The landmark January 2016 Delaware Chancery Court decision in Trulia has led to dramatic changes in the mergers and acquisitions litigation landscape. On a surface level, the results are straightforward — a sharp reduction in the use of preclosing “disclosure-only settlements” to dispose of mostly nuisance suits filed indiscriminately on virtually every deal whereby a target’s shareholders would receive supplemental prevote or pretender disclosures (sometimes of questionable value) in exchange for broad liability releases. While some of these settlements involved meaningful disclosure after plaintiffs engaged in appropriate discovery, the monetary benefits of these settlements flowed only to the plaintiffs’ attorneys, who received a fee award, usually six figures, for obtaining these disclosures on behalf of the target’s shareholders. In Trulia, the Chancery Court’s growing disfavor of this outcome culminated in the outright rejection of a proposed disclosure settlement and a clear warning that “practitioners 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, and the subject matter of the proposed release is narrowly circumscribed.”
While the impact of Trulia has been significant with the demise of the fast-track disclosure settlement route in Delaware, it has not spelled the end of deal litigation. Instead, it has set in motion a cascading set of developments that change (but do not eliminate) the risk profile of M&A litigation and create new pathways for the management of that risk.
Below, we highlight a handful of these noteworthy post-Trulia trends.
Significant Reduction in Overall Deal Litigation
Given the large number of public companies incorporated in Delaware and the influence of Delaware courts nationwide, the economic incentive for plaintiffs attorneys to reflexively file claims and seek a disclosure settlement has been reduced. According to Cornerstone Research, from 2010 to 2014, more than 90 percent of deals valued at over $100 million were the subject of at least one lawsuit (and usually multiple filings), with only a handful ever going to full trial and well over 50 percent being the subject of disclosure-only settlements. By contrast, in the post-Trulia first half of 2016, only 64 percent of such deals drew a legal challenge.
Many plaintiffs are seeking a “friendlier” forum. As a result of the Trulia decision in Delaware and the corresponding pressure on attorneys' fee awards in cases where the only remedy is additional disclosure, plaintiffs are now looking to file M&A cases in non-Delaware jurisdictions where they may find a more sympathetic audience for the continued pursuit of disclosure settlements. Many states have not yet adopted the Trulia approach to these settlements, and courts in those states may still be willing to approve disclosure settlements and make robust plaintiff attorneys’ fee awards. This trend is reflected in data from Cornerstone Research. While plaintiffs filed in Delaware in over 60 percent of M&A lawsuits in prior periods, in the most recent nine months, Delaware was the chosen forum in only 26 percent of litigated deals. The adoption by a target company of a forum selection bylaw mandating that breach of fiduciary duty suits must be filed in Delaware can help mitigate the effect of this forum shopping by plaintiffs.
Increase in Federal Claims
To evade the Delaware trends as well as the protective benefits of a forum selection bylaw, which only applies to state law claims, plaintiffs have also sought to recast their deal-related claims as disclosure claims brought in federal court under the proxy or tender offer rules. According to Cornerstone Research, the first half of 2016 showed an increase of 167 percent in the number of federal M&A suits compared to the preceding six months. While disclosure settlements resulting from this uptick in federal claims are now working their way through the federal courts, it is worth noting that just this month, an appellate panel in the Seventh Circuit (Walgreens) overturned a district judge’s approval of a disclosure settlement. Adopting Trulia-like reasoning, the Seventh Circuit panel described the settlement as a “racket” where the “only concrete interest suggested by this litigation is an interest in attorneys’ fees, which of course accrue solely to class counsel and not to any class members.”
Renewed Focus on Appraisal Claims
Plaintiffs are also focusing more on appraisal claims as an alternative avenue to challenge deals. These claims have not been impacted by Trulia and do not necessarily require proof that the board breached its fiduciary duties. After a string of cases where Chancery judges determined that the deal price was the best indicator of fair value (i.e., that appraisal claims would not lead to a higher value award than the deal price where there was a good sale process), in the recent Dell and DFC Global appraisal cases, the Delaware Chancery Court awarded the claimant shareholders a “fair price” per share that was above the deal price by 28 percent and 7 percent, respectively, even while acknowledging that the sale processes in those cases were fairly robust.
Focus on Getting Disclosure Right
At the same time as the Trulia developments, the Delaware courts also moved to articulate clearly a general principle regarding the “cleansing” effect of a fully informed shareholder approval of the deal on potential target board liability. In particular, the Delaware Supreme Court held in Corwin v. KKR that a board’s decisions will have the benefit of being reviewed under the more deferential “business judgment” standard, as opposed to being subject to enhanced scrutiny under stricter standards, if a transaction is “approved by a fully informed, uncoerced majority of disinterested stockholders.” This articulation of the benefit of accurate and complete disclosure coincided with Trulia, which resulted in less litigation about, and therefore less scrutiny of and possible improvements to, the pre-vote or tender disclosures issued to target shareholders. As a result, perceived disclosure shortcomings are more often being litigated post-closing, where the impact of any disclosure deficiencies is magnified by the potential loss of the “cleansing” effect imbedded in the KKR doctrine. Therefore, parties should place increased emphasis on preparing appropriate disclosure in the first instance, as there will likely not be either preclosing litigation claims to improve the disclosure or the prospects of a general release of liability received in a preclosing disclosure settlement.
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While the impact of Trulia is profound, rumors that it represented the demise of M&A litigation were greatly exaggerated. As described above, deal litigation continues, albeit in different forums, with different claims, and subject to different risk mitigation tactics.
—By Daniel E. Wolf and David B. Feirstein, Kirkland & Ellis LLP
Daniel Wolf and David Feirstein are partners in Kirkland & Ellis' New York office.