As previously discussed in Insights: The Delaware Edition, throughout the second half of 2015, the Delaware Court of Chancery began to question its long-standing practice of approving deal litigation settlements involving broad releases for defendants in exchange for therapeutic benefits, and it analyzed such proposed settlements with increased scrutiny. During that time, members of the court issued varying decisions in this area and had not yet landed on a uniform view.
In January 2016, Chancellor Andre G. Bouchard issued his widely anticipated decision on a proposed disclosure-based settlement in In re Trulia, Inc. Stockholder Litigation. The chancellor denied the settlement, finding that the supplemental disclosures forming the basis of the settlement consideration did not meet the new “plainly material” standard he set forth in the opinion. He urged that instead of disclosure-based settlements, disclosure claims in deal litigation be adjudicated in an “adversarial process.” Since Trulia, the court has issued additional decisions, all following the Trulia “plainly material” standard, but still with varied views.
Chancellor Bouchard’s Views
On September 16, 2015, Chancellor Bouchard reserved decision on approval of a disclosure-based settlement of litigation arising from a stock-for-stock merger transaction between online real estate companies Trulia and Zillow. In re Trulia, Inc. Stockholder Litig., C.A. No. 10020-CB (Del. Ch. Sept. 16, 2015) (TRANSCRIPT). At the time, the chancellor noted that the parties had presented the “underbelly of settlements” but nevertheless requested supplemental briefing, including to address whether disclosures must be material to support a disclosure-based settlement.
In January 2016, Chancellor Bouchard declined to approve the settlement. In re Trulia, Inc. Stockholder Litig., C.A. No. 10020-CB (Del. Ch. Jan. 22, 2016). Regarding disclosure-based settlements in general, the chancellor reiterated many of the concerns expressed in cases such as Acevedo v. Aeroflex Holding Corp., C.A. No. 9730-VCL (Del. Ch. July 8, 2015) (TRANSCRIPT); In re Intermune Inc. Stockholders Litig., Consol. C.A. No. 10086-VCN (Del. Ch. July 8, 2015) (TRANSCRIPT); and In re Riverbed Technology, Inc., C.A. No. 10484-VCG (Del. Ch. Sept. 17, 2015).
Among other things, Chancellor Bouchard noted that the court may have an insufficient basis to evaluate a settlement when “no motion practice has occurred and the discovery record is sparse, as is typically the case in an expedited deal litigation leading to an equally expedited resolution based on supplemental disclosures before the transaction closes.” Chancellor Bouchard also reflected on “the rapid proliferation and current ubiquity of deal litigation, the mounting evidence that supplemental disclosures rarely yield genuine benefits for stockholders, [and] the risk of stockholders losing potentially valuable claims that have not been investigated with rigor.” He concluded that “the Court’s historical predisposition toward approving disclosure settlements needs to be reexamined.”
With that backdrop, Chancellor Bouchard advised that “the optimal means by which disclosure claims in deal litigation should be adjudicated is outside the context of a proposed settlement so that the Court’s consideration of the merits of the disclosure claims can occur in an adversarial process where the defendants’ desire to obtain a release does not hang in the balance.” The chancellor explained that such “adversarial process” can occur in two different contexts: i) during 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 providing that ‘the alleged omission or misrepresentation is material,’” or ii) in a mootness scenario, where “plaintiffs’ counsel 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 which case “defendants are incentivized to oppose fee requests they view as excessive.”
In the settlement context, Chancellor Bouchard indicated that going forward, the court would be “increasingly vigilant in applying its independent judgment to its case-by-case assessment of the reasonableness of the ‘give’ and ‘get’ of such settlements,” and that “practitioners 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 “plainly material” standard, the court clarified, requires “that it should not be a close call that the supplemental information is material as that term is defined under Delaware law.”
Finding that the supplemental disclosures issued in connection with the Trulia settlement — which focused on additional details in the fairness opinion section of the proxy — were not “plainly material,” Chancellor Bouchard declined to approve that proposed settlement.
