March 27, 2014

Strine Rejects Disclosure-Only Settlement of M&A Lawsuit

Below is an excerpt from this Hunton & Williams memo:

In one of his last bench rulings before becoming chief justice of the Delaware Supreme Court, Chancellor Leo E. Strine, Jr. recently refused to approve a “disclosure-only” settlement related to a merger in In re Medicis (See In re Medicis Pharm. Corp. S’holders Litig., Consol. C.A. No. 7857-CS, trans. ruling (Del. Ch. Feb. 26, 2014)). It is unusual for Delaware courts to reject settlements of M&A litigation, most of which are based on supplemental disclosures and do not involve an increase to the merger consideration or other changes to the terms of the merger agreement.

In Medicis, however, Chancellor Strine refused to approve the settlement because he believed the supplemental disclosures did not support the release of claims being given by the stockholder class. While this means that the plaintiff could proceed with the litigation, Chancellor Strine’s comments indicated that the plaintiff’s claims had little chance of success. This result is potentially frustrating to defendants, which frequently enter into disclosure-only settlements to avoid the nuisance costs associated with handling these lawsuits post-closing. But it may also signal increased judicial scrutiny over the proliferation of lawsuits challenging M&A transactions from the newest member of the Delaware Supreme Court.