As previously discussed here, in 2015, the Delaware Court of Chancery issued a number of decisions calling for enhanced scrutiny of “disclosure-only” M&A settlements that involve no monetary benefits to a shareholder class. For example, the recent decision in In re Riverbed Technology, Inc. Stockholders Litigation expressly eliminated the “reasonable expectation” that a merger case can be settled by exchanging insignificant supplemental disclosures (and nothing more) for a broad release of claims. In In re Trulia, Inc. Stockholder Litigation, the Chancery Court demonstrated that its “increase[ed] vigilance” in this area is genuine, rejecting a disclosure-only M&A settlement and finding that the supplemental disclosures did not warrant the broad release of claims.
In re Trulia arose out of the acquisition of Trulia, Inc., an online real estate database, by Zillow, Inc. After the merger was announced in July 2014, several Trulia shareholders filed suit, alleging that, among other things, the Trulia board breached its fiduciary duties by failing to properly value the company and disseminating “false and misleading disclosures” in Trulia’s proxy statement. As is typical in M&A cases, the parties quickly agreed-in-principle to settle the litigation on a disclosure-only basis, and on November 19, 2014, Trulia filed a Form 8-K containing the supplemental disclosures sought by plaintiffs. A month later, the acquisition was overwhelmingly approved by Trulia shareholders.
The settlement stipulation included “an extremely broad release” (which was later narrowed somewhat in response to concerns articulated by the court at an initial settlement hearing) and a statement that plaintiffs intended to seek a fee award “not to exceed $375,000.”
The parties failed, however, to obtain the court’s approval. Chancellor Bouchard rejected the proposed settlement, finding it was neither fair nor reasonable to Trulia’s stockholders. At the outset of the opinion, the court lamented the “current ubiquity” of deal litigation, explaining that “far too often such litigation serves no useful purpose” other than “to generate fees for certain lawyers who are regular players in the enterprise of routinely filing hastily drafted complaints . . . and settling quickly on terms that yield no monetary compensation to the stockholders they represent.” The decision went on to explain that it is the court’s role to assess and compare the value of the “give” (the release of claims) with the “get” (the supplemental disclosures). In analyzing the four items in Trulia’s supplemental disclosures, the court found that none “were material or were even helpful in this case.” Thus, Trulia’s shareholders were giving up more than they were getting, and the settlement was not fair.
While In re Trulia is likely to make it more difficult for parties to achieve a disclosure-only settlement in Delaware (particularly where the supplemental disclosures are insignificant and/or the release of claims is broad), the court noted that there is another path for plaintiffs to challenge mergers and receive an award of fees: the “mootness dismissal.” In this scenario, defendants issue the supplemental disclosures sought by plaintiffs in exchange for plaintiffs’ voluntary dismissal of their claims on mootness grounds. Whereas a settlement requires court approval, a dismissal (prior to class certification) does not. This option also permits the parties to negotiate fees privately. Of course, the mootness dismissal is not as favorable to corporate defendants because it does not provide a formal release of claims. Because of this, it is conceivable that a different plaintiff could file a separate suit after the initial suit was dismissed (although Chancellor Bouchard stated his belief that such an occurrence would be “[un]likely”). In any event, it remains to be seen whether the mootness dismissal catches on as a replacement for disclosure-only settlements in M&A cases.