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.
Delaware Chancery Court Finds that Director Defendants Can Not “Merge Their Way Out of” Breach of Fiduciary Claims
On July 28, 2016, the Delaware Chancery Court allowed claims of unfair dealing against the Board of property management company Riverstone National Inc. to survive where the directors facilitated a merger that forestalled a derivative suit against them. The court held that by orchestrating a merger that extinguished a possible derivative action, the director defendants obtained a special benefit for themselves. As a result, the directors were interested in the transaction, thereby rebutting the presumption of the business judgment rule, and triggering application of the “entire fairness” doctrine.
Chancery Court Continues to Close the Door on Disclosure-Only Settlements and Fees (But Opens a Window for “Mootness Dismissals”)
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 Riverbed: The Beginning of the End for Disclosure-Only Settlements in M&A Cases?
The past decade has seen an incredible rise in M&A litigation. According to Cornerstone, in 2014, a whopping 93% of announced mergers valued over $100 million were subject to litigation, up from 44% in 2007. As Delaware Supreme Court Chief Justice Leo Strine explained several years ago, “the reality is that every merger involving Delaware public companies draws shareholder litigation within days of its announcement.” These lawyer-driven class action suits, which typically allege breaches of fiduciary duty by directors and insufficient disclosures, overwhelmingly end in settlement, with corporate defendants agreeing to provide additional disclosures in exchange for a broad release, and plaintiffs’ counsel walking away with attorneys’ fees for the theoretical “benefit” they conferred upon the class.