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E-MailMeredith E. Kotler is a partner and Vanessa C. Richardson is an associate in the New York office of Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Ms. Kotler and Ms. Richardson. This post is part of the Delaware law series; links to other posts in the series are available here.
Since our last blog post on the changing landscape of disclosure-only settlements in the Delaware Court of Chancery, there have been developments in several areas, including the continued lower filing rates for shareholder litigation in Delaware, the adoption of the Trulia “plainly material” standard for supplemental disclosures by the Seventh Circuit, and the lower standard for disclosures required in order for plaintiffs’ lawyers to be awarded a fee in the mootness context.
Lower Filing Rates in Delaware
As expected, fewer cases challenging mergers have been filed in Delaware since In re Trulia, Inc. Stockholder Litigation was issued in January 2016. A report on Shareholder Litigation from Cornerstone found that only 64 percent of M&A deals faced litigation during the first six months of 2016, which is the lowest rate since 2009. We predict this trend will continue, and plaintiffs instead may attempt to file these suits in other forums that may be more willing to accept disclosure-only settlements. These attempts, however, will be hampered by exclusive forum bylaws, which have been widely adopted by public companies. There is some speculation that corporations may waive such bylaws in the hope of a quick, disclosure-only settlement in another forum, but it remains to be seen how receptive other courts would be to that approach.
Seventh Circuit Adopts Trulia Standard
Another report by Cornerstone on Securities Class Action Filings (discussed on the Forum here) found that the number of M&A-related filings in federal court has increased dramatically in the first half of 2016, to its highest rate since 2010. But a recent opinion from the Seventh Circuit, authored by Judge Posner, may make it more difficult for plaintiffs to attempt to evade Trulia by pursuing disclosures-only settlements in federal court. In In re Walgreen Co. Stockholder Litigation, No. 15-3799 (7th Cir. Aug. 10, 2016), the Seventh Circuit quoted approvingly from Trulia, and endorsed the standard that “[t]he misrepresentation or omission that the supplemental disclosures correct must be ‘plainly material.’” The court then determined that the supplemental disclosures at issue had no value, and reversed the district court’s decision to certify the class.
Judge Posner was highly critical of disclosure-only settlements, calling them “no better than a racket” and stating that “[n]o class action settlement that yields zero benefits for the class should be approved, and a class action that seeks only worthless benefits for the class should be dismissed out of hand.” The court remanded the case, noting that “class counsel, if one may judge from their performance in this litigation, can’t be trusted to represent the interests of the class,” and recommending that the district court seriously consider either appointing new class counsel or dismissing the suit.
Southern District of Illinois Judge Staci Yandle, who was sitting by designation on the Seventh Circuit panel, dissented from the opinion, and her dissent will be issued separately at a later time.
Mootness Fees
As a result of courts’ continued disfavor of disclosure-only settlements, more defendants have decided to issue supplemental disclosures that would unilaterally moot any disclosure claims brought by plaintiffs in merger challenges. In those instances, plaintiffs’ counsel may be entitled to seek a mootness fee for the “benefit” of supplemental disclosures that they obtained on behalf of stockholders.
Although the Court in Trulia held that supplemental disclosures must be “plainly material” in order to support a settlement and class wide release, Vice Chancellor Glasscock recently held that there is a lower standard in the mootness fee context. In that context, a merely “helpful” disclosure that “provides some benefit to stockholders” may support a mootness fee award, even if the disclosure is not material. In re Xoom Corp. Stockholders Litigation, C.A. No. 11263-VCG (Del. Ch. Aug. 4, 2016). Vice Chancellor Glasscock explained that because there was no release of claims other than to the named plaintiffs, “there is no ‘give’ to balance against the disclosure ‘get’; the benefit is the ‘get’ of the disclosures, with no waiver of class rights to be set against that benefit.” Id. Former Vice Chancellor Noble also has held that Trulia “does not require a ‘plainly material’ inquiry in the mootness fee award context.” LAMPERS v. Black, C.A. No. 9410-VCN (Del. Ch. Feb. 19, 2016) (noting that “mootness dismissals do not pose the same sorts of systemic concerns as court-approved disclosure settlements”).
Nonetheless, the Court of Chancery will continue to carefully review applications for mootness fees to ensure that they do not simply replace disclosure-only settlements. For example, Vice Chancellor Glasscock determined in Xoom that plaintiffs’ requested mootness fee of $275,000 was not justified for the disclosures obtained, and reduced the award to only $50,000. Furthermore, Chancellor Bouchard recently denied an application for a mootness fee award where the Court determined that the supplemental disclosures did not obtain any benefit for the stockholders, because the supplemental disclosures only confirmed things that had been previously disclosed. In re Keurig Green Mountain, Inc. Stockholder Litigation, C.A. No. 11815-CB (consol.), transcript (Del. Ch. July 22, 2016).
