On January 22, 2016, the Delaware Court of Chancery issued another important decision regarding disclosure-only settlements. In In re Trulia, Inc. Stockholder Litigation, the Court declined to approve a stockholder class action settlement on the grounds that the disclosures the company agreed to provide to its stockholders were immaterial and insufficient consideration for the broad releases the company would obtain in the settlement. In the decision, Chancellor Andre G. Bouchard criticized the “proliferation” of disclosure-only settlements and voiced his concern that such settlements “rarely yield genuine benefits for stockholders” yet “threaten the loss of potentially valuable claims that have not been investigated with rigor.” The opinion promises stricter judicial scrutiny over the approval of disclosure settlements “to ensure that they are genuinely fair and reasonable to the absent class members.” As such, the Court’s ruling will likely have implications for a number of ongoing stockholder suits in Delaware, and, as noted by the Court, it may push litigation to other states that provide the prospect of more generous fees and releases for interested litigants.
The opinion concerns consolidated class action suits filed by several stockholders of Trulia, Inc. (“Trulia”) after Zillow, Inc. announced it would acquire Trulia in two successive stock-for-stock mergers. The parties agreed to a settlement in principle that would require Trulia to supplement its proxy materials and pay the plaintiffs’ attorneys fees. In exchange, the stockholders would drop their preliminary injunction motion and provide broad releases to Trulia on behalf of a proposed class of Trulia stockholders. Trulia made the supplemental disclosures, the stockholders withdrew their motion for a preliminary injunction, Trulia’s stockholders approved the transaction, and it closed in February 2015.
In June 2015, the parties executed a stipulation in support of their proposed settlement. The proposed settlement included, in the Court’s words, “an extremely broad release” for “unknown claims” and other broad categories of potential claims. The Court held a hearing and required supplemental briefing on “whether disclosures must meet the legal standard of materiality in order to constitute an adequate benefit to support a settlement” and the “rationale and justification for including ‘unknown claims’ among the claims that would be released.” Following the hearing, the parties removed “unknown claims” and “foreign claims” from the scope of the release. Despite the narrowing of the release, the Court ultimately held that “the terms of the proposed settlement are not fair or reasonable because none of the supplemental disclosures were material or even helpful to Trulia’s stockholders, and thus the proposed settlement does not afford them any meaningful consideration to warrant providing a release of claims to the defendants.”
Notably, one-third of the opinion addresses the Court’s concerns regarding the proliferation of disclosure-only settlements, as well as the Court’s perspective on how practitioners should adjudicate disclosure claims in the future. The Court noted the flurry of class action stockholder litigation filed after “virtually every transaction” and lamented that “far too often such litigation serves no useful purpose for stockholders,” as it merely allows companies to obtain broad releases as a form of “deal insurance” and “generate[s] fees for certain lawyers who are regular players in the enterprise of routinely filing hastily drafted complaints on behalf of stockholders on the heels of the public announcement of a deal and settling quickly on terms that yield no monetary compensation to the stockholders they represent.” The opinion blames the Court’s “historical practice” of approving disclosure-only settlements for the explosion in deal litigation “beyond the realm of reason.” Accordingly, the opinion calls for a reexamination of the Court’s historical predisposition toward approving disclosure-only settlements and a transition toward adjudicating disclosure claims outside of the context of a proposed settlement. Specifically, the Court highlights the potential for judicial review of disclosures in the context of a preliminary injunction motion or when plaintiffs’ counsel applies for fees after a defendant voluntarily decides to supplement its proxy materials.
In the meantime, the opinion warns practitioners that the Court will be “increasingly diligent” in evaluating stockholder disclosure-only settlements:
To be more specific, practitioners should expect that disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission, and the subject matter of the proposed 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. In using the term “plainly material,” I mean that it should not be a close call that the supplemental information is material as that term is defined under Delaware law.
In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB, in the Court of Chancery of the State of Delaware.