Vice Chancellor Laster Identifies Certain Disclosures as ‘Plainly Material’ in Settlement Context
In February 2016, two weeks after the Trulia decision was issued, Vice Chancellor Laster declined to approve a partial class settlement, determining that, although the “plainly material” standard articulated in Trulia was satisfied, the settlement should nevertheless be rejected because “too many questions” had been raised to conduct an appropriate “give-get balancing.” Haverhill Retirement System v. Kerley, C.A. No. 11149-VCL (Del. Ch. Feb. 9, 2016) (TRANSCRIPT).
In August 2015, plaintiff stockholders of Providence Service Corporation sought to preliminarily enjoin a preferred stock issuance on the basis of allegedly inadequate disclosures and inequitable coercion. After discovery and briefing, in lieu of proceeding to a preliminary injunction hearing, the parties settled those claims for additional disclosures involving alleged conflicts of interest and other therapeutic benefits, while other fiduciary duty claims remained.
Vice Chancellor Laster ultimately found that the “plainly material” standard articulated in Trulia was satisfied, as “the original disclosures that were put out in connection with [the] transaction were painfully inadequate.” The disclosures included, among other things, the existence of two serious conflicts.
Nevertheless, Vice Chancellor Laster denied approval of the settlement because he was “not comfortable … carving off a portion of the case as if it [could] be excised and amputated in a neat little surgical bucket and then have the rest of the case proceed.” He concluded that there was “too much evidence that raises too many questions about too many dimensions of the decision-makers and their advisors to attempt right now a give-get balancing that would give [him] any type of comfort that what [he] was doing [by approving the settlement] was appropriate.” Vice Chancellor Laster noted that he would consider a mootness fee application should plaintiffs decide to pursue one.
Vice Chancellor Noble Approves Disclosure-Based Settlement Under ‘Plainly Material’ Standard
A few weeks later, on February 18, 2016, Vice Chancellor John W. Noble (in one of his last decisions before leaving the bench) approved a settlement (entered into pre-Trulia) involving “plainly material” supplemental disclosures. In re NPS Pharmaceuticals Stockholders Litig., C.A. No. 10553-VCN (Del. Ch. Feb. 18, 2016) (TRANSCRIPT). “Recogniz[ing] the difficulty when the rules of the game change while you’re playing the game,” Vice Chancellor Noble indicated that had the settlement hearing occurred prior to the court’s decision in Trulia, he “probably would have taken the Carefusion or Riverbed approach” and relied on the parties’ reasonable expectations in approving the settlement. However, Vice Chancellor Noble indicated that “the world ha[d] finally changed” and he could not “forget about Trulia.”
Applying Trulia’s “plainly material” standard, Vice Chancellor Noble found the additional disclosures provided in the settlement “sufficient,” as they involved “information that clearly was important to the DCF analysis,” including risk-adjusted and product-level projections, in addition to other information, such as additional details about the financial advisors’ analysis, details about the board’s consideration of strategic alternatives and information about the process leading up to the merger, that “help[ed] the shareholders understand a little bit better what was going on.” Moreover, the parties had negotiated a less broad release, ultimately agreeing to release state law claims, as well as federal securities law claims concerning disclosure, that arose from the transaction. The court was comfortable that this release fit within the Trulia standard, in that it was “narrowly circumscribed” to encompass “disclosure claims,” both state and federal, as well as “fiduciary duty claims which are essentially the price and process claims.” Vice Chancellor Noble concluded that “plaintiffs’ counsel did investigate the price and process claims and that the decision not to pursue them in this action was reasonable.” He also approved a negotiated fee award of $370,000.
Chancellor Bouchard Approves Therapeutic Settlement but Confirms Views Expressed in Trulia
The same day Vice Chancellor Noble approved the NPS settlement, Chancellor Bouchard — in what appears to be his first opportunity applying the “plainly material” standard to a disclosure-based settlement since authoring Trulia — approved a settlement involving “plainly material” supplemental disclosures and a clarification that six nondisclosure agreements (NDAs) used as part of the process leading up to the merger did not prevent the parties to those NDAs from privately asking for a waiver of the standstill provisions in order to make a topping bid. In re BTU International, Inc., C.A. No. 10310-CB (Del. Ch. Feb. 18, 2016) (TRANSCRIPT).
