On Jan. 22, 2016, the Delaware Court of Chancery released its opinion in In re Trulia Stockholder Litigation in which it rejected a “disclosure only” settlement of a shareholders’ suit challenging an M&A transaction. This decision confirms the trend of increasing hostility of the Delaware courts towards “disclosure only” settlements and serves as a warning to plaintiffs firms that they will find it increasingly difficult to extract attorneys’ fees from companies in these types of settlements.
In re Trulia involved the purchase of Trulia, Inc. by Zillow, Inc. through a statutory merger with a NewCo formed to facilitate the merger. Following announcement of the transaction, a barrage of plaintiffs firms filed suit alleging, among other things, breach of fiduciary duties and seeking to enjoin the merger.
The plaintiffs firms quickly consolidated the lawsuits into a class action and shortly thereafter reached a settlement with Trulia and Zillow. The settlement required certain minor disclosures to supplement the merger proxy statement and awarded up to $375,000 in attorneys’ fees in exchange for the stockholders’ release of all claims against Trulia and Zillow. Because the lawsuit being settled was a class action lawsuit, the fairness of the settlement agreement to the class had to be reviewed and approved by the Delaware Chancery Court.
For those scholars of law and economics, Chancellor Bouchard’s opinion in Trulia provides a good, concise history and analysis of the court’s considerations in reviewing disclosure claims in M&A litigation and is worth the read. However, for the rest of the readers, I will do you the courtesy and skip that part.
The court concluded that the additional disclosure provided by the settlement agreement was not material and did not represent “adequate consideration” for the releases of claims by stockholders. Therefore, the settlement was not fair or reasonable to Trulia’s stockholders, the court rejected the settlement, and no attorneys’ fees were awarded.
The Trulia opinion is notable for the warning that Chancellor Bouchard provides to practitioners that they “should expect that disclosure [only] 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.”
- Delaware courts are becoming increasingly hostile to the barrage of plaintiffs’ lawyers filing suits challenging M&A transactions. Lawsuits challenging M&A transactions have decreased significantly since the Delaware Chancery Court announced its increased hostility to M&A litigation in its Aeroflex and Riverbed opinions in the second half of 2015. Expect this continued hostility to result in further decreases in lawsuits challenging M&A transactions.
- The court suggests that Delaware corporations should enact a forum selection bylaw to ensure that any lawsuits brought against the corporation or its directors are brought in Delaware, rather than in another jurisdiction that is less hostile to these plaintiffs. Delaware corporations should consider adopting a forum selection bylaw.
- The court recommends that other state courts adopt the same hostility to plaintiffs in M&A litigation that the Delaware courts have adopted. It remains to be seen whether other state courts will follow suit.