Delaware Court of Chancery Clamps Down on Disclosure-Only Settlements

Each year from 2011 through 2014, well over 90 percent of deals with a nominal value in excess of $100 million drew at least one, if not more, securities class actions.¹ These cases follow a pattern: the target’s Board is accused of breaching its fiduciary duties by not getting a good enough deal. The acquirer is accused of aiding and abetting the target’s Board in breaching its fiduciary duties, on the theory that the acquirer got too good a deal. And both sides are accused of failing to disclose in the disclosure documents something they should have disclosed.

What is a Disclosure-Only Settlement?

Until very recently, virtually all of these cases settled, and settled early, for what are called disclosure-only settlements. These are settlements in which the target’s stockholders get a supplemental S-4 with additional disclosures, while the money that changes hands all goes to the plaintiffs’ lawyers. In return, the defendants get peace—at least the sort of peace that a broad release can provide. The release becomes a type of insurance policy against another lawsuit. But in a series of recent decisions, the Delaware Court of Chancery has started to clamp down on these disclosure-only settlements, criticizing them roundly.

The Trulia Decision

On January 22, 2016, the Delaware Court of Chancery rejected the proposed settlement of a stockholder class action lawsuit challenging Zillow, Inc.’s acquisition of Trulia, Inc. in a stock-for-stock merger valued at something between $2.5 billion and $3.5 billion.² Chancellor Andre Bouchard found that the proposed settlement was neither fair nor reasonable because the company would be providing its stockholders with useless and immaterial supplemental disclosures that did not justify a broad release of claims.³ Chancellor Bouchard also warned 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.⁴

The Trulia decision follows a series of recent decisions in which the Court of Chancery has signaled its growing unwillingness to approve disclosure-based settlements of merger litigation.

Vice Chancellor Sam Glasscock III examined the problems with disclosure-only settlements in his September 17, 2015 opinion in In re Riverbed Technology, Inc. Stockholder Litigation.⁵ He noted the incentives: Plaintiffs’ counsel get a quick and certain fee. And defendants avoid future litigation by paying a deal tax to gain a broad release—a release that could displace the interests of stockholder class members in diligently pursuing and investigating real claims.⁶ Although Vice Chancellor Glasscock narrowly approved the proposed settlement in Riverbed, he insisted that the court would approach future proposed settlements with increased scrutiny, particularly with respect to the breadth of claim releases.⁷

Less than a month later, Vice Chancellor J. Travis Laster rejected a proposed settlement arising from an action challenging the $2.7 billion acquisition of Aruba Networks, stating that plaintiffs’ counsel had inadequately represented the stockholder class members.⁸ At the settlement hearing, Vice Chancellor Laster questioned the merits of the case at the time it was initially filed, took note of the weak discovery record of plaintiffs’ counsel and expressed concerns over the fact that the proposed release extended far beyond the disclosure claims to cover future, unknown claims. The Courts’ close scrutiny of the proposed settlement in Aruba set the stage for Chancellor Bouchard to issue his stern warning in Trulia several months later.

Download: Delaware Court of Chancery Clamps Down on Disclosure-Only Settlements

1. Matthew D. Cain and Steven Davidoff Solomon, Takeover Litigation in 2015, at 2 (Berkeley Law Jan. 2016), available at
   http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2715890
2. In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB, 2016 WL 325008, at *1 (Del. Ch. Jan. 22, 2016). The agreed-upon additional disclosures would have added to the existing 224-page proxy “(1) certain synergy numbers in J.P. Morgan's value creation analysis; (2) selected comparable transaction multiples; (3) selected public trading multiples; and (4) implied terminal EBITDA multiples for a relative discounted cash flow analysis.” Id. at *11.
3. The court rejected the settlement even though the parties narrowed the release to exclude unknown claims and antitrust claims. As narrowed, the release still released all claims “arising under federal, state, foreign, statutory, regulatory, common law or other law or rule” held by any member of the proposed class relating in any conceivable way to the transaction. Id. at *3-*4.
4. Id. at *10 (“[P]ractitioners 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. In using the term ‘plainly material,’ I mean that it should not be a close call that the supplemental information is material as that term is defined under Delaware law.”). The Chancellor also encouraged parties to adjudicate disclosure claims outside the context of a settlement—either by a preliminary injunction motion or by a contested fee application. Neither would result in a release.
5. C.A. No. 10484-VCG, 2015 WL 5458041, at *3-4 (Del. Ch. Sept. 17, 2015).
6. Id.
7. Id. at *6.
8. In re Aruba Networks, Inc. Stockholder Litigation, C.A. 10765-VCL, Hr’g Tr. (Del. Ch. Oct. 9, 2015)