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.