February 8, 2017

Disclosure-Only Settlements: NY Appellate Court Rejects Trulia

Last year, in In re: Trulia, the Chancery Court adopted a hard line on disclosure-only settlements – requiring supplemental disclosures to be “plainly material” in order to support a broad release & fee award.  Since that time, a few other courts have decided to toe Delaware’s line – most notably the 7th Circuit with its decision in the Walgreen case.  However, disclosure-only settlements continue to be approved by courts in a number of other jurisdictions.

This Orrick memo highlights what appears to be the first state appellate court decision addressing disclosure-only settlements post-Trulia.  In Gordon v. Verizon, New York’s 1st Dept. parted company with Delaware’s rejection of disclosure-only settlements.  The lower court rejected the settlement, citing Trulia – but the Appellate Division reversed:

As an initial matter, the Appellate Division found that because the parties included a New York choice-of-law provision in the settlement agreement, New York law would apply (an implicit rejection of the trial court’s frequent citation to Chancery precedent). Although Verizon is a Delaware corporation, it does not have a Delaware forum-selection clause in its corporate bylaws and the Appellate Division did not evaluate whether the internal affairs doctrine required application of Delaware law.

Since the Court held that New York law applied, it looked to New York’s test for approving the settlement of merger litigation – which is more lenient toward disclosure-only settlements than Delaware’s.

What’s the key takeaway for Delaware corporations?  Adopt an exclusive forum bylaw if you don’t already have one:

Verizon’s lack of a Delaware forum selection bylaw allowed the Gordon shareholder-plaintiffs to file suit in New York and thereby evade recent Delaware precedent regarding merger settlements. In light of the precipitous decline in merger litigation filed in Delaware post-Trulia, it is fair to wonder whether the Gordon plaintiffs would have brought suit at all if the matter was required to proceed in Chancery Court. Consequently, Delaware corporations should consider whether the adoption of an exclusive forum bylaw would be beneficial to reduce frivolous merger-related suits.

New York’s more lenient approach may make it a more popular venue for merger litigation, which is sort of a double-edged sword.  New York’s approach might encourage the filing of more frivolous suits, but it may also facilitate settlement of lawsuits for companies looking for a quick resolution to claims surrounding a deal.

John Jenkins