August 31, 2016

Disclosure-Only Settlements: Do Other States Have to Follow Trulia?

Broc recently blogged about the 7th Circuit’s Walgreen decision, which endorsed Delaware’s “plainly material” approach to disclosure-only settlements announced in the Trulia case. The Walgreen case suggests that Trulia is gaining traction in other jurisdictions.  Still, many commentators anticipate that one of the consequences of Delaware’s hard line in this area will be the migration of many M&A claims to jurisdictions that are friendlier to disclosure-only settlements.

But what if other jurisdictions must apply Trulia to those migratory Delaware cases?  That’s the provocative question raised in this recent “Business Law Prof Blog.” Professor Ann Lipton noted that since Trulia addresses only the standard that applies to approval of settlements, its applicability in courts outside of Delaware is uncertain:

Chancellor Bouchard held that Delaware would only approve disclosure-only settlements in deal class actions where the new disclosures were “plainly material.” Note, this is not the substantive standard for disclosures – it is not the standard necessary to win at trial.  It is not the standard that an individual plaintiff would have to meet.  It is only the standard for the settlement of a merger class action.

Which immediately begged the question: What happens if another state is entertaining a merger case involving a Delaware company?  Does the Trulia standard count as a substantive rule of law, subject to the internal affairs doctrine, or a procedural one, that varies based on the forum?

What’s the internal affairs doctrine?  The Supreme Court described it in Edgar v. MITE:

The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation’s internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders — because otherwise a corporation could be faced with conflicting demands.

If Trulia establishes a substantive rule of corporate law, then it implicates the internal affairs doctrine and courts in other jurisdictions applying conflicts principles generally would be obligated to follow it in cases involving Delaware corporations.

If that’s the right answer, then the forum-shopping game that many have predicted could end very quickly.  Is it? The jury’s still out. Professor Lipton notes that the 7th Circuit’s opinion in Walgreen does not seem to view Trulia as involving internal affairs, but she points out that a recent New Jersey case – Vergiev v. Aguero – reached the opposite conclusion.

John Jenkins