My congratulations to the indefatigable Sean Griffith, who has fought the good fight against frivolous M&A litigation and the especially pernicious phenomenon of disclosure-only settlements. In Griffith v. Quality Distribution, Inc., Sean and his counsel persuaded the Florida Court of Appeals to adopt the Delaware rule laid out in In re Trulia:
In In re Trulia, the Delaware Court of Chancery discussed the proliferation of "disclosure settlements" and the problems associated with a request to approve such a settlement. 129 A.3d at 887, 891-99. The court was asked to approve a proposed settlement of a class action brought by shareholders of Trulia, Inc., for breach of fiduciary duty relating to a proposed merger with Zillow, Inc. 129 A.3d at 887-88. The parties engaged in limited discovery, and within four months after the complaint was filed, the shareholders entered into an agreement to settle. Id. at 887.
In essence, Trulia agreed to supplement the proxy materials disseminated to its stockholders before they voted on the proposed transaction to include some additional information that theoretically would allow the stockholders to be better informed in exercising their franchise rights. In exchange, plaintiffs dropped their motion to preliminarily enjoin the transaction and agreed to provide a release of claims on behalf of a proposed class of Trulia's stockholders. If approved, the settlement will not provide Trulia stockholders with any economic benefits. The only money that would change hands is the payment of a fee to plaintiffs' counsel.
Id. at 887. The agreement provided that plaintiffs' counsel could seek an award of attorney's fees and expenses up to $375,000. Id. at 889-90.
The Court of Chancery explained that "disclosure settlements" are becoming increasingly more common:
Today, the 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. On occasion, although it is relatively infrequent, such litigation has generated meaningful economic benefits for stockholders when, for example, the integrity of a sales process has been corrupted by conflicts of interest on the part of corporate fiduciaries or their advisors. But 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.
...
In just the past decade, the percentage of transactions of $100 million or more that have triggered stockholder litigation in this country has more than doubled, from 39.3% in 2005 to a peak of 94.9% in 2014. Only recently has the percentage decreased, falling to 87.7% in 2015 due to a decline near the end of the year. In Delaware, the percentage of such cases settled solely on the basis of supplemental disclosures grew significantly from 45.4% in 2005 to a high of 76.0% in 2012, and only recently has seen some decline. The increased prevalence of deal litigation and disclosure settlements has drawn the attention of academics, practitioners, and the judiciary.
Id. at 891-92, 894-95 (footnotes omitted). The court explained how such settlements are achieved in these class action lawsuits:
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.
Id. at 892-93 (footnotes omitted). The court further explained that "[o]nce an agreement-in-principle is struck to settle for supplemental disclosures, the litigation takes on an entirely different, non-adversarial character," which the court described as problematic. Id. at 893.
The lack of an adversarial process often requires that the Court become essentially a forensic examiner of proxy materials so that it can play devil's advocate in probing the value of the "get" for stockholders in a proposed disclosure settlement. . . . In an adversarial process, defendants, armed with the help of their financial advisors, would be quick to contextualize the omissions [in the original disclosures] and point out why the missing details are immaterial (and may even be unhelpful) given [information] already disclosed in the proxy. In the settlement context, however, it falls to law-trained judges to attempt to perform this function, however crudely, as best they can.
Id. at 894. The court opined that these dynamics and the court's willingness to approve such settlements "have caused deal litigation to explode in the United States beyond the realm of reason." Id.
The court concluded that in light of the concerns expressed above, disclosure settlements should be met with disfavor "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." Id. at 898. The supplemental information will be considered plainly material "if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote" or, in other words, if "from the perspective of a reasonable stockholder, there is a substantial likelihood that it 'significantly alter[s] the "total mix" of information made available.' " Id. at 899 ....
The Florida court noted that:
The Seventh Circuit applied the In re Trulia decision in rejecting a proposed class settlement in what the court termed a "strike suit" or "deal litigation." Hays v. Walgreen Co., 832 F.3d 718, 721 (7th Cir. 2016). ... Recognizing that "Delaware's Court of Chancery sees many more cases involving large transactions by public companies than the federal courts of [the Seventh Circuit]," the court adopted the standard set forth in In re Trulia. Id. at 725.
The Florida court likewise "recognize[d] the complexity of merger litigation and the Delaware courts' expertise in such matters." It therefore "adopt[ed] the standard set forth in the well-reasoned In re Trulia decision and clarified in the Hays decision."
