Joining a rising chorus of criticism of “disclosure settlements” in merger class actions, Chancellor Bouchard (in In re Trulia, Inc. Stockholder Litigation) rejected a proposed settlement of a stockholder class action challenging Zillow, Inc.’s acquisition of Trulia, Inc. in a stock-for-stock merger that closed in February 2015. After defendants agreed to moot plaintiffs’ disclosure claims by supplementing their disclosures before the stockholder vote, the proposed settlement would have resulted in a fee to plaintiffs’ counsel and broad releases for defendants, but no economic benefit to the stockholder class. Although not the first to express distaste for such settlements and the incentives they create, the Chancellor’s Opinion is notable for its comprehensive discussion of their problems and firm proposals to avoid such problems going forward, including a clear message that the Court will no longer hesitate to reject disclosure settlements involving supplemental disclosures of dubious value and overbroad releases, even if unopposed.
As has become commonplace, multiple Trulia stockholders filed lawsuits challenging the proposed merger shortly after it was announced. The actions were consolidated and, after expedited discovery, plaintiffs moved for a preliminary injunction on the grounds that the proxy was false and misleading in certain respects. Before the preliminary injunction motion could be heard by the Court, the parties entered into an agreement-in-principle to settle the litigation for certain supplemental disclosures. The merger was then overwhelmingly approved by the Trulia stockholders. After plaintiffs conducted confirmatory discovery, the parties executed a final settlement agreement containing, in the Court’s words, “an extremely broad release” of defendants and a provision that plaintiffs’ counsel intended to seek $375,000 in fees, which defendants agreed not to oppose. At the September 16, 2015 hearing to consider the fairness of the proposed settlement, the Court expressed concerns even though no party had objected.
On January 22, 2016, the Court issued its Opinion rejecting the proposed settlement. Before addressing its fairness, the Court discussed “some of the dynamics that have led to the proliferation of disclosure settlements” generally, and noted concerns among academics, practitioners, and other members of the Chancery Court “that these settlements rarely yield genuine benefits for stockholders and threaten the loss of potentially valid claims that have not been investigated with rigor.” In particular, the Chancellor pointed to evidence that the supplemental disclosures in such cases rarely change stockholders’ vote, and that the broad releases obtained by defendants (often before any meaningful discovery) could preclude viable claims, such as the Rural/Metro case which recently resulted in payment to the stockholder class of over $100 million where the Chancery Court had earlier come “very close” to approving a settlement that would have released such claims. The Court also discussed the institutional challenges of a law-trained judge evaluating the materiality of disclosures without the benefit of adversarial argument by attorneys assisted by financial advisors.
Based on these considerations, the Court proposed that, in the future, disclosure claims should be adjudicated outside the non-adversarial settlement context, “in at least two ways”: First, the materiality of disclosures could be adjudicated in the context of a contested preliminary injunction motion. Second, if defendants chose to moot the disclosure claims by issuing supplemental disclosures before the stockholder vote, their materiality could be addressed in the context of an application by plaintiffs’ counsel for a mootness fee award, where defendants would be incentivized to contest materiality in order to avoid paying any fees (unlike in the settlement context, in which the prospect of gaining broad releases incentivizes defendants not to contest materiality). Although in this scenario defendants would not obtain the benefit of any releases, Chancellor Bouchard suggests that any remaining claims in the case may be amenable to dismissal under the familiar standards of Unocal, Revlon, and the Delaware Supreme Court’s recent confirmation that the business judgment rule applies to post-closing damages actions that are not subject to entire fairness and are approved by an informed, uncoerced majority of the disinterested stockholders. Alternatively, after “some discovery to probe the merits” of such claims, plaintiffs may stipulate to dismiss their claims without a class-wide release, likely ending the case “as a practical matter.”
Otherwise, the Court will be “increasingly vigilant in scrutinizing the ‘give’ and the ‘get’” of disclosure-only settlements. More specifically, the Court says that “practitioners should expect that disclosure settlements are likely to be met with continued disfavor in the future unless [i] the supplemental disclosures address a plainly material misrepresentation or omission, and [ii] the subject matter of the release is narrowly circumscribed to encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process, if the record shows that such claims have been investigated sufficiently.” By “plainly material,” the Court said it meant that “it should not be a close call that the supplemental information is material as that term is defined under Delaware law.”
Applying this test to the proposed settlement before it, the Chancellor found that none of the supplemental disclosures (all of which related to minutiae regarding the analysis of JPMorgan, Trulia’s financial advisor) were material. Accordingly, the Court found these disclosures did not constitute a sufficient “get” to justify the “give” of any releases, even though the parties had significantly narrowed them in response to the Court’s concerns expressed at the fairness hearing.
Going forward, one can expect to see fewer cases challenging mergers filed in Delaware, at least involving arms-length mergers between unrelated parties (indeed, recent studies have already shown a marked drop in such suits in the last quarter of 2015). Chancellor Bouchard acknowledged that plaintiffs may simply choose to file such suits elsewhere, but noted that Delaware corporations now have the power to (and many have) enacted a forum selection bylaw to address this concern. As for cases filed in the Chancery Court, one can expect to see more litigated preliminary injunction motions or defendants unilaterally mooting any disclosure claims and then opposing mootness fee applications. The Trulia decision could also result in an uptick in fiduciary duty claims being pursued in the post-closing damages context in the absence of class-wide settlements releasing such claims, although it remains to be seen.