Last week, in an opinion authored by Judge Richard Posner, the U.S. Court of Appeals for the Seventh Circuit rejected a proposed class-action settlement arising from Walgreen Co.’s acquisition of the Swiss-based pharmacy company, Alliance Boots GmbH. In re Walgreen Co. Stockholder Litigation, No. 15-3799 (7th Circ. Aug. 10, 2016).  Judge Posner’s sharply-worded opinion endorsed the Delaware Chancery Court’s holding in In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884, 894 (Del. Ch. 2016) and represents another blow to disclosure-only settlements of merger litigation.

The plaintiffs in Walgreens brought suit after the company filed a proxy statement seeking shareholder approval for its plan to acquire Alliance Boots.  Shortly before the shareholder vote on the proposed transaction, the parties agreed to a settlement requiring Walgreens to issue several supplemental disclosures in exchange for a narrow release of claims.  The settlement also authorized class counsel to seek an award of $370,000 in attorneys’ fees without opposition from Walgreens.  Concluding that the supplemental disclosures “may have mattered to a reasonable investor,” the district judge approved the settlement.

The Seventh Circuit reversed and remanded, concluding that the supplemental disclosures that formed the basis of the settlement were worthless. “It is inconceivable that the six disclosures added by the settlement agreement either reduced support for the merger by frightening the shareholders or increased that support by giving the shareholders a sense that now they knew everything,” Judge Posner wrote.  “The value of the disclosures in this case appears to have been nil.”

Judge Posner explained that the district court should have scrutinized the disclosures using a higher standard. “‘May have’ is not good enough,” Judge Posner wrote.  “Possibility is not actuality or even probability. The question the judge had to answer was not whether the disclosures may have mattered, but whether they would be likely to matter to a reasonable investor.”  The court went on to endorse the standard adopted by the Delaware Chancery Court in Trulia earlier this year.  “The misrepresentation or omission that the supplemental disclosures correct must be ‘plainly material.’”

Judge Posner concluded, “The type of class action illustrated by this case—the class action that yields fees for class counsel and nothing for the class—is no better than a racket. It must end. No class action settlement that yields zero benefits for the class should be approved, and a class action that seeks only worthless benefits for the class should be dismissed out of hand.”

The opinion reinforces the warning delivered by the Delaware Chancery Court in Trulia: going forward, practitioners should expect courts to be “increasingly vigilant” when assessing the reasonableness of disclosure-only settlements in “deal tax” cases.