Silicon Valley court signals increased scrutiny of disclosure-only settlements of merger objection litigation

  • Delaware Courts have become reluctant to approve settlements of merger objection lawsuits based on disclosure-only settlements.
  • The Santa Clara Superior Court appears to have adopted the Delaware view.
  • It remains to be seen whether the trend will expand to other Courts in California

The Delaware Court of Chancery’s January 2016 decision in Trulia marked a sea change in Delaware’s approach to settlements of class action lawsuits challenging mergers where the only benefit achieved for shareholders is additional disclosures. Trulia noted that “scholars, practitioners and members of the judiciary have expressed that these settlements rarely yield genuine benefits for stockholders and threaten the loss of potentially valuable claims that have not been investigated with rigor.” It held that, moving forward, the Court of Chancery will no longer approve disclosure-only settlements unless (1) the supplemental disclosures satisfy a “plainly material” standard and (2) the proposed release is sufficiently narrow. (See our prior Alert on Delaware Court of Chancery Clamps Down on Disclosure-Only Settlements for an in-depth discussion of the Trulia case.)

Since that time, the Delaware Chancery Court has refused to approve many disclosure-only settlements. (See, e.g., In re Aruba Networks Stockholder Litigation, C.A. No. 10765 VCL, transcript op. (Del Ch. Oct. 9, 2015) and Acevedo v. Aeroflex Holding, C.A. No. 9730 VCL, slip. Op. (Del.Ch. July 8, 2015).) The practice of many plaintiffs’ attorneys has shifted to obtaining supplemental disclosures, voluntarily dismissing the action, with prejudice as to the lead plaintiffs only, and then seeking a mootness fee. (See, e.g., In re Receptos, Inc. Stockholder Litig., No. 11316-CB (Del. Ch. Jul. 21, 2016), where the court awarded a mootness fee of $100,000 when plaintiffs requested $350,000.)

Silicon Valley Judges Have Embraced the Trulia Standard

The Santa Clara County Superior Court, whose jurisdiction encompassing much of Silicon Valley and whose Complex Civil Litigation department sees a significant number of merger objection cases, now appears to have firmly embraced the Trulia standard.

During his tenure in the Complex Case department, Judge Peter H. Kirwan applied Trulia in three merger cases. In Pharmacyclics, he gave final settlement approval after considering the Trulia standard over objections from Prof. Sean Griffin, who had been influential in bringing about the Trulia decision through his objection in that case. Subsequently, he denied a motion for preliminary approval in 1st Century Bancshares and denied a motion for final approval in Alexza Pharmaceuticals.

On September 29, 2017, Judge Kirwan’s successor in the Complex department, Judge Brian C. Walsh, issued a ruling in a case involving the acquisition of Alliance Fiber Optic Products Inc. by Corning Inc. In that ruling, Judge Walsh indicated that he would evaluate the settlement of the Alliance Fiber case under the standard announced in Trulia. In so doing, Judge Walsh commented:

Trulia was quickly endorsed by Judge Posner of the United States Court of Appeals for the Seventh Circuit in a published opinion, In re Walgreen Co. Stockholder Litigation (7th Cir. 2016) 832 F.3d 718. In adopting the Trulia standard for disclosure settlements, Judge Posner also cited “recent empirical work which shows that there is little reason to believe that disclosure-only settlements ever affect shareholder voting.” (At p. 723, italics original.) While no published California opinion has yet addressed the impact of Trulia, the Court finds its reasoning and the reasoning of Walgreen to be compelling. Notably, deal practitioners should not be encouraged to file strike suits in California in order to avoid Trulia, a possibility which Trulia itself recognized. (See In re Trulia, Inc. Stockholder Litigation, supra, 129 A.3d at p. 899 [“[S]ome have expressed concern that enhanced judicial scrutiny of disclosure settlements could lead plaintiffs to sue fiduciaries of Delaware corporations in other jurisdictions in the hope of finding a forum more hospitable to signing off on settlements of no genuine value. … We hope and trust that our sister courts will reach the same conclusion [as ours] if confronted with the issue.”].)

Judge Walsh deferred ruling on the motion and directed plaintiffs to submit supplemental briefing addressing the Trulia standards.

Practitioners handling M&A cases in Santa Clara County should take heed. It is quite possible that this trend will now reach to other courts in California, as well.