July 14, 2015

Trend for Courts to Scrutinize “Disclosure Only” Settlements Continues

In the pending case of In Re Riverbed Technology, Fordham Professor Sean Griffith has filed an objection to a disclosure only settlement and the payment of plaintiffs’ attorney fees on the basis that the disclosures really aren’t worth anything. While Delaware VC Laster has become increasingly critical of proposed settlements involving claims with little or no merit (eg. Raymond Acevedo v. Aeroflex Holding, C.A. No. 9730-VCL, hearing (Del. Ch.; 7/8/15) and Haverhill Retirement System v. Omar Asali and Harbinger Group, C.A. No. 9474-VCL, transcript (Del. Ch.; 6/8/15)) – and VC Noble recently was critical & withheld judgment over a settlement for similar reasons (In Re InterMune Stockholder Litigation, C.A. No. 10086-VCN (consol.) hearing (Del. Ch.; 7/8/15)) – this objection by an actual stockholder, albeit a law professor, may provide the Chancery Court with a significant opportunity to crack down on such settlements.

While shareholders have occasionally filed objections to settlements, few have appeared in court to object – and none have argued the merits of their objection as thoroughly and cogently as Prof. Griffith.

The upside is that increasing scrutiny of settlements may reduce the incentives for plaintiffs’ counsel to file complaints over virtually every merger assuming that, at a minimum, they will ultimately be able to collect $400-$500k for a “disclosure only” settlement and a bit more for a “disclosure plus” settlement. The downside for defendants is that the inability to get such settlements approved will limit the ability of defense counsel to obtain broad global releases unless they bump the price or otherwise materially amend the terms of the deal (i.e. reduce deal protections in a manner reasonably likely to increase the likelihood of a topping bid).