Disclosure-only settlements challenged by Delaware Court

Author: Edward Price | Published: 6 Oct 2015
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The Delaware Court of Chancery is questioning the practice of disclosure-only settlements. On September 17 the court issued an opinion that could signal the end of disclosure-only settlements, or at least a decrease in the number of such settlements being approved.

With M&A deals often challenged by stockholders, disclosure-only settlements are a common solution, making the court’s challenge significant. "It’s a big deal" said Brian Lutz, a partner at Gibson Dunn & Crutcher.

According to Lutz, virtually all major deals are challenged through shareholder litigation. And the scale is large, with the value of US M&A activity surging to $1.5 trillion last year, up from $1 trillion in 2013, according to Thomson Reuters.


KEY TAKEAWAYS

  • Delaware Court of Chancery is challenging the disclosure-only settlements
  • Virtually all major deals are challenged through shareholder litigation
  • Critics of disclosure-only settlements see them as an 'attorney fee tax’
  • Possible implications of the court’s decision include fewer such cases being brought in Delaware, but the litigations could move to federal courts

To end legal disputes quickly, companies use disclosure-only settlements. Their aim is to end legal disputes fast, before shareholders vote on merger deals. "Companies obviously have a significant interest in ensuring a timely shareholder vote on the transaction, without the threat of an injunction that may delay or preclude a shareholder vote on the deal," said Lutz.

Disclosure-only settlements are therefore straightforward. Corporate defendants agree to make additional disclosures about how a merger deal was reached. They also agree to pay legal fees. In exchange, plaintiffs drop their litigation, agreeing full release from defendant liability.

While disclosure-only settlements are a simple way of dealing with stockholder litigation, opponents have described them in unflattering terms. "Disclosure-only settlements are an attorney fee tax," said Fordham University’s Sean Griffith, a law professor.

Those critics now seem to include the Delaware Chancery Court. As a result, Griffith believes disclosure-only settlements are now under threat. "Lawyers can no longer assume that judges - and in particular Delaware judges - will rubber stamp disclosure-only settlements."

Professor Griffith has a particular interest in disclosure-only settlements, having been buying shares in companies he expects will end up in disputed M&A deals. That, he hopes, gives him access to the details.

The case that brought this issue to a head was re Riverbed Technology Stockholders Litigation. Professor Griffith had bought stock in Riverbed Technology and last year, the company entered an agreement to be acquired for approximately $3.6 billion. The agreement was with private equity firm Thoma Bravo and Teachers’ Private Capital, the private investor department of Ontario Teachers’ Pension Plan.

Shareholders initially sought to block the merger before receiving a disclosure-only settlement from Riverbed. According to the court, Griffith filed a brief opposing the settlement and was represented by counsel at the settlement hearing."

On September 17, the court issued its opinion: "This case, like many stockholder actions settled in this Court, was resolved by the defendants, agreeing to make additional disclosures to the stockholders, that in theory enable the plaintiff class to exercise its franchise in a better-informed manner," the court said in its decision.

"While such disclosures are in some instances material to the class members in exercising their voting franchise, and are thus valuable, in other cases their value is dubious."

The court has two key concerns. The concern expressed in these decisions is that plaintiffs’ counsel for individual shareholders may be putting their own financial interest in a settlement payment over the interest of absent class members whose claims are being released.

According to Griffith, "disclosure-only settlements are a volume game." Neither Lutz nor his firm had dealings in the Riverbed case, but Gibson Dunn & Crutcher have represented Riverbed Technology in other litigations.


"Disclosure-only settlements are an attorney fee tax"


Griffith points out the second concern held by the court. Disclosure-only settlements often result in a very broad release from liability. As a result, some stockholders are barred from making legitimate complaints. 

"The size of the release is also an issue. They [Delaware Chancery Court] are now looking to protect class interests, and in particular absent class interests, which is what they should be doing" Griffith said. The court’s September 17 decision reflects this.

Lutz thinks there could be a positive outcome to challenging disclosure-only settlements: "It certainly would be a good thing if this trend in Delaware law reduces the number of meritless cases brought by shareholders."

But there is a catch. Disclosure-only settlements may simply move elsewhere. "Water flows downhill" said Griffith. "If Delaware gets serious about disclosure-only settlements, the cases could just move to federal courts under federal substantive law."

"Lawyers will find a way" he added.

Riverbed Technology could not to be reached for comment in this story. Neither could Teachers’ Private Capital. A representative of Thoma Bravo declined to comment.