On April 11, 2016, the Fordham Journal of Corporate & Financial Law co-hosted the 16th Annual Albert A. DeStefano Lecture on Corporate, Securities and Financial Law with the Corporate Law Center at Fordham Law School.
This years lecture features Chancellor Andre G. Bouchard, who elaborated on his In Re Trulia, Inc. Stockholder Litig. decision and provided insight into the future of disclosure settlement cases.
On January 22, 2016, Chancellor Bouchard issued an opinion [1] rejecting the proposed settlement in the litigation arising out of Zillow’s acquisition of Trulia. Four Trulia stockholders filed complaints shortly after the proposed merger was announced, alleging that Trulia’s directors had breached their fiduciary duties in approving the proposed transaction at an unfair exchange ratio. Less than four months later, the parties entered into a settlement agreement that Trulia agreed to provide supplemental disclosures in exchange for plaintiffs dropping their motion to preliminarily enjoin the merger and agree to provide a release of claims on behalf of a proposed class of Trulia’s stockholders. The terms of the proposed settlement contained what Chancellor Bouchard called an “extremely broad release” of claims, including “unknown claims” and “claims arising under federal, state, foreign, statutory, regulatory, common law or other law or rule.” [2] The settlement agreement also included a proposed $375,000 fee for plaintiffs’ counsel. Chancellor Bouchard declined to approve [3] the proposed settlement because “none of the supplemental disclosures were material or even helpful to Trulia’s stockholders, and thus the proposed settlement does not afford them any meaningful consideration to warrant providing a release of claims to the defendants.”
In his lecture, Chancellor Bouchard noted that disclosure settlements rarely yield genuine benefits for stockholders and such litigation serves only to generate fees for certain lawyers. He also expressed his concerns over the risk of stockholders losing potentially valuable claims and the difficulties of the Court evaluating disclosure settlements in a non-adversarial process. [4]
Based on these considerations, Chancellor Bouchard offered his perspective on the optimal means to assess disclosure claims outside the context of a proposed settlement. One is in the context of a preliminary injunction motion where plaintiffs would have the burden to demonstrate that the alleged omission or misrepresentation is material. A second way is when plaintiffs’ counsel asks the Court to award attorneys’ fees after defendants voluntarily supplement their proxy materials by making one or more of the disclosures sought by plaintiffs, thereby mooting some or all of their claims.
Chancellor Bouchard further noted that broad releases will not be approved going forward and supplemental disclosures that are not “plainly material” will be rejected. “To the extent that litigants continue to pursue disclosure settlements, they can expect that the Court will be increasingly vigilant in scrutinizing the “give” and the “get” of such settlements to ensure that they are genuinely fair and reasonable to the absent class members.”
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[1] In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 888 (Del. Ch. 2016)
[2] In response to concerns raised by Chancellor Bouchard, the parties narrowed the release language to remove “unknown claims” and “foreign claims” and added a carve-out so that the release would not cover any claims that arise under the Hart-Scott-Rodino, Sherman, or Clayton Acts, or any other state or federal antitrust law.
[3] Approval of a class action settlement requires the Court to independently examine whether the settlement is reasonable and intrinsically fair.
[4] In the disclosure settlement context, once the parties agree to settle for supplemental disclosures, the litigation enters a new and unusual phase where both parties then share the same interest in obtaining the Court’s approval of the settlement: plaintiffs’ counsel has an interest in getting the settlement approved so that they can get their attorneys’ fees, and the defendants also have an interest in getting the settlement approved so that they can close the deal.
