Sean Griffith was quoted in a Reuters article about shareholder lawsuits challenging big M&A announcements.
It is increasingly likely, in other words, that judges outside of Delaware Chancery Court will preside over shareholder M&A litigation. So the Cornerstone report adds real-life urgency to a question I’ve previously asked in theory. In Delaware, plaintiffs’ lawyers know they can’t collect six-figure fees for bringing unwarranted deal challenges and defendants know they can’t buy global releases for the low, low price of a few hundred thousand bucks in fees to shareholders’ counsel. But will other judges countenance those agreements?
Fordham law professor Sean Griffith is worried that they will. As you may recall, Griffith is one of the academics who stirred the debate over disclosure-only settlements, co-authoring the 2015 paper, “Confronting the Peppercorn Settlement in Merger Litigation.” He then pledged to put his theories into practice. Griffith bought shares of recently acquired companies in order to object to disclosure-only settlements in shareholder class actions challenging the transactions. He made a splash last summer as an objector in a Delaware case involving Riverbed Technologies. (Griffith’s objection didn’t squelch the Riverbed settlement but provoked an opinion expressing skepticism about the viability of future disclosure-only settlements; the judge nevertheless awarded the professor’s lawyer only $10,000 in fees because he was worried about encouraging meritless objections.)
Now Griffith is busy warning courts outside of Delaware about disclosure-only settlements. In April, he objected to a proposed settlement in New Jersey state court to resolve a challenge to the $105 million buyout of a company called Metalico. The settlement agreement called for plaintiffs’ lawyers to receive $525,000 for negotiating supplemental disclosures to the deal documents. Griffith’s objection argued that the New Jersey judge should apply Delaware law, which, since last year, disfavors such settlements. In June, Union County Superior Court Judge Thomas Walsh agreed the additional disclosures were not material and rejected the settlement. His ruling aligns New Jersey state court with judges in New York State Supreme Court who, as Griffith notes, began bouncing disclosure-only M&A settlements even before Delaware Chancery Court threw down the gauntlet.
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The Fordham professor told me his big fear is that defendants will be able to game the system if judges outside of Delaware don’t adopt Delaware’s skeptical approach to disclosure-only settlements. For defendants, the goal is broad releases from shareholder claims. If they can obtain those releases by negotiating settlements with plaintiffs’ lawyers who sue in courts that allow disclosure-only resolutions, Griffith said, they will be perfectly happy to make those deals. “This is a defendants’ racket,” he said. “We academics have been hammering on the plaintiffs’ side for too long.”
Many corporations have forum selection bylaws or charter provisions designating Delaware as the exclusive forum for shareholder litigation. But a lot of those forum selection clauses give corporate directors flexibility about whether to enforce their own rules. Griffith said Chancery Court’s rigidity about disclosure-only settlements will encourage corporate defendants to negotiate ineffectual settlements with second-rate plaintiffs’ firms suing outside of Delaware. The fees generated by such settlements, he said, will continue to fuel these marginal plaintiffs’ firms. Shareholders are the big potential losers in this scenario, he said, because legitimate M&A suits that ought to be litigated before experienced Delaware judges will be settled outside of Delaware.
“This is not a good public policy position we’re in right now,” Griffith said.
