Congratulations to Fordham Law Professor Sean Griffith, whose outstanding crusade against the pernicious wave of disclosure-only settlements is now coming to fruition. As Forbes reports:
Plaintiff lawyers were warned last year, and now a Delaware judge has delivered a potentially crippling blow to “disclosure-only” settlements that reward lawyers with rich fees but give their clients nothing.
In a detailed, 42-page ruling issued today, Chancery Court Judge Andre Bouchard formally rejected a settlement lawyers at Rigrodsky & Long and several other firms negotiated with Zillow last year over its $3.5 billion takeover of Trulia. That settlement, as is typical with these sorts of cases, provided nothing for their shareholder clients except for “supplemental disclosures” of information beyond the 200-page proxy statement they had already received detailing the terms of the merger. It did promise something of great value to Zillow: a global release of all claims stemming from the merger, including “unknown claims” the plaintiffs weren’t even aware of yet.
Going forward, plaintiff lawyers won’t be able to staple such broad releases to their settlement deals. And that means those lawyers won’t have nearly as much leverage to negotiate their fees, since one of the main things they had to offer in exchange was court-approved protection from any further litigation.
“From the perspective of some defendants in some cases, this isn’t so good because they just lost their $400,000 global release,” said Sean Griffith, a professor at Fordham Law School who successfully challenged the Zillow settlement. “But for defendants overall, it will mean fewer cases challenging mergers.”
I think Prof. Griffith is right that this decision may be a game changer. A new study of takeover litigation by Matthew Cain and Steven Davidoff Solomon finds that:
Takeover litigation was substantially disrupted in 2015 by the Delaware courts' willingness to challenge "disclosure only" settlements. For the full year, lawsuits were brought in 87.7% of completed takeovers versus 94.9% in 2014. However, the lawsuit rate dropped precipitously in the fourth quarter of 2015 to 21.4% of all transactions in the wake of Delaware's challenge. There were also substantial delays in the approval of litigation settlements and attorneys' fee awards. Multi-jurisdictional litigation continued its sharp decline, falling approximately 50% from its 2012 high. Despite the higher rates of dismissals, large awards and settlements were give in litigation arising from the Rural/Metro, Dole and Freeport-McMoRan transactions, among others.
Another likely outcome will be accelerated adoption of forum selection clauses. Indeed, investors now have a strong incentive to insist that companies adopt such bylaws, so that their companies are less subject to meritless litigation and so that there is less incentive for plaintiff lawyers to settle meritorious cases on terms that benefit only themselves and the defendants who get global releases in return for a few worthless disclosures. And that's a good thing, because as Chancellor Bouchard observed, under the current regime:
... far too often such litigation serves no useful purpose for stockholders. Instead, it serves only to generate fees for certain lawyers who are regular players in the enterprise of routinely filing hastily drafted complaints on behalf of stockholders on the heels of the public announcement of a deal and settling quickly on terms that yield no monetary compensation to the stockholders they represent.
So how will these cases be handled in the future? Bouchard explained the problem to which he was responding as follows:
In such lawsuits, plaintiffs’ leverage is the threat of an injunction to prevent a transaction from closing. Faced with that threat, defendants are incentivized to settle quickly in order to mitigate the considerable expense of litigation and the distraction it entails, to achieve closing certainty, and to obtain broad releases as a form of “deal insurance.” ...
Once the litigation is on an expedited track and the prospect of an injunction hearing looms, the most common currency used to procure a settlement is the issuance of supplemental disclosures to the target’s stockholders before they are asked to vote on the proposed transaction. The theory behind making these disclosures is that, by having the additional information, stockholders will be better informed when exercising their franchise rights. Given the Court’s historical practice of approving disclosure settlements when the additional information is not material, and indeed may be of only minor value to the stockholders, providing supplemental disclosures is a particularly easy “give” for defendants to make in exchange for a release.
Once an agreement-in-principle is struck to settle for supplemental disclosures, the litigation takes on an entirely different, non-adversarial character. Both sides of the caption then share the same interest in obtaining the Court’s approval of the settlement. ...
It is beyond doubt in my view that the dynamics described above, in particular the Court’s willingness in the past to approve disclosure settlements of marginal value and to routinely grant broad releases to defendants and six-figure fees to plaintiffs’ counsel in the process, have caused deal litigation to explode in the United States beyond the realm of reason. ... [PB: Kudos to the Chancellor for taking accountability and responsibility for his court having helped create the problem.]
So here's the solution:
... 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, 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 using the term “plainly material,” I mean that it should not be a close call that the supplemental information is material as that term is defined under Delaware law.
In addition, Bouchard specifically endorsed the emergent practice of mootness dismissals in which "defendants voluntarily decide to supplement their proxy materials by making one or more of the disclosures sought by plaintiffs, thereby mooting some or all of their claims." The defendants then move to dismiss the case on mootness grounds. In response, it is increasingly common for the plaintiffs to dismiss their actions without prejudice to the other members of the putative class (which has not yet been certified)." The Chancery Court then "reserves jurisdiction solely to hear a mootness fee application." As Bouchard pointed out, "[i]n that scenario, where securing a release is not at issue, defendants are incentivized to oppose fee requests they view as excessive."