August 15, 2016

Disclosure-Only Settlements: 7th Circuit Approves of Trulia

As noted in this Sheppard Mullin blog, the 7th Circuit’s recent Walgreen decision is the latest – and perhaps most significant – opinion in which a jurisdiction has adopted Delaware’s “plainly material” standard set forth in Trulia for evaluating disclosure-only settlements. As Alison Frankel recently reported in this Reuters blog:

There were two big takeaways from a new Cornerstone Research study of shareholder suits challenging big M&A announcements. First, Cornerstone confirmed what other analysts have previously reported: Plaintiffs’ lawyers are filing fewer cases in the wake of a 2015 crackdown on disclosure-only settlements by Delaware’s Chancery Court. The drop-off is dramatic (assuming that, like me, you accept the premise that the filing rate of shareholder M&A suits is the stuff of drama). At the 2013 peak of shareholder M&A litigation, plaintiffs’ lawyers sued to challenge 94 percent of announced deals valued at more than $100 million. In the first half of 2016, the rate was down to 64 percent – lower than we’ve seen since 2009.

Cornerstone’s second big finding is that when plaintiffs’ lawyers do sue over M&A transactions, they are much more likely to file cases outside of Delaware. In the first three quarters of 2015 – before Chancery Court judges began rejecting settlements that granted defendants broad releases in exchange for immaterial additional proxy disclosures – shareholders sued in Delaware in 61 percent of the M&A deals that prompted litigation. After the crackdown, only 26 percent of the deal challenges were filed in Delaware. Even when the acquired company is incorporated in Delaware, shareholders’ lawyers sued in Chancery Court in only 36 percent of all cases, compared to 74 percent in 2015. It is increasingly likely, in other words, that judges outside of Delaware Chancery Court will preside over shareholder M&A litigation.

In Walgreen, Judge Posner wrote:

In merger litigation the terms “strike suit” and “deal litigation” refer disapprovingly to cases in which a large public company announces an agreement that requires shareholder approval to acquire another large company, and a suit, often a class action, is filed on be-half of shareholders of one of the companies for the sole purpose of obtaining fees for the plaintiffs’ counsel. Often the suit asks primarily or even exclusively for disclosure of details of the proposed transaction that could, in principle at least, affect shareholder approval of the transaction. But almost all such suits are designed to end—and very quickly too—in a settlement in which class counsel receive fees and the shareholders receive additional disclosures concerning the proposed transaction. The disclosures may be largely or even entirely worthless to the shareholders, in which event even a modest award of attorneys’ fees ($370,000 in this case) is excessive and the settlement should therefore be disapproved by the district judge…

The disclosures agreed to in the settlement (the parties call these the supplemental disclosures, as shall we) represented only a trivial addition to the extensive disclosures already made in the proxy statement: fewer than 800 new words—resulting in less than a 1 percent increase—spread over six disclosures… [The court than goes on to explain why each of the six supplemental disclosures were worthless.]

The reorganization that ratified Walgreens Boots Alliance was approved by 97 percent of the Walgreens shareholders who voted. It is inconceivable that the six disclosures added by the settlement agreement either reduced support for the merger by frightening the shareholders or increased that support by giving the shareholders a sense that now they knew everything. This conclusion is supported by recent empirical work which shows that there is little reason to believe that disclosure-only settlements ever affect shareholder voting. Jill E. Fisch, Sean J. Griffith & Steven Davidoff Solo-mon, “Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform,” 93 Tex. L. Rev. 557, 561, 582–91 (2015). The value of the dis-closures in this case appears to have been nil. The $370,000 paid class counsel—pennies to Walgreens, amounting to 0.039 cents per share at the time of the merger—bought nothing of value for the shareholders, though it spared the new company having to defend itself against a meritless suit to void the shareholder vote…

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.

Delaware’s Court of Chancery sees many more cases involving large transactions by public companies than the federal courts of our circuit do, and so we should heed the re-cent retraction by a judge of that court of the court’s “willingness in the past to approve disclosure settlements of marginal value and to routinely grant broad releases to defend-ants and six-figure fees to plaintiffs’ counsel in the process.” The result has been to “cause[] deal litigation to explode in the United States beyond the realm of reason. In just the past decade, the percentage of transactions of $100 million or more that have triggered stockholder litigation in this country has more than doubled, from 39.3% in 2005 to a peak of 94.9% in 2014.” In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884, 894 (Del. Ch. 2016).