We are pleased to provide a posting from our colleagues, William K. Hill, a shareholder in Gunster’s Business Litigation practice group, and Joshua A. Levine, an associate in that practice group.
On January 22, 2016, as part of the Delaware Court of Chancery’s decision concerning the stockholder class action challenging Zillow’s acquisition of Trulia, see In re Trulia, Inc. Stockholder Litig., CV 10020-CB, 2016 WL 325008 (Del. Ch. 2016), the Delaware Court extensively discussed the phenomenon of “disclosure settlements” and the Court’s attitude and approach to them.
The Court wrote that, in today’s environment, a public announcement of virtually every transaction involving the acquisition of a public corporation provokes a “flurry” of class action lawsuits alleging that the target’s directors breached their fiduciary duties by agreeing to sell the corporation for an unfair price. The Court explained that the percentage of transactions of $100 million or more that have triggered stockholder litigation in the United States has gone from 39.3% in 2005 to a peak of 94.9% in 2014.
Far too often, the Court explained, such litigation serves no useful purpose for shareholders and only generates fees for “certain lawyers who are regular players in the enterprise of routinely filing hastily drafted complaints on behalf of stockholders.” The plaintiff leverages its threat of an injunction to prevent a transaction from closing, and defendants are incentivized to quickly settle in order to avoid the expense and distraction of litigation and to obtain comprehensive releases as a form of “deal insurance.” Defendants procure settlements by issuing supplemental disclosures to the target’s stockholders before they are asked to vote on the proposed transaction, under the theory that, by having this additional information, stockholders will be better informed when exercising their franchise rights. Once an agreement in principle is reached to settle for supplemental disclosures, the Court must evaluate the fairness of the proposed settlement.
In discussing the “give” and “get” of these “disclosure settlements,” the Court explained that the supplemental disclosures are generally an easy “give” for defendants in exchange for the broad release, but the lack of a true adversarial process forces the Court to become a forensic examiner of the proxy materials to determine whether the “get” of the stockholders is sufficient. The Court explained that this process “falls to law-trained judges to attempt to perform this function, however crudely, as best they can.” In the case of the Trulia/Zillow transaction, the Court declined to approve the proposed settlement, determining that the terms of the proposed settlement were not fair or reasonable because “none of the supplemental disclosures were material or even helpful to Trulia’s stockholders, and thus the proposed settlement [did] not afford them any meaningful consideration to warrant providing a release of claims to the defendants.”
The Court went on to warn practitioners to “expect that the Court will continue to be increasingly vigilant in applying its independent judgment to its case-by-case assessment of the reasonableness of the ‘give’ and ‘get’” of disclosure settlements and to “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, and 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.”
In light of the Court’s stated intention to scrutinize disclosure settlements more closely than it has done so in the past, it is important to find attorneys who are sensitive to the Court’s considerations and are capable of properly representing companies faced with securities disclosure litigation.