In January 2016, the Court of Chancery issued an opinion in In re Trulia, Inc. Stockholder Litigation that will surely have an impact on the amount of disclosure settlements and merger-related litigation. The court expressed three concerns regarding disclosure settlements: (1) the supplemental disclosures often provide no real benefit to stockholders; (2) through a broad release, shareholders waive claims that have not been rigorously investigated and which could confer an economic benefit; and (3) it is hard for the court to evaluate the benefit conferred by the supplemental disclosures at this stage in the non-adversarial context. After discussing these concerns, the court made clear that in the context of disclosure settlements, in which the sole or predominant consideration for plaintiffs’ release of claims is supplemental disclosures, “the Court [of Chancery] will be increasingly vigilant in scrutinizing the ‘give’ and ‘get’ of such settlements.”
In the opinion, the court set a high standard that disclosure settlements must meet in order to be approved. First, the supplemental disclosures must be “plainly material.” The court stated that supplemental disclosures would be considered “plainly material” “if, from the perspective of a reasonable stockholder, there is a substantial likelihood that it [the supplemental disclosure] ‘significantly alters the “total mix” of information made available.’” Secondly, the release of claims cannot be a broad release of claims. Rather, the release of claims must be narrowly circumscribed to include nothing more than disclosure claims and fiduciary duty claims relating to the sale process. Unless the settlement meets the two above criteria, the settlement will be disfavored and will fail to receive approval by the court.
After setting such a high standard, the question has become whether settlement disclosures and related deal litigation will end or decrease significantly. At first glance, the answer would be an obvious yes. Disclosure settlements were extremely attractive because plaintiffs’ lawyers could file complaints with relatively little risk, the settlements were approved, and the lawyers would collect a large amount of fees. However, after Trulia, that seems no longer possible. Now, there is more risk involved, as the settlements must meet two criteria in order to be approved. Plaintiffs’ lawyers may be less willing to file such complaints after the announcement of a merger or acquisition, as it seems there is a strong possibility that any proposed settlement will be rejected. A rejection of a settlement means more money and more time tied up in litigation. Plaintiffs’ lawyers may not be willing to take such a risk in litigation with no guarantee of an award of attorneys’ fees.
Additionally, not only is more risk involved due to longer litigation and no guarantee of an award of attorneys’ fees, but plaintiffs’ lawyers have also lost their main bargaining chip. Plaintiffs will not have as much leverage to negotiate fees, as they can no longer stipulate to a broad release of claims. Without their main bargaining chip, plaintiffs’ lawyers may be deterred from filing such complaints.
However, a closer look reveals that the impact of Trulia’s heightened standard on the frequency of disclosure settlements, and in turn merger-related litigation, depends on several different factors. First, that impact will depend on how hard it will be for disclosures to meet the “plainly material” standard. The court stated that supplemental disclosures must be “plainly material,” that is, they must address a plainly material misrepresentation or omission. Recent cases imply, however, that many different types of disclosures may be “plainly material.” Thus, it may not be overly difficult for disclosures to meet the standard. In a recent hearing, Havermill Retirement System v. Richard Kerley, et al. and The Providence Service Corp., the court concluded that disclosures of conflicts of interests satisfy the “plainly material” standard. Although the disclosures satisfied the “plainly material” standard, the court did not approve the settlement due to an issue with the release of claims and the case involving a partial settlement.
Additionally, in In Re BTU International, Inc. Stockholder Litigation, the court recently approved a disclosure settlement. The court found that the disclosures of management free cash flow projections were “plainly material.” The court went on to approve the disclosure settlement, finding that the release of claims was narrowly circumscribed as required under the Trulia standard.
The two above-mentioned cases are the first applications of the Trulia standard, and it is notable that in both of the cases, the court found that the disclosures satisfied the “plainly material” standard. Such a result suggests that disclosures may meet the “plainly material” standard more often than one would think despite the nominally high standard established in Trulia.
Moreover, in its opinion in Trulia, the court stated, “[w]here the supplemental information is not plainly material, it may be appropriate for the Court [of Chancery] to appoint an amicus curiae to assist the [c]ourt in its evaluation of the alleged benefits of the supplemental disclosures, given the challenges posed by the non-adversarial nature of the typical disclosure settlement hearing.” This statement seems to imply that even if the supplemental disclosures are not “plainly material,” the court will perhaps still approve the settlement if it can evaluate the alleged benefits of the disclosures, and it finds that the “give and get” of the settlement is “fair and reasonable.” If this is the case, then it may be easier for plaintiffs to have their disclosure settlements approved by the court, which in turn would minimize any decrease the frequency of disclosure settlements or merger related litigation.
Other factors that may affect whether or not there is a significant decrease in settlement disclosures is whether other jurisdictions follow Delaware’s lead and adopt heightened scrutiny in disclosure settlements, and whether corporations begin to adopt forum selection bylaws (for those that do not already have such bylaws). If other jurisdictions do not follow Delaware and do not look at disclosure settlements with greater scrutiny, plaintiffs may find more favorable venues. If this occurs, there will not likely be a significant decrease in settlement disclosures, as plaintiffs will move to more favorable venues.
However, if jurisdictions do not follow Delaware’s lead, defendant corporations may choose to adopt forum selection bylaws, if the corporations do not already have them. Such bylaws would require plaintiffs to meet Delaware’s heightened scrutiny and may deter plaintiffs from filing complaints. This would lead to a significant decrease in settlement disclosures, and in turn, merger related litigation.
A final factor to consider is the ease of obtaining attorneys’ fees through mootness dismissals. The court in Trulia made clear that the preferred avenue for resolving claims of inadequate disclosures is mootness dismissals. If plaintiffs’ lawyers have a relatively easy time in obtaining attorneys’ fees through mootness dismissals, there may not be a substantial decrease in merger related litigation. To the contrary, if plaintiffs’ lawyers do not have easy access to attorneys’ fees through mootness dismissals, and are unable to find more favorable venues, then there would most likely be a substantial decrease in merger related litigation.
There is no question that the heightened standard set forth in Trulia will decrease settlement disclosures and merger related litigation to some extent. However, a closer look at recent Court of Chancery decisions, and other factors, indicate that Trulia may not significantly decrease settlement disclosures and merger related litigation, and it undoubtedly will not put an end to settlement disclosures in the future.
Erin Rogers is a third year law student at Widener University Delaware Law School, and a Senior Staff Member on the Delaware Journal of Corporate Law. Erin worked for the Delaware Public Defender’s Office in New Castle County during the summer of 2015. She was also a certified legal intern, under Delaware Supreme Court Rule 56, in the Delaware Civil Clinic in the Fall 2015, where she helped victims of domestic violence obtain protection from abuse orders and with custody issues.
Suggested Citation: Erin Rogers, In Re Trulia, Inc. Stockholder Litigation: End to Disclosure Settlements?, Del. J. Corp. L (April 13, 2016), www.djcl.org/blog.