Chancellor Bouchard of the Delaware Court of Chancery rejected a disclosure settlement in In Re Trulia, Inc. Stockholder Litigation.  The Chancellor concluded the terms of the proposed settlement were not fair or reasonable because none of the supplemental disclosures were material or even helpful to Trulia’s stockholders, and thus the proposed settlement did not afford them any meaningful consideration to warrant providing a release of claims to the defendants.

These supplemental disclosures provided additional details concerning:

  • Certain synergy numbers in J.P. Morgan’s value creation analysis.
  • Selected comparable transaction multiples.
  • Selected public trading multiples.
  • Implied terminal EBITDA multiples for a relative discounted cash flow analysis.

Perhaps more importantly, the Chancellor offered his views on how plaintiffs and defendants can deal with these types of claims. According to the Chancellor, one way is the case could proceed to a preliminary injunction motion, in which case the adversarial process would remain intact and plaintiffs would have the burden to demonstrate on the merits a reasonable likelihood of proving that “the alleged omission or misrepresentation is material.”  In other words, plaintiffs would bear the burden of showing “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.

The Chancellor said another way is for plaintiffs’ counsel to apply to the Court for an award of attorneys’ fees after defendants voluntarily decide to supplement their proxy materials by making one or more of the disclosures sought by plaintiffs, thereby mooting some or all of their claims. In that scenario, where securing a release is not at issue, defendants are incentivized to oppose fee requests they view as excessive. Hence, the adversarial process would remain in place and assist the Court in its evaluation of the nature of the benefit conferred (i.e., the value of the supplemental disclosures) for purposes of determining the reasonableness of the requested fee.

According to the Chancellor, the preferred scenario of a mootness dismissal appears to be catching on. According to the Chancellor, the Court has observed an increase in the filing of stipulations in which, after disclosure claims have been mooted by defendants electing to supplement their proxy materials, plaintiffs dismiss their actions without prejudice to the other members of the putative class (which has not yet been certified) and the Court reserves jurisdiction solely to hear a mootness fee application. The Chancellor stated from the Court’s perspective, this arrangement provides a logical and sensible framework for concluding the litigation. After being afforded some discovery to probe the merits of a fiduciary challenge to the substance of the board’s decision to approve the transaction in question, plaintiffs can exit the litigation without needing to expend additional resources (or causing the Court and other parties to expend further resources) on dismissal motion practice after the transaction has closed. The Chancellor believes that although defendants will not have obtained a formal release, the filing of a stipulation of dismissal likely represents the end of fiduciary challenges over the transaction as a practical matter.

The Chancellor also observed that the parties also have the option to resolve the fee application privately without obtaining Court approval in the mootness scenario. A corporation’s directors have the right to exercise business judgment to expend corporate funds (typically funds of the acquirer, who assumes the expense of defending the litigation after the transaction closes) to resolve an application for attorneys’ fees when the litigation has become moot, with the caveat that notice must be provided to the stockholders to protect against “the risk of buy off” of plaintiffs’ counsel.   The Court has stated, “notice is appropriate because it provides the information necessary for an interested person to object to the use of corporate funds, such as by ‘challeng[ing] the fee payment as waste in a separate litigation,’ if the circumstances warrant.”  In other words, notice to stockholders is designed to guard against potential abuses in the private resolution of fee demands for mooted representative actions. With that protection in place, the Chancellor stated the Court has accommodated the use of the private resolution procedure on several recent occasions and reiterated the propriety of proceeding in that fashion.