This opinion represents the Court of Chancery’s latest and most definitive move toward greater scrutiny of disclosure-based settlements of stockholder class actions challenging public company mergers and acquisitions.  In denying a proposed settlement of litigation challenging Zillow, Inc.’s acquisition of Trulia, Inc., Chancellor Bouchard surveys the circumstances that have in the past led to the approval of settlements that generate a fee for plaintiffs’ counsel and a broad release for defendants, but little-to-no benefit for stockholders.  The opinion concludes that the Court’s “historical predisposition” toward approving disclosure settlements “must evolve” and that practitioners can expect such settlements to be met with disfavor unless the supplemental disclosure addresses a “plainly material” misrepresentation or omission and the settlement involves a “narrowly circumscribed” release.  The opinion also expresses a preference for dealing with disclosure claims outside of the settlement context, and raises the possibility of appointing amicus curiae to assist the Court in evaluating the benefits of any future proposed disclosure settlements. 

As is the case for nearly every transaction involving the acquisition of a public company, several plaintiffs’ firms filed suit shortly after Trulia and Zillow’s announcement that they had entered into a merger agreement.  The litigation followed a typical and well-known path.  The various suits were consolidated, and the parties agreed to an expedited schedule, obviating the need for the Court to rule on plaintiffs’ motion to expedite.  Plaintiffs conducted minimal discovery in aid of their motion for preliminary injunction, which focused on purported disclosure issues in the proxy statement filed in connection with the merger.  Within days of the filing of the proxy statement, the parties agreed to settle for certain disclosures to supplement those in the proxy, subject to confirmatory discovery.  Plaintiffs agreed to a broad release of all claims, including unknown claims, and defendants agreed not to oppose a fee award to plaintiffs’ counsel of up to $375,000. 

The opinion outlines the context in which the typical merger challenge proceeds with no opportunity for the Court to evaluate the claims or the settlement in an adversarial context.  Plaintiffs and their counsel have the leverage of a preliminary injunction that may threaten to derail the transaction.  Perhaps more importantly, they can offer “deal insurance” in the form of a global release of all claims related to the transaction, often including any potential securities and antitrust claims.  By agreeing to settle for additional disclosure and not oppose an attorneys’ fee, defendants avoid the considerable expense of further litigation and obtain this broad release, which may cover any uninvestigated and potentially meritorious claims.  As a result, the Court is left to evaluate the merits of the alleged supplemental disclosures without the benefit of opposing viewpoints, leaving it in the position of “a forensic examiner of proxy materials” in evaluating disclosures that often involve the addition of minutiae from the financial advisor’s board presentations to an already lengthy proxy disclosure. 

The opinion announces a reexamination of the Court’s past willingness to approve settlements in this context, which in the Chancellor’s view has contributed to the proliferation of deal litigation that rarely provides any genuine benefits for stockholders. 

The opinion first expresses a strong preference that disclosure claims be presented outside of the settlement context.  This can be accomplished through a motion for preliminary injunction, in which case the plaintiffs are required to show a likelihood of success on their claims.  It can also occur in the “preferred scenario” of an application for attorneys’ fees following defendants’ decision to voluntarily moot claims by making additional disclosures.  In either case, securing a release is not an issue for defendants, making it more likely that the adversarial nature of the proceeding (in the form of an opposition to a preliminary injunction or an unreasonably large mootness fee request) will aid the Court in evaluating the merits of the disclosure claims.  Alternatively, the parties can privately agree to a mootness fee without Court approval, so long as they provide notice to stockholders.  Although these alternatives likely will represent the end of fiduciary litigation related to the transaction, it remains possible that a stockholder could pursue meritorious fiduciary duty or other claims related to the deal. 

Future settlements presented in the “historically trodden but suboptimal” context of a settlement will be met with increased scrutiny.  “[P]ractitioners 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.”  The opinion explains that “plainly material” means that it “should not be a close call that the supplemental information is material as that term is defined under Delaware law.” 

Interestingly, the opinion also suggests that where the supplemental information does not meet the “plainly material” standard, it may be appropriate to appoint amicus curiae to assist the Court in analyzing any benefits of the supplemental disclosure, with the costs of the amicus curiae taxed to the parties in the Court’s discretion. 

With respect to the Trulia/Zillow merger, the Court found that the supplemental disclosures involved additional details of the financial analysis performed by Trulia’s financial advisor that were not material or even helpful to stockholders, and that the proposed release was overbroad because it was not limited to disclosure claims and fiduciary duty claims related to the decision to enter the merger.  The Court therefore declined to approve the proposed settlement.  

The full opinion is available here