Are Disclosure-Only Claims Dead Yet?
Are "disclosure only" claims now at an end in Delaware? Following the Delaware Court of Chancery's Jan. 22 decision in In re Trulia, 129 A.3d 884 (Del. Ch. 2016), various commentators have concluded Trulia "likely spells the end of disclosure-only settlements in Delaware." But as Monty Python famously said, "I am not dead yet," and the same may be true of claims attacking a corporate transaction for want of adequate disclosures.
The background to this matter is well known.
Almost all mergers involving publicly traded corporations in recent years have generated multiple suits attacking the merger. Usually, those suits were promptly settled, with the defendants agreeing to make a few additional disclosures and pay a fee to the plaintiff's lawyers in return for a release of claims. These "disclosure-only settlements" were criticized as only providing a windfall for lawyers in return for largely meaningless supplements to proxy statements, while releasing even potentially good claims of the stockholders.
The Court of Chancery gradually began to curtail disclosure-only settlements. Then came Trulia. There the chancellor disapproved a proposed disclosure-only settlement and made it clear that the court would thereafter reject all such similar settlements absent "plainly material" additional disclosures. The Trulia decision makes it clear as well that the "plainly material" bar is set high. Hence, commentators predict that Trulia will mark the end of disclosure-only settlements and the litigation that led to these settlements.
That judgment is premature.
To begin with, Trulia itself recognizes there are other ways disclosure litigation may still lead to plaintiffs attorneys recovering fees for even minor supplemental disclosures. First, if the defendants voluntarily make these disclosures, the plaintiffs may then declare the case is moot and still seek a fee award without offering a release to defendants. Presumably the defendants could contest the fee application, but the court's concern over the "give" and the "get" would be much less when no release of claims is involved. Perhaps the "plainly material" standard would be lowered and some fee approved.
In fact, the recent decision in Louisiana Municipal Police Employees' Retirement System v. Black, C.A. 9410-VCN (Del. Ch. Feb. 19, 2016), supports a lower standard for fee awards in a moot case. The Black decision expressly held that Trulia "does not require a 'plainly material' inquiry in the mootness fee award context." Black awarded $184,375 for disclosures "not much more than material" and some "tweaking of the deal protection measures."
A second way to obtain a fee for only supplemental disclosures is to resolve the dispute privately, with a stipulation of dismissal with prejudice only to the named plaintiff, notice to the stockholders and a negotiated fee. Trulia expressly approves that approach.
Of course the obvious question is why defendants would voluntarily pay any fee under these circumstances when they do not get a release in return. There are several reasons to do so. A settlement avoids a risky court hearing over the size of a fee award and the defense costs there incurred. A settlement makes at least that particular case go away. Even if there are other cases pending, any settlement will tend to weaken the plaintiffs' wolf pack by diminishing its numbers and possibly discouraging other litigants. After all, even a different court cannot help but be somewhat influenced by a plaintiff's declaration the case is not worth pursuing further.
Whatever may have been the motivations, recent cases have employed this private settlement procedure including a mootness fee. Trulia itself cites to some examples and others have occurred as well. Hence, it is not beyond the realm of possibility that disclosure-only settlements will continue in Delaware. The procedure may be different, but there will be such settlements.
Is that desirable?
There are certainly arguments to be made that almost all of the disclosure-only settlements are just a payoff to plaintiffs lawyers with no accompanying social benefits. Yet it is also true that some of this merger objection litigation uncovered insider abuses and led to large judgments for stockholders. The courts cannot be expected to spend their scarce resources examining every suit to punish the meritless litigation for the sake of purifying the system. If the parties agree to settle, why should the courts be involved? And even if the court needs to resolve a fee dispute, that is less burdensome than continued litigation. So long as the stockholders do not release claims, a small fee is worth the benefit of resolution. Moreover, Trulia will discourage baseless claims to some extent as the plaintiffs bar does not want to waste its time and resources either.