In In re Riverbed Technology, Inc. Stockholders Litigation, the Delaware Chancery Court upheld a disclosure-only settlement of shareholder claims objecting to a merger, but cautioned that these types of settlements may not receive judicial approval as easily in the future. C.A. No. 10484-VCG (consol.) (Del. Ch. Sept. 17, 2015).
Shortly after investors took Riverbed private in 2014, shareholders brought suit alleging that the proxy statement failed to disclose potential conflicts of interest and that the transaction undervalued the company. The parties reached a settlement in which Riverbed agreed to make supplemental disclosures and pay $500,000 for plaintiffs’ attorney fees in exchange for a release of all of the shareholders’ federal and state claims, known or unknown, related to the transaction.
Although the court recognized that the released claims had little merit, it called the “very broad” (and perhaps even “inter-galactic”) release “troubling.” It further noted that the value of the supplemental disclosures offered to the shareholders in exchange for the release was “minor.” Despite these misgivings, the court approved the settlement—largely because the parties had reasonably relied on the “formerly settled practice” of the Chancery Court approving settlements with similar terms. The court, however, reduced the award of attorney fees from $500,000 to $300,000, citing the “modest benefit” conferred on the shareholders by the litigation.
Although the Chancery Court approved the settlement, this opinion adds to a line of recent decisions questioning disclosure-only settlements of shareholder claims. Earlier this year, the Chancery Court rejected an M&A litigation settlement in which the defendants agreed to supplement disclosures, shorten the matching rights period, and reduce the break-up fee in exchange for a release of claims. Acevedo v. Aeroflex Holding Corp., C.A. No. 9730-VCL (Del. Ch. Jul. 8, 2015) (transcript). Last year, it found that a disclosure-only settlement of shareholder claims was insufficient, commenting that “giving out releases lightly . . . is something we’ve got to be careful about.” In re Medicis Pharm. Corp. S’holders Litig., C.A. No. 7857-CS (Del. Ch. Feb. 26, 2014) (transcript).
It remains to be seen whether increased scrutiny of merger litigation settlements will be favorable for transacting companies. On the one hand, closer scrutiny of shareholder claims and fee awards may disincentivize the filing of these lawsuits. On the other hand, the courts may foreclose the option of resolving such lawsuits through settlements that are relatively quick and inexpensive.