In yet another strongly-worded opinion, the Seventh Circuit rejected the proposed settlement of a Walgreens’ shareholder strike suit in which the class obtained “worthless” supplemental disclosures but class counsel received generous fees. Judge Posner authored the opinion, as he did in Person v. NBTY, Inc., 772 F.3d 778 (7th Cir. 2014) and Eubank v. Pella Corp, 753 F.3d 718 (7th Cir. 2014). He described the practice of settling “deal litigation” like this that yields fees for class counsel but nothing for the class as “no better than a racket” and declared, “It must end.”

The case arose almost immediately after Walgreens announced its intention to acquire Alliance Boots GmbH and reorganize as a wholly-owned subsidiary of a new Delaware corporation to be known as “Walgreens Boots Alliance.” Only 18 days later (less than one week before the shareholder vote), the parties agreed to settle: Walgreens would provide additional disclosures to the class and would not oppose class counsel seeking an award of $370,000 in attorneys’ fees. The district court approved the settlement but with express misgivings because the parties only presented arguments of counsel rather than expert testimony that the supplemental disclosures actually mattered.

On appeal, the Seventh Circuit once again instructed that in deciding whether to approve a class settlement, district courts must determine whether the agreement benefits class members. The court found that the district court used the wrong standard to determine that the supplemental disclosures “may have mattered” to a reasonable investor. As the court explained, possibility is not enough. Rather the district court should have determined whether the supplemental disclosures would be likely to have mattered to a reasonable investor. Noting that the percentage of transactions that have resulted in shareholder litigation has skyrocketed, the court explained that the standard for determining whether supplemental disclosures confer a benefit on the class is whether the disclosed items are “plainly material.”

Here, the Seventh Circuit found the benefit nonexistent. The court described the supplemental disclosures as “trivial” because they contained less than 800 new words that represented a less than 1 percent increase to the disclosures that Walgreens had already provided the shareholders. The court found it “inconceivable” that the supplemental disclosures “either reduced support for the merger by frightening the shareholders or increased support by giving the shareholders a sense that they now knew everything.” In sum, the court found the disclosures “worthless”. The court further explained that any class representative who proposes that high transaction costs (attorneys’ fees) be incurred at the class members’ expense is not adequately protecting the class. In this case, the only concrete interest protected by the settlement agreement was compensation of class counsel in the amount of $370,000 for less than a month’s work, with zero benefit to the class.

Accordingly, the court reversed the district court’s approval of the class settlement and remanded the case with directions that since the class counsel failed to represent the class fairly and adequately, the district court should give serious consideration to either appointing new class counsel or “dismissing the suit.”

In Re: Walgreen Co. Stockholder Litigation, No. 15-3799 (August 10, 2016).