As discussed in our prior posts,¹ several decisions by the Delaware Chancery Court during the second half of 2015 signaled that the historical practice of Delaware courts routinely approving disclosure-only settlements in stockholder litigation over a merger and acquisition (M&A) transaction would no longer be followed. If any doubt remained that the tide has irrevocably turned against the routine approval of such settlements, the recent decision by Chancellor Bouchard of the Delaware Chancery Court to reject the proposed disclosure-only settlement in In re Trulia, Inc. Stockholder Litigation² should extinguish it.

In rejecting the settlement, Chancellor Bouchard noted that “the Court’s historical predisposition toward approving disclosure settlements needs to be reexamined” and laid out the very narrow circumstances under which a disclosure-only settlement could possibly be approved going forward. He also offered his perspective that “the optimal means by which disclosure claims in deal litigation should be adjudicated [was] outside the context of a proposed settlement,” indicating the ideal contexts for consideration of disclosure claims was a mootness fee application or a preliminary injunction motion.

Prior to In re Trulia, a report analyzing preliminary statistics on 2015 M&A litigation noted that the M&A litigation rate in 2015 dropped for the first time in eight years from 94.9% of transactions of $100 million or more in 2014 to 87.7% in 2015.³  Even more surprisingly, the report noted that in the wake of the Delaware Chancery Court’s increasing unwillingness to approve disclosure-only settlements, the litigation rate for completed and uncompleted M&A transactions during the fourth quarter of 2015 plummeted to 21.4%.

These developments make clear that the M&A litigation landscape in Delaware has irrevocably changed. If the litigation rate in the fourth quarter of 2015 is any indication, this latest decision should result in a continuing reduction in the number of meritless M&A lawsuits filed. However, this will also result in companies losing the ability to obtain the relatively cheap deal “insurance” provided by the plaintiffs giving a global release in exchange for defendants making additional disclosures and agreeing to pay the plaintiffs’ attorneys fees. 

In re Trulia, Inc.

Only disclosure settlements involving “plainly material” disclosures and “narrowly circumscribed” releases will likely be approved in the future. Chancellor Bouchard noted that “practitioners should expect that disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission.”  “Plainly material” was explained to mean that there is not “a close call that the supplemental information is material” (that is, there is a substantial likelihood that the disclosure of the omitted information would have been viewed by a reasonable investor as significantly altering the total mix of information available). Even where the supplemental disclosures are “plainly material,” the Court will only approve a disclosure-only settlement where “the subject matter of the proposed release is narrowly circumscribed to encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process, if the record shows that such claims have been investigated sufficiently.”⁴  Thus, acceptable releases will likely need to exclude at least unknown claims, federal securities law, federal and state antitrust claims and other state law causes of action not included in the complaint. 

Importantly, Chancellor Bouchard indicated that this standard applies not only to settlements where the sole consideration provided to stockholders is supplemental disclosure, but also to settlements where the predominant consideration is supplemental disclosure and other non-monetary consideration is provided, such as minor modifications to deal protections. As a result, merely including immaterial modifications to deal protections in a proposed settlement will likely not convince the Court to find a “give” that supports a release of claims.

Supplemental disclosures at issue were not material. Chancellor Bouchard found that the supplemental disclosures obtained as part of the proposed settlement, which related solely to the proxy statement discussion of the financial advisor’s financial analysis,⁵ “were [not] material or even helpful to Trulia’s stockholders.” He noted that the standard that the Delaware courts have relied upon for over a decade when analyzing proxy statement disclosures about the work of financial advisors was that stockholders are entitled to “a fair summary of the substantive work performed by the investment bankers upon whose advice the recommendations of their board as to how to vote on a merger or tender rely.”⁶ Under the “fair summary” standard, only a summary providing an “accurate description of the advisor’s methodology and key assumptions” is required, meaning the summary does not need to include “all information underlying the financial advisor’s opinion or contained in its report to the board” nor does it need to “provide sufficient data to allow the stockholders to perform their own independent valuation.” Disclosures that “provide extraneous details do not contribute to a fair summary and do not add value for stockholders.” 

Even if the disclosures had been material and supported the “give” of a release of some claims, Chancellor Bouchard felt the scope of the release was too broad to support a fair and reasonable settlement because it was not limited to disclosure claims and fiduciary duty claims concerning the decision to enter the merger. It deserves note that this opinion came after the parties had revised the release to remove “unknown claims,” foreign claims and claims arising under state or federal antitrust law, while retaining “any claims arising under federal, state, statutory, regulatory, common law, or other law or rule.”

