Disclosure only settlements are in deep trouble in Delaware based on the Court of Chancery's decision last month in In re Trulia Inc. Stockholder Litigation.  That decision is said to have sounded a "death knell" in Delaware for such settlements.

If you are not familiar with disclosure only settlements, David Wright provides a good explanation on Robinson Bradshaw's Carolinas Class Action blog.

In the Trulia Opinion, Chancellor Bouchard concluded after an extended analysis (on pages 25-43) of each of the disclosures on which the settlement (and fee) were based that "none of the supplemental disclosures  were material or even helpful to Trulia's stockholders" and declined to approve the settlement, which would have involved a fee to the lawyers obtaining the disclosures of up to $375,000.  The Chancellor said that the Chancery Court would be "increasingly vigilant in scrutinizing the 'give' and the 'get'" of  disclosure only settlements.  Op. at 2.

How will this affect disclosure only settlements in North Carolina?  Hardly at all, at least based on how I read the recent Order by Judge Gale in Corwin v. British American Tobacco PLC, 2016 NCBC 14 which certified a class, approved a disclosure only settlement, and awarded Plaintiff's counsel nearly $400,000 in fees.

The Objection To The Corwin Settlement

The Corwin case was brought by a Reynolds shareholder attacking the transaction by which Reynolds American, Inc. (formerly R.J. Reynolds Tobacco) acquired Lorillard Tobacco.  Mr. Corwin originally sought to enjoin the transaction from proceeding, but he dropped that Motion in exchange for a settlement involving a limited group of additional disclosures.

Only one objection to the settlement was filed.  It was by a Lorillard shareholder named James Snyder.  I readMr. Snyder's Objection at the time it was filed and thought it was well done, especially coming from a person who I assumed was not a lawyer, as he said in his Objection that he was "in the process of retaining counsel."

Later, I found out (from the Plaintiff's response to the Objection) that Mr. Snyder was not only a lawyer, but that he had previously been General Counsel for Family Dollar Stores, and in-house counsel for Home Depot, Inc.  Before that, he was a partner at King and Spalding in Atlanta.

Mr. Snyder fired off his most potent attack on the settlement through an Affidavit from a law professor/expert witness he retained named Sean Griffith.  Professor Griffith's CV is very impressive (he has just about everything in it but a Supreme Court clerkship). 

Professor Griffith's Affidavit excoriates the value of the additional disclosures obtained by Corwin.  Say you were a Reynolds shareholder interested in reviewing the Reynolds proxy statement and the additional disclosures obtained via the class action.  Here's what you got:

  • The "unlevered free cash flow projections" for Reynolds and Lorillard.  Given the wealth of financial data in the original proxy statement, this probably was useless additional information for a "reasonable investor."
  • A statement that Reynolds had not, at the time the transaction was announced, entered into a "technology-sharing initiative" with British American Tobacco.  You knew that there was no agreement in place even before the additional disclosures, as Reynolds referred in its original proxy statement only to "an agreement in principle" with BAT.  That was a pointless additional disclosure.
  • A statement that Reynolds "could not predict future regulatory action with regard to menthol" cigarettes.  Well, duh, who can predict future regulatory action?

The Business Court Said That It Had Carefully Assessed The "Give" And The "Get" of The Settlement

I was looking forward to Judge Gale weighing the value of these seemingly worthless disclosures, and dealing with Professor Griffith's Affidavit, but he didn't.  He covered the disclosures in a mere 15 words, saying that "[t]he Court has carefully balanced the ''give' and the 'get'' of the proposed Partial Settlement," and he overruled the Objection. Order ¶11(f).  There wasn't any discussion of whether the "give" (the $379,389.65 in fees) was an appropriate exchange for the "get" (the additional disclosures and a release by the class).

The applicability of the Trulia decision in North Carolina as a basis for disapproving disclosure only settlements was dealt with in this way:

the Court noted that there are differences between Delaware law and North Carolina law that may be relevant to Chancellor Bouchard's favored approach of reviewing fee requests based on supplemental disclosures. . . . That approach is possible because Delaware courts employ the common-benefit doctrine when approving attorneys'-fee requests.  North Carolina does not.

Order ¶11(f).  I have puzzled over the significance of the lack of recognition of the common-benefit doctrine in NC, and I just don't get it.  Even though our state doesn't recognize the "common-benefit doctrine" -- which means that when a shareholder obtains a substantial benefit (though nonmonetary) for other shareholders, a fee can be awarded --  it still is settled in NC that a court certifying a class action and approving a settlement is bound to assess the reasonableness of fees to be awarded to class counsel.  See, e.g., Ehrenhaus v. Baker (N.C. App. 2015)(a trial court considering a class action settlement "must ascertain whether the proposed settlement is fair, reasonable and adequate.").

Judge Gale did take steps towards assessing the reasonableness of the fee.  He said that the hourly rate yielded by the fee was $325.00 per hour, which he said was "reasonable, and clearly not an excessive rate."   Order ¶11(n).  And he also said that the fee award was "consistent with, and in fact less than, the amount of fees awarded in connection with other disclosure-based settlements that have come before this Court for approval" and that the amount of the fee was also in line with "what a Delaware court would award in similar litigation," Order ¶11(o),  Whether that statement regarding what the Delaware Court of Chancery would have done if this settlement had been before it is open to debate, given the Trulia decision.

But there is absolutely nothing contained in this Order about whether the additional disclosures provided any meaningful new information to the Reynolds shareholders.  Maybe, in North Carolina, the Business Court is not going to bother to consider whether additional disclosures traded in exchange for a at fee award are really worth anything.

What Would Judge Tennille Have Done With This "Stinky Fee"?

I''m disappointed by the lack of analysis of these disclosures.  I think that Judge Tennille, the first Judge to serve on the Business Court, would have handled this differently.  Five years ago, in an unpublished Order, he railed against what he referred to as the "stinky fees" paid to the lawyers challenging merger transactions and settling for getting the disclosure of "additional information."

But if the result of the Business Court's decision in Corwin is that it is seen as a welcome mat for lawyers to bring more class actions in North Carolina courts challenging merger transactions, that's probably at least good for the North Carolina lawyers defending those actions.

It is worthwhile to point out that this blog does not represent the views of Brooks Pierce.  These views are only my own and they shouldn't be interpreted as a criticism of Judge Gale.  Only . . .  disappointment in theCorwin decision.