When Delaware Chancellor Andre Bouchard rejected the proposed disclosure-only settlement in the litigation arising out of Zillow’s acquisition of Trulia, there was some belief that his decision represented the death knell for these kinds of settlements in merger objection lawsuits. There is indeed some evidence that the number of merger objection lawsuits filed has declined. However, as discussed in an April 29, 2016 Washington Legal Foundation article by attorneys Anthony Rickey and Keola R. Whittaker (here), “Delaware’s sister courts continue to approved disclosure only settlements and award six-figure attorneys’ fees.” As discussed below, the net effect of Delaware’s hostility to disclosure only settlements may not necessarily be that fewer of these kinds of cases get filed, it may be that weaker cases are “driven to other jurisdictions.”
As well-documented by a number of legal studies (refer for example here), we had reached the point in recent years where virtually every M&A lawsuit drew at least one merger objection lawsuit. In many cases, these cases were quickly resolved by the defendant’s agreement to supplement the disclosures in the deal documents and to pay the plaintiffs’ attorneys fees, in exchange for which the plaintiffs gave the defendant an “intergalactic” release of all claims.
Chancellor Bouchard’s January 2016 rejection of the proposed disclosure-only settlement in the Trulia case was the culmination of a series of decisions in which members of the Delaware Chancery court expressed their concern with the dynamic these cases represent (most notably including Vice Chancellor Laster’s October 2015 rejection of the proposed settlement of the H-P/Aruba Networks merger objection litigation) .
Chancellor Bouchard explained that he was rejecting the proposed Trulia settlement because the “none of the supplemental disclosures were material or even helpful to Trulia’s stockholder,” the proposed settlement “does not afford them meaningful consideration to warrant providing a claim release.”
Bouchard also offered his perspective on the ways that remedial disclosure assertions in deal litigation could optimally be litigated. At a minimum, Bouchard’s opinion represents a warning to the plaintiffs’ bar that to the extent they continue to pursue disclosure settlements, they can “expect that the Court will be increasingly vigilant in scrutinizing the ‘give’ and the ‘get’ of such settlements to ensure that they are genuinely fair and reasonable to the absent class members.”
In their recent article, the authors note that some states’ courts (particularly those of New York) also have been active in scrutinizing disclosure-only settlements in merger objection lawsuits. However, they note, “early indications are that Delaware’s sister courts continue to approve disclosure-only settlements and award six-figure attorneys’ fee.” The authors identify seven settlement approvals, all taking place after Chancellor Bouchard’s decision in Trulia, in which courts in other jurisdictions have approved disclosure-only settlements and awarded plaintiffs’ attorneys’ fees in amounts ranging from approximately $280,000 to $441,000.
Among other factors that may be contributing to this dynamic outside Delaware notwithstanding the alarms raised in Trulia is the non-adversarial nature of the settlement hearings. Plaintiffs certainly are not going to cite the Trulia decision to these other courts, and so the courts are simply not taking Chancellor Bouchard’s analysis in the Trulia case into account.
In the authors view, the concern with this dynamic is that “if non-Delaware courts remain willing to approve disclosure-only settlements and generous fee awards, Trulia may simply drive weak claims to other jurisdictions.”
To be sure, companies could fight this dynamic by adopting forum-selection clauses designating Delaware’s courts as the forum for resolution of shareholder disputes. However, some companies may reconsider the advisability of this type of forum constraint. Delaware companies, the authors note, “may decide not to adopt or enforce a Delaware forum-selection clause so that they may obtain a broad release in a more settlement-friendly jurisdiction.”
The authors conclude by noting that “it remains to be seen whether Trulia will prove strong-enough medicine, or if the epidemic of merger-tax lawsuits will continue by finding new life outside of Delaware.”
I will be interested to see if by year end the statistics show that the number of merger objection cases overall has declined. I suspect that what we will conclude is that while the number of cases filed in Delaware has declined sharply, the number of merger objection suits overall will have declined less steeply, if at all. Based solely on the number merger objection suits filed so far this year in federal courts (and therefore are easier for me to track), my observation is that the merger objection lawsuits continue to be filed in considerable numbers. Every merger transaction that has arisen this year in my own client portfolio and involving transactions where both the acquirer and the target are publicly traded, has involved multiple merger objection lawsuits filed, all filed outside of Delaware.
In addition to the impact on the amount of litigation and the place of filing, it will be interesting to see what the effect of Trulia will be on the number of companies creating (or preserving) forum-selection by laws designating Delaware as the forum for the resolution of shareholder disputes.
The bottom line is that we still have further to go before we know what the long term effects will be of the Trulia decision and of Delaware’s courts’ hostility to disclosure-only settlements in merger-objection lawsuits. The evidence may not be there yet from which to conclude, as was suggested at the time, that the Trulia decision represented the end of the line for disclosure-only settlements.