Whether you consider them a vindication of shareholder rights or simply a “deal tax,” merger and acquisition litigation is undergoing significant changes — at least in Delaware, by far the most prominent jurisdiction for deal cases.
As has been written about extensively, Delaware courts have recently taken a harder line on so-called disclosure settlements — settlements in which full releases for the target’s board are provided in exchange for some additions to the proxy and payment of the plaintiff’s attorneys' fees.
As the Delaware Chancery Court held in Trulia, “[P]ractitioners should expect that disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission ... [I]t should not be a close call that the supplemental information is material.” In re Trulia, Inc. Stockholder Litigation, No. 10020-CB (Del. Ch. Jan. 22, 2016).
Delaware courts’ increasing skepticism of such settlements culminated in the recent Trulia case, in which Chancellor Andre Bouchard rejected a proposed settlement agreement and release — which had not been objected to by any shareholder — concluding sua sponte that the additional disclosures provided to shareholders were little more than “minutiae.”
Increasing judicial scrutiny of these types of shareholder class action settlements has led to a shift in attitudes toward the shareholder claims themselves. Going forward, practitioners challenging corporate transactions on behalf of shareholders, as well as those practitioners defending their clients’ deals, should no longer assume that expedited discovery is inevitable regardless of the strength of the claims at issue. Courts are carefully examining these claims at the outset and, in some instances, determined that the additional disclosure sought is so minimal or marginal that either there is no “colorable claim” under Delaware law and, therefore, no reason to utilize court resources on expedited proceedings, or that the disclosure dispute would be more appropriately addressed post-closing.
For example, in Xoom Corp., No. 11263-VCG (Aug. 14, 2015), in a case challenging the adequacy of certain disclosures provided to shareholders in the context of the corporate acquisition of Xoom, the Delaware Chancery Court denied expedition after the plaintiffs failed to demonstrate that their claims were “colorable” and because plaintiffs conceded that no additional discovery on those claims was “necessary.”
By way of further example, in another case challenging the adequacy of certain disclosures provided to shareholders, Diamond Foods Inc., No. 11721-VCL (Feb. 3, 2016), the Delaware Chancery Court denied expedition and declined to rule on materiality, instead ruling that the materiality of the alleged disclosure violations could be addressed in a post-closing motion to dismiss and, if anything, could support a post-closing monetary remedy. The court remarked that its “approach also dovetails with [the] Trulia [decision],” in which the Delaware Chancery Court declined to approve a disclosure-only settlement, because “the pressure created by the motion to expedite ruling” often led “cost-effective people” to try to settle cases preclosing.
Nonetheless, the litigant who actually has colorable claims and needs expedited relief should not be discouraged. Even post-Trulia, Delaware courts have expedited cases that are time-sensitive. For example, deal cases in which the movant can show imminent, irreparable harm have been found to warrant expedition:
In Williams Companies v. Energy Transfer Equity, No. 12168-VCG (Apr. 14, 2016), Williams sued to compel Energy Transfer Equity to consummate a merger valued at $37.7 billion. Williams claimed a “willful and material breach” by ETE due to its failure to obtain a tax opinion, and sought to expedite a trial. The Delaware Chancery Court granted expedition and a trial was held within two months of the filing of the complaint. At trial, the court determined that ETE did not have to close and the merger was terminated.
In Kealine Holding v. WesPac Midstream, No. 12054-VCL (Mar. 7, 2016), claims were filed concerning the control of a limited liability company. The Delaware Chancery Court rejected the argument that loss of the plaintiff’s control rights over the LLC could be remedied by money damages, and granted expedition of those claims.
And notwithstanding the countervailing trend, even disclosure claims can still warrant expedition where the disclosure complained of is sufficiently meaningful to warrant the opportunity for discovery seeking actionable information before any shareholder vote:
In Keurig Green Mountain, No. 11815-CB (Feb. 2, 2016), the Delaware Chancery Court granted expedition in view of a specific disclosure claim that he found to be colorable: an allegation that the company made inconsistent disclosures regarding the timing of discussions surrounding management’s continued employment. Notwithstanding the expedition, however, the court, citing Trulia, emphasized that a disclosure-only settlement would not receive court approval and further noted that “[i]t would take a fairly extraordinary set of circumstances for the Court to enjoin the company’s stockholders from having the opportunity to vote.”
Practitioners and their clients litigating deals in this new era should carefully examine the facts of their cases before seeking — or agreeing to — expedited discovery. More specifically, a movant should be prepared to show harm that is genuinely imminent and irreparable post-closing. That need for a critical evaluation is even stronger in the context of disclosure claims, where an expensive, expedited proceeding may yield limited value to a plaintiff in any event.
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