On Thursday, September 17, 2015,1 in In re Riverbed Technology, Inc. Stockholders Litigation, the Delaware Chancery approved a disclosure-only settlement related to the go-private deal for Riverbed Technology, Inc. Although the court approved the settlement, it expressed serious reservations about the broad releases provided to Riverbed’s directors in exchange for enhanced disclosures that provided little value for shareholders. In re Riverbed is yet another in a line of Delaware cases that have expressed dissatisfaction with the current trend of merger litigation resulting in disclosure-only settlements.2
The Concerns Presented By Litigation Without Adversaries
In In re Riverbed, Vice Chancellor Glasscock outlined the general agency issues that are presented by class litigation opposing mergers. First, a plaintiff’s attorney has incentive to reach settlement quickly to avoid the additional effort to develop valuable claims that may not generate an additional fee.3 Second, the defendants have incentive to consummate the merger and terminate threats of future litigation.4 “In combination, the incentives of the litigants may be inimical to the class: the individual plaintiff may have little actual stake in the outcome, her counsel may rationally believe a quick settlement and modest fees is in his best financial interest, and the defendants may be happy to ‘purchase,’ at the bargain price of disclosures of marginal benefit to the class and payment of the plaintiffs’ attorney fees, a broad release from liability.”5 This leaves courts to determine the value of the claims that are released in comparison to the value of the settlement, which requires a balancing of “the policy preference for settlement against the need to insure that the interests of the class have been fairly represented.”6
Under the facts of In re Riverbed, the court reasoned that the settlement was appropriate because (1) the supplemental disclosures made regarding Goldman Sachs’ involvement provided some value to investors, (2) 99.48% of shareholders voted in favor of the merger despite the disclosures, (3) no expert could opine that the amount paid to the shareholders was unfair, and (4)plaintiffs’ counsel testified that he thoroughly examined the record to search for viable Federal securities claims and found none. Further, while the parties disputed the breadth of the release in the settlement agreement, the court found it to be a “very broad, but hardly unprecedented, release” of “existing claims arising from the merger, known and unknown.”7 In consideration of the specific facts of this case, Vice Chancellor Glasscock acknowledged that while the value the shareholders received from the supplemental disclosures may have only been a mere “peppercorn,” the value of what was released amounted to only a “mustard seed” – as such, the settlement was confirmed.8
The Shifting Tide Of Disclosure-Only Settlement Approval
While the Chancery Court’s ruling approved the settlement based on the specific facts of this case, it found the “breadth of the release . . . troubling.”9 The court reasoned that if not for “the reasonable reliance of the parties on formerly settled practice in this Court . . . the interests of the Class might merit rejection of a settlement encompassing a release that goes far beyond the claims asserted and the results achieved.”10 Corporations contemplating mergers should make note of the court’s hesitation in approving this settlement and warning about the future of such settlements. The court’s opinion in In re Riverbed indicates that broadly-worded releases in settlement agreements in exchange for disclosures that provide little value to shareholders will be more closely scrutinized in the future and may not be approved. Given the “near-ubiquity of litigation in connection with public company mergers,” merging corporations should expect suits challenging the merger and have a strategy for disclosure and settlement.11 Further, disclosure-only settlements have become the industry norm, with “almost 80 percent of settlements reached in 2014 provid[ing] only additional disclosures.”12 Indeed, in 2014 only six litigations regarding mergers ended in settlement payments to shareholders.13
The Chancery Court’s seeming distain for disclosure-only settlements is by no means new.14 In Acevedo v. Aeroflex Holding Corp., Vice Chancellor J. Travis Laster rejected a settlement that would resolve a lawsuit challenging the acquisition of Aeroflex Holding Corp. Vice Chancellor Laster concluded that the settlement consideration of additional disclosures, a 40 percent reduction in the breakup fee, and a reduced matching period brought no value to the shareholder class and, consequently, the releases that were exchanged were too broad. The In re Riverbed opinion, in conjunction with the Aeroflex opinion and other recent opinions, highlight the Chancery Court’s efforts to ensure that meritorious merger challenges are litigated and there is disincentive to bring suit where there has been no breach of fiduciary duty and the value provided to shareholders was fair.15
Due to the increased scrutiny and rejections of disclosure-only settlements, the plaintiffs’ bar may react to the In re Riverbed opinion by filing suits challenging mergers involving Delaware companies in jurisdictions outside of Delaware to avoid the general disapproval of broad releases in disclosure-only settlements that the Chancery Court has expressed. Delaware companies should carefully consider whether to adopt a forum selection bylaw to eliminate such forum shopping. Also, In re Riverbed could reduce the number of suits challenging mergers by raising doubt as to whether plaintiffs can obtain quick and easy disclosure-only settlements. Generally, these possible outcomes are positive for corporations considering mergers, but the potential lack of a relatively cheap and quick settlement alternative could result in more protracted merger litigation for some companies. Public corporations considering mergers should continue to consider litigation risks and possible settlement strategy early in the merger process.