In a 2-1 decision, the Seventh Circuit has joined the Delaware Court of Chancery’s call for enhanced scrutiny of “disclosure-only” M&A settlements that involve no monetary benefits to shareholders. As previously discussed here, M&A litigation, typically alleging breach of fiduciary duty by directors and insufficient disclosures, often ends in settlement, with defendants agreeing to provide supplemental disclosures in exchange for broad releases of claims, while plaintiffs’ counsel “earns” large attorneys’ fees for providing the class with the “benefit” of the agreed-upon disclosures. In In re Walgreen Company Stockholder Litigation (“In re Walgreen Co.”), the Seventh Circuit rejected such a settlement, endorsing the standard for approval of disclosure-only settlements articulated by the Delaware Court of Chancery in In re Trulia, Inc. Shareholder Litigation (“In re Trulia”). In In re Trulia, the Court of Chancery held that disclosure-only settlements in M&A litigation will meet with disfavor unless they involve supplemental disclosures that address a “plainly material misrepresentation or omission” and any proposed release of claims accompanying the settlement encompasses only disclosure claims and/or fiduciary duty claims regarding the sale process.
Endorsing the Trulia standard, the Seventh Circuit reversed the district court’s approval of the disclosure-only settlement between Walgreen Company (“Walgreens”) and the class of investors who brought suit and remanded to the district court with instructions to replace class counsel or dismiss the case because, in agreeing to the settlement terms, class counsel failed to “represent the class fairly and adequately.” In rejecting the Walgreens settlement, the Seventh Circuit has joined the Delaware Court of Chancery’s wave of 2015 and 2016 decisions refusing to accept terms of many “disclosure-only” settlements, signaling what may be a turning point in M&A settlements (see our previous discussion here and here). Whether this trend will benefit defendant corporations remains to be seen.
In re Walgreen Co. arose out of Walgreens’ $15 billion acquisition of Alliance Books GmbH. Two weeks after Walgreens filed a proxy statement seeking shareholder approval of the deal, plaintiff-shareholders filed suit, seeking additional disclosures regarding the merger. Merely 18 days later, the parties agreed to settle, requiring Walgreens to issue six supplemental disclosures and releasing the company from liability for the other disclosure-related claims in the suit. The settlement also authorized class counsel to ask the district court for $370,000 in attorneys’ fees. After the district court approved the settlement and attorneys’ fees, a shareholder named John Berlau unsuccessfully objected. He then appealed to the Seventh Circuit.
Noting that the six supplemental disclosures represented only a “trivial” addition to the extensive disclosures in the proxy statement, the Seventh Circuit found that they provided no new material information, and their value was “nil.” Accordingly, the $370,000 in attorneys’ fees for plaintiffs’ counsel “bought nothing of value for the shareholders.” The Seventh Circuit also rejected the district court’s approval of the settlement based on the lower court’s reasoning that the supplemental disclosures “may have mattered to a reasonable investor,” holding that the new information must be material and “likely to matter to a reasonable investor.”
In unabashedly rejecting the settlement, the Seventh Circuit found, “The type of class action illustrated by this case – the class action that yields fees for class counsel and nothing for the class – is no better than a racket. It must end. No class action settlement that yields zero benefits for the class should be approved, and a class action that seeks only worthless benefits for the class should be dismissed out of hand.” The Seventh Circuit’s decision may signal that the number of jurisdictions following the Delaware Court of Chancery’s lead and seeking to put an “end” to the “racket” of disclosure-only settlements is increasing. The tougher question is how these decisions will impact the M&A litigation landscape and whether the decisions limiting disclosure-only settlements will benefit defendant corporations – which may now find themselves defending fewer M&A suits, but facing uphill battles regarding settlement terms.