In In re Trulia, Inc Stockholder Litigation Chancellor Bouchard rejected a proposed disclosure-only settlement of stockholder litigation challenging the acquisition of Trulia, Inc by Zillow, Inc, and held that the proposed settlement terms, which involved immaterial supplemental disclosures concerning the work performed by Trulia's financial adviser, did not provide Trulia's stockholders with adequate consideration for the released claims. Bouchard indicated that disclosure-only settlements will be met with disfavour unless they involve supplemental disclosures that address a "plainly material misrepresentation or omission" and include a "narrowly circumscribed" release of claims. In his opinion, Bouchard also expressed his hope and trust that "sister courts" in other jurisdictions would adopt a similar approach to disclosure-only settlements (for further details please see "Demise of disclosure-only settlements? Delaware court outlines new regime"). This decision has effected a dramatic change in stockholder litigation in Delaware. Two cases – one from the Seventh Circuit Court of Appeals and the other from the New Jersey Superior Court of Union County – may signal growing support for Trulia in courts outside Delaware. More recently, however, the Appellate Division for the First Department of New York reversed a lower court's rejection of a disclosure-only settlement.
In In re: Walgreen Co Stockholder Litigation(1) the Seventh Circuit rejected a "disclosure-only" settlement involving stockholder litigation concerning Walgreen Co's 2014 purchase of Alliance Boots GmbH, and cited the Delaware Court Trulia decision with approval.
Judge Posner, writing the majority decision for the Seventh Circuit in a two-to-one decision, noted that that the district court judge had approved the disclosure-only settlement "with misgivings", and was ultimately persuaded that the supplemental disclosures "may have mattered to a reasonable investor". However, Posner concluded that the supplemental disclosures agreed to in the settlement represented only a trivial addition to the extensive disclosures already made in the proxy statement, and their value was "nil". He further explained that the "question the [district court] judge had to answer was not whether the disclosures may have mattered, but whether they would be likely to matter to a reasonable investor". Posner called these types of disclosure-only settlement a "racket" that "must end", and further stated that such settlements "that seek only worthless benefits for the class should be dismissed out of hand".
Unlike Trulia, where the plaintiffs had brought actions in state court asserting statutory breach of duty claims, the plaintiffs in Walgreen brought their actions in federal court and filed their complaints against Walgreen Co (an Illinois corporation) in the US District Court for the Northern District of Illinois, alleging violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and breaches of the board's fiduciary duty of disclosure under Illinois state law.
In Vergiev v Aguero(2) a New Jersey Superior Court also rejected a disclosure-only settlement involving stockholder litigation concerning the 2015 merger of Metalico, Inc with Total Merchant Limited. In applying Trulia, the trial judge concluded that he could not approve the settlement in light of the immateriality of the supplemental disclosures that were provided in exchange for a broad release of claims relating to the transaction.
In contrast, in Gordon v Verizon Communications, Inc(3) the Appellate Division for the First Department in New York found that, in applying New York law, the five factors articulated in In re Colt Industry Shareholders Litigation(4) weighed in favour of approving the proposed disclosure-only settlement of litigation arising from Verizon's acquisition of Vodafone's 45% stake in Verizon Wireless for approximately $130 billion in cash and Verizon common stock. Under Colt the appellate division evaluated:
- the likelihood of success on the merits;
- the extent of support from the parties for the proposed settlement;
- the judgment of counsel;
- the presence of bargaining in good faith; and
- the nature of the issues of law and fact.
After observing that the Colt five-factor test had not been revisited in 25 years and determining that it should be revisited, the appellate division proceeded to introduce two additional factors:
- "whether the proposed settlement is in the best interest of the putative settlement class as a whole"; and
- "whether the settlement is in the best interest of the corporation".
Although the lower court had concluded that the supplemental disclosures that were negotiated as part of the proposed settlement failed to "materially enhance" the shareholders' knowledge about the merger and that they provided "no legally cognizable benefit to the shareholder class", the appellate division found that, in applying its first additional factor, the supplemental disclosures were "of some benefit to the shareholders". Further, the appellate division found the "most beneficial aspect" of the proposed settlement to be the inclusion of a corporate governance requirement that obligated Verizon to obtain a fairness opinion in the event that it sought to sell or spin off a certain amount of assets over the next three years. With respect to the second additional factor, the appellate division concluded that the proposed settlement was in the best interest of the corporation because Verizon had "direct input" into the supplemental disclosures and the corporate governance requirement and enabled it to avoid additional litigation expense.
While other New York courts have rejected disclosure-only settlements, the appellate division distinguished those cases on the basis that they had relied on Delaware law or did not involve an application of the Colt five-factor test. The Gordon decision is being heralded as New York's break with Delaware's rejection of disclosure-only settlements, but it remains unclear whether the enhanced Colt standard set out in Gordon will be adopted by other judicial departments or the New York Court of Appeals.
In 2016, in response to the change effected by the Delaware Court of Chancery's increasing rejection of disclosure-only settlements, there was a significant decrease in the volume of M&A-related lawsuits filed in Delaware and a dramatic increase in the number of M&A-related lawsuits filed in federal court. While it is too early to tell how these cases will be treated, Posner's sharp rebuke of disclosure-only settlements in Walgreen, in addition to the Trulia decision, may persuade judges in other jurisdictions to review disclosure-only settlements with greater skepticism. Irrespective of whether more non-Delaware courts decide to follow Trulia, given the Gordon opinion, Delaware corporations that have not adopted Delaware-only forum selection bylaws should consider the benefits of doing so.
For further information on this topic please contact Patrick Diaz at Ropes & Gray LLP's Boston office by telephone (+1 617 951 7000) or email (firstname.lastname@example.org). Alternatively, contact Marvin Tagaban at Ropes & Gray LLP's New York office by telephone (+1 212 596 9000) or email (email@example.com). The Ropes & Gray LLP website can be accessed at www.ropesgray.com.
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