A new line of Delaware decisions promises to reshape settlement norms surrounding stockholder litigation challenging mergers. It will come as news to no one that, under today’s legal landscape, a shareholder lawsuit comes closely on the heels of virtually all large public company mergers. According to a 2015 Cornerstone Research study, in each year since 2010, over 90 percent of M&A deals draw a shareholder lawsuit. Until recently, the vast majority of these suits have resulted in quick court approvals of settlements that require only that the company make additional public disclosures and pay plaintiffs’ attorneys' fees, and in exchange provide broad releases for company and individual defendants. But of late Delaware courts have been pushing back and signaling that they will no longer sanction this practice, calling such settlement agreements nothing more than a way for plaintiffs' lawyers to earn fees.
Disclosure-only settlements were recently slammed on October 9, 2015, when the Delaware Court of Chancery rejected a settlement of the lawsuit stemming from Hewlett-Packard’s $2.7 billion acquisition of Aruba Networks. See In re Aruba Networks, Inc. Stockholder Litig., Cons. C.A. No. 10765-VCL (Del. Ch. Oct. 9, 2015). There, the parties negotiated an agreement under which defendants would provide supplemental disclosures in a Form 8-K, plaintiffs’ counsel would receive a fee award, and defendants would receive a global release of claims. Finding that the additional disclosures provided minimal value to shareholders, Vice Chancellor Laster stated, “[w]e have to acknowledge that settling for disclosure and giving the type of expansive release that has been given has created a real systemic problem.” He declared the settlement “outside the range of reasonableness” and said the case appeared to be set up as a case for plaintiffs' counsel to “harvest” fees “because there wasn’t a basis to file in the first place.”
This result was not entirely surprising: Less than a month earlier, the Court of Chancery expressed serious reservations about approving disclosure-only settlements in no uncertain terms. In that case, In re Riverbed Technology, Inc., Cons. C.A. No. 10484-VCG (Del. Ch. Sept. 17, 2015), Vice Chancellor Glasscock noted that, in the particular case before him, “the parties in good faith negotiated a remedy—additional disclosures…with the reasonable expectation that the very broad, but hardly unprecedented released negotiated in return would be approved by this Court,” but stated that such expectations would be “diminished or eliminated going forward.” Vice Chancellor Glasscock found particularly troubling the breadth of the release, especially when weighed against the value of the disclosures, which he compared to a mere “peppercorn.” This echoes comments made by Vice Chancellor Laster this summer in rejecting the settlement following Cobham plcC’s $1.5 billion Aeroflex deal. There, he declared a settlement providing only disclosures, plus two “tweaks” to the merger agreement, to mean that “[t]he class…gets nothing. Zero. Zip.” See Acevedo v. Aeroflex Holding Corp., No. 7930-VCL (Del. Ch. July 8, 2015).
The Bottom Line: It remains to be seen whether these recent decisions herald the end of disclosure-only settlements in Delaware. But given this trend, a Delaware corporation seeking to settle a merger suit should carefully consider additional settlement conditions, the language of its settlement release, and stand ready to demonstrate the proportionality between the settlement terms and the release itself.