The Court believes disclosure claims in M&A litigation should be adjudicated outside the context of a proposed settlement. Chancellor Bouchard stressed that the optimal manner to adjudicate disclosure claims in M&A litigation is outside of the settlement context to ensure that the Court’s consideration of the merits of the disclosure claims occurs “in an adversarial process where the defendants’ desire to obtain a release does not hang in the balance.” He discussed the following two ways to accomplish this goal:

• Mootness fee application. The Court noted that this “preferred scenario…appears to be catching on” following the recent Court scrutiny of disclosure settlements. In this situation, the Court would review the disclosure claims when the plaintiffs’ counsel applied for an award of attorneys’ fees after defendants voluntarily provided the supplemental disclosures sought by plaintiffs that mooted some or all of plaintiffs’ claims. Because defendants do not seek a release in this situation, the adversarial process would remain intact since the defendants would be “incentivized to oppose fee requests they view as excessive.” The adversarial nature would help the Court evaluate whether the value of the supplemental disclosures supported the fee request. Although defendants would not obtain a formal release in this situation, Chancellor Bouchard implied that this could still prove valuable to defendants because “the filing of a stipulation of dismissal likely represents the end of fiduciary challenges over the transaction as a practical matter.” Chancellor Bouchard reminded the parties that they may resolve the mootness fee application themselves without Court approval provided that notice is provided to stockholders.

• Preliminary injunction motion. In this situation, plaintiffs would bear the burden of showing “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”⁷

Importance of Forum Selection Clauses

In Trulia, Chancellor Bouchard reminded Delaware corporations that they may adopt a forum selection bylaw⁸ to address concerns that the Court’s enhanced judicial scrutiny of disclosure settlements could cause plaintiffs to sue Delaware corporations and their fiduciaries in other jurisdictions in an attempt to find more hospitable forums to approve settlements “of no genuine value.” To avoid this type of forum shopping, Delaware corporations that have not already done so should consider whether to adopt a forum selection bylaw. Before proceeding, boards should carefully consider whether a forum selection bylaw is in the corporation’s best interest, the timing of adoption to ensure it would occur on a “clear day” and the current voting policies or positions of institutional investors and proxy advisory firms with respect to forum selection bylaws.

Likely as a result of more issuers adopting and enforcing forum selection bylaws, the report analyzing preliminary statistics on 2015 M&A litigation also noted that the rate of multi-jurisdictional M&A litigation decreased by approximately one-third from 2014 to 2015 and by over 50 percent since the 2012 high point.⁹

_{1. Delaware Courts Scrutinize Recent Proposed Settlement Agreements – A Harbinger of Fewer M&A “Transaction Tax” Lawsuits?}

_{2. 2016 WL 325008, C.A. No. 100020-CB (Del. Ch. Jan. 22, 2016), available at http://courts.delaware.gov/opinions/download.aspx?ID=235370.}

_{3. Matthew D. Cain & Steven Davidoff Solomon, Takeover Litigation in 2015 (Jan. 14, 2016), available at http://ssrn.com/abstract=2715890. The sample included all completed transactions of at least $100 million involving Delaware and non-Delaware publicly traded targets with an offer price of at least $5 per share.} 

_{4. Where the supplemental information is not plainly material, Chancellor Bouchard noted that the Court may find it appropriate to appoint an amicus curiae to assist in the Court’s evaluation of the disclosures’ alleged benefits, “given the challenges posed by the non-adversarial nature of the typical disclosure settlement hearing.”}

_{5. The disclosures provided additional details about: (1) certain synergy numbers in the financial advisor’s value creation analysis; (2) selected comparable transaction multiples; (3) selected public trading multiples; and (4) implied terminal EBITDA multiples for a relative discounted cash flow analysis.}

_{6. Citing In re Pure Resources, Inc. S’holders Lit., 808 A.2d 421, 449 (Del. Ch. 2002).}

_{7. Citing Gantler v. Stephens, 965 A.2d 695, 710 (Del. 2009) (quoting Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1277 (Del. 1994)).}

_{8. Delaware Passes Legislation Prohibiting Fee-Shifting Bylaws and Validating Exclusive Forum Selection Bylaws for Stock Corporations.}

_{9. The rate was 23.4% in 2015 compared to 36.2% in 2014 and 53.6% in 2012. See Cain & Solomon, supra note 3, at 3.}