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