Takeaway: Strike suits against corporate mergers are often resolved in worthless “disclosure-only” settlements. Derided as a “peppercorn and a fee,” a disclosure-only settlement provides no monetary relief to the stockholders. Instead, it results in the payment of a significant fee to the plaintiff’s attorney, coupled with “supplemental disclosures” about the transaction to address alleged deficiencies in the proxy. The new disclosures – touted in the settlement as beneficial to shareholders – are typically worthless. Led by the Delaware Court of Chancery, most notably in In re Trulia, Inc. Stockholder Lit., 129 A.3d 884 (Del. Ch. 2016) (Bouchard, C.) (“Trulia”), a number of courts have heightened the showing required for approval of such settlements, resulting in a decline in meritless merger litigation. However, New York’s First Department has not followed suit, endorsing in a recent decision (Gordon) a more lenient settlement approval standard, a decision criticized by a leading commentator (John C. Coffee, Jr.) as constituting a “legal rubber stamp.” See Gordon v. Verizon Commc’ns, Inc., 148 A.D.3d 146, 46 N.Y.S.3d 557 (1st Dept. 2017). But a recent New York trial court decision, City Trading, shows that even in jurisdictions such as New York that have not expressly adopted Delaware’s Trulia standard, trial judges are still on the lookout and will not approve disclosure-only settlements perceived as worthless to the shareholders of a corporation. City Trading Fund v. Nye, No. 651668/2014, 2018 WL 792283 (N.Y. Sup. Ct. Feb. 8, 2018).

In City Trading, the trial judge (Judge Shirley Werner Kornreich of the New York County Supreme Court) evaluated a proposed disclosure-only settlement arising out of a stockholder suit that sought to enjoin a merger on the basis of inadequate disclosures. The trial court was required to apply New York’s governing Gordon standard. Her opinion strongly suggests, however, that she did so under protest.

The Gordon decision, which was issued after Trulia and acknowledged the “increasingly negative view” of disclosure-only settlements, declined to follow Trulia’s lead. Gordon, 148 A.D.3d at 154-155. To the contrary, the Gordon court observed that it was premature to conclude that Trulia and like decisions signaled the extinction of disclosure-only settlements. Id.

The Gordon court went on to review the then-current New York standard for approving non-monetary settlements, adding two additional factors to address “the need to curtail excesses” in M&A litigation. Id. at 158. These two additional factors required that a settlement be in “the best interests of all of the members of the putative class” and also “in the best interest of the corporation.” Id. The Gordon court concluded that, as supplemented, the New York standard was “comparable” to Trulia and “assure[d] an appropriately balanced standard of review.” Id. at 162. But there was quick disagreement with the Gordon court’s conclusion that the two standards were comparable. Gordon was widely viewed as a more lenient standard and a meaningful departure from Trulia. See City Trading, 2018 WL 792283, at *1 n.4 (discussing John Coffee’s article criticizing Gordon, entitled, The Race to the Bottom: Is the Last Stop New York?).

In City Trading, the trial court in which Gordon originated, albeit before a different judge, and which initially denied approval of Gordon’s disclosure-only settlement before being reversed by the First Department in Gordon, had a chance to respond. And respond it did.

City Trading discusses the Trulia and Gordon standards at length. The decision regales the former as “a thorough and compelling decision” that “eloquently explained” the dynamic of so-called strike suits. Id. at *5, n.8. In contrast, the court dedicates a nearly page-long footnote to criticism of Gordon. Id. at *1, n.4. And although the court issued its decision under the cloak of Gordon, it employed language plucked directly from Trulia to do so. The court summarized Trulia’s “plainly material” standard as requiring that the value of the proposed disclosures “should not be a close call.” Id. at *5. It then used this same language to characterize the case before it: “This case is not a close call.” Id. at *10. The court distinguished City Trading from two post-Gordon decisions in which New York courts granted final approval of disclosure-only settlements, noting that neither of those “was a strike suit seeking the extraction of a merger tax.” Id. at *14. It went on to dismiss the supplemental disclosures proposed in that case as “utterly worthless” before dutifully, if briefly, applying the facts to the Gordon factors. Id. at *17. With no room left for suspense, the court rejected the proposed disclosure-only settlement. Id.

In addition to its thorough and approving summary of Trulia, City Trading is also noteworthy because the court effectively shored up the New York standard, a task it was uniquely situated to undertake, given the case’s procedural history. Id. at *2. The parties in City Trading had already appeared once before the appellate court following the trial court’s denial of preliminary approval of a disclosure-only settlement. Id. In that first appeal, which preceded Gordon, the appellate court reversed the trial court’s denial as premature on a motion for preliminary approval (the “Preliminary Decision”). Id. It found that the proposed disclosures were “arguably beneficial” and directed the trial court to hold a fairness hearing to determine whether final approval of the settlement should be granted. Id.

The City Trading court spent several pages assessing the intended meaning of the Gordon standard, which requires that proposed disclosures provide “some benefit to the shareholders.” Id. at *7-8. It specifically considered and rejected the conclusion that Gordon only required that proposed disclosures be “arguably beneficial,” language the appellate court had used in its Preliminary Decision in City Trading. Id. A finding that proposed disclosures were only “arguably beneficial” would not pass muster under Gordon. Id. Instead, the City Trading court concluded that a showing of “some benefit” required that “the court must be able to plausibly conclude that the supplemental disclosures would, in fact, aid a reasonable shareholder in deciding whether to vote for the merger.” Id.

Through its analysis, City Trading arguably elevated the standard set out in Gordon. Moving forward, New York courts will have to contend with the distinction between disclosures that are “arguably beneficial,” which would fail the Gordon test under City Trading’s analysis, and those which would plausibly in fact provide information that assists a stockholder in assessing and approving a merger. The court’s tough analysis also reveals the limits of Gordon’s plaintiff-friendly leniency. The decision serves as a reminder to prospective litigants that despite disparate standards for approving disclosure-only settlements, those standards are subject to an inherently flexible materiality analysis that will likely be made against the backdrop of Trulia. And, parties should no longer presume that they will be able to settle such claims for a “peppercorn and a fee.” Id. at *1 (quoting Solomon v. Path Commc’ns Corp., 1995 WL 250374, at *4 (Del. Ch. 1995)).