of reason.” By 2014, nearly 95% of deals worth $100 million or even more led to shareholder suits. Although that percentage declined a little in 2015, it’s still correct that “virtually every transaction relating to the purchase of an open corporation provokes a flurry of class action lawsuit lawsuits…”
Incentives for defendants to stay. Because plaintiffs “leverage the specter of an injunction to avoid a transaction from closing[,]… defendants are incentivized to stay.Inches Furthermore, the truth that plaintiffs have generally not been held to some rigorous standard when moving for expedited discovery implies that one possible “gating mechanism” for screening frivolous cases is frequently bypassed.
Insufficient advantages to shareholders. “[F]ar too frequently [M&A] litigation serves no helpful purpose for stockholders,” especially since the agreed-upon supplemental disclosures aren’t material. Of particular note, a legal court has routinely been requested to approve settlements where (as with Trulia) plaintiffs do nothing more than “identify and acquire supplemental disclosure of the laundry listing of minutiae inside a financial advisor’s board presentation.”
Insufficient an adversarial process. Considering the “potent” incentives for defendants to stay without incurring the time and money of opposing expedited discovery or preliminary injunction motions, a legal court needs to look at the merits of alleged claims and suggested settlements without the advantage of energetic give-and-take between your parties.
The Trulia decision concludes that, moving forward, disclosure settlements won’t be approved unless of course: (i) the supplemental disclosures “address a plainly material misrepresentation or omission” (ii) the discharge is “narrowly circumscribed” to pay for only disclosure claims and fiduciary duty claims concerning the purchase process and (iii) the record shows that the released claims happen to be “investigated sufficiently (e.g., through discovery). Around the first point, Chancellor Bouchard stressed the “plainly material” standard implies that “it ought to be ‘t be a detailed call” if the supplemental information was material. Quite simply, funds would simply be available in situations where (amongst other things) a business effectively admits it unsuccessful to supply information you need to the stockholders.
However, Trulia endorses another mechanism for resolving such cases: a “mootness dismissal.” Under this “preferred scenario,” the parties can agree that supplemental disclosures-even non-material disclosures-moot plaintiffs’ claims. Plaintiffs can obtain a “mootness fee,” which defendants could contest. This permits a legal court to evaluate the need for specific disclosures with the advantage of adversarial proceedings-a procedure which will, within the ordinary situation, presumably lead to charges substantially less than individuals formerly approved regarding the disclosure settlements. Defendants wouldn’t get yourself a class-wide release, but generally it’s unlikely that other stockholders would commence litigation following a mootness dismissal.
What exactly should companies expect moving forward? A couple of takeaways appear obvious:
- Less cases. Trulia essentially alters the company plan utilized by the plaintiffs’ bar, by growing the potential risks and expenses of M&A litigation (in the outlook during plaintiffs) while lowering the expected benefits. Consequently, the current loss of situation filings should accelerate, and plaintiffs could be more selective within the claims they convey.
- Greater possibility of contested litigation in individuals cases which are filed. As plaintiffs be selective, they’ll presumably be prepared (a minimum of within the short term) to devote sources to individuals cases that “make the cut.” What this means is not just trying to enjoin suggested transactions, but additionally going after damage claims following a deal closes.
- More fights over expedited discovery. Previously, plaintiffs have frequently had the ability to obtain expedited discovery too easily. As Trulia notes, contested motions for expedited discovery pay the Court an chance to avoid meritless claims from imposing undue burdens on defendants.
- Greater utilization of forum selection bylaws. Plaintiffs will appear for possibilities to create class actions in jurisdictions apart from Delaware, wishing to locate idol judges more hospitable to traditional disclosure settlements. Consequently, Delaware corporations which have not already adopted bylaws creating a legal court of Chancery because the mandatory forum for such suits must do so.
- Less focus on financial advisors’ analyses. The supplemental disclosures at issue in Trulia-i.e., specific data utilized by an economic consultant regarding anticipated synergies, multiples for comparable companies and transactions, and aspects of a reduced income analysis- are the types of allegedly “omitted” info on which plaintiffs frequently base fiduciary duty claims. The Court’s explanation of why similarly info was immaterial in Trulia, and it is reiteration that Delaware law just needs a “fair summary” of the financial advisor’s work, should pressure plaintiffs to re-think their approach.
- More mootness charges. With disclosure settlements no more a choice (with the exception of the rare situation where a clients are prepared to acknowledge that it is proxy does not include “plainly material” information), the “preferred scenario” described in Trulia offers the only realistic choice for a negotiated resolution of sophistication claims.