As Vice Chancellor Noble did in NPS, Chancellor Bouchard recognized that the settlement predated the Trulia decision but nevertheless applied “the kind of heightened scrutiny that Trulia contemplates.” Chancellor Bouchard found that the disclosures at issue, which included cash flow projections used in the financial advisors’ analyses, satisfied the “plainly material” standard.
Turning to the scope of the release, Chancellor Bouchard explained that “[t]he release … [was] consistent … with the scope of a release that would pass muster under Trulia because it [was] limited to the release of disclosure claims and fiduciary duty claims relating to the decision to enter the merger.” Chancellor Bouchard also approved the negotiated fee award of $325,000.
However, during the hearing, Chancellor Bouchard emphasized again that the court prefers “that disclosure issues in deal litigation be resolved in an adversarial process, either through actual litigation or in connection with a mootness fee application,” and reiterated that “counsel on both sides of the caption … would be wise to pursue the options enumerated in Trulia in the future, for the reasons that are explained in that decision.
The Court of Chancery’s approach to disclosure-based settlements continues to develop and evolve. The recent decisions described above provide greater clarity for how the court expects or prefers parties to resolve disclosure claims in deal litigation. The key takeaways from these recent cases are:
- Disclosure-based settlements with narrowly tailored releases are still available in the appropriate circumstances but will receive greater judicial scrutiny as to whether disclosures satisfy the “plainly material” standard, and the release relates only to disclosure claims and process claims arising from the underlying transaction that have been “investigated sufficiently.”
- The courts continue to send the message that such settlements should be presented less frequently than in the past. The court’s preferred approach for resolving disclosure claims is through an “adversarial process.”
- In light of the heightened “plainly material” standard for disclosure settlements, it could mean that more injunction hearings addressing disclosure claims may occur. However, this will likely be tempered by the Delaware Supreme Court’s recent decision in C&J Energy where the court stressed that where no competing bid emerges after a deal is announced, demonstrating reasonable success on the merits will be difficult.
- In addition, deal litigation involving disclosure claims may be resolved more frequently by mootness dismissals. As the court in Trulia noted, for the vast majority of such cases, a mootness dismissal based on supplemental disclosures effectively ends the litigation.
- Defendants faced with multiforum deal litigation involving a Delaware corporation will not be able to control that tactic as easily through a settlement with a broad release in the Delaware Court of Chancery.
- This may prompt Delaware corporations to adopt forum-selection provisions that require deal litigation (and other claims involving the internal affairs of the corporation) to be filed exclusively in Delaware. In this regard, the Trulia court emphasized a company’s ability to enact a forum-selection bylaw as an effective way to manage multiforum deal litigation.
- The plaintiffs’ bar may begin to file more deal litigation actions outside of Delaware, whether or not a company has an exclusive forum provision in their charter or bylaw, in the hopes that it might be easier to pursue a disclosure-based settlement in a non-Delaware forum. We have seen evidence of this already.
- Plaintiffs may avoid state law claims altogether and instead pursue claims under the federal securities laws that are pertinent to merger or acquisition litigation, such as claims under Section 14a of the Securities Exchange Act. These types of federal law claims may not be covered by the applicable forum selection provision.
- It remains to be seen whether other states will follow Delaware’s lead in embracing Trulia’s enhanced scrutiny of disclose-based settlements. Regarding deal litigation brought solely in other jurisdictions, at least two other forums (courts in North Carolina and California) have acknowledged Trulia and requested litigants to provide supplemental information regarding the materiality of the disclosures and how they justified the releases sought. In one North Carolina action, the judge approved a disclosure-based settlement over a Trulia-based objection.