Risk & Compliance

Delaware Judge Deals Blow to Shareholder Lawsuits

The decision in a suit challenging a takeover is "a nail in the coffin" of so-called disclosure settlements, an expert says.
Matthew HellerJanuary 26, 2016
Delaware Judge Deals Blow to Shareholder Lawsuits

In a landmark ruling that could chill some takeover lawsuits, Delaware’s top corporate judge has rejected the proposed settlement of a shareholder class action, finding it would provide no benefit to investors to disclose additional information in proxy materials.

So-called disclosure settlements have become a common way of resolving shareholder litigation over takeovers. Trulia stockholders in November 2014 agreed to such a settlement of their claims challenging its $3.5 billion acquisition by Zillow, another real estate website.

The agreement provided for certain disclosures to supplement the proxy and a broad release of future claims. The plaintiffs’ lawyers would receive an award of no more than $375,000 in attorneys’ fees and expenses, but the investors themselves would receive no economic benefit.

But Andrew Bouchard, the chancellor or chief judge of Delaware’s Court of Chancery, ruled Friday that the terms of the deal were not fair or reasonable because “none of the supplemental disclosures were material or even helpful to Trulia’s stockholders, and thus the proposed settlement does not afford them any meaningful consideration to warrant providing a release of claims to the defendants.”

In future, he warned, the Delaware court will “be increasingly vigilant in scrutinizing the ‘give’ and the ‘get’ of such settlements.”

While other Delaware judges have expressed concerns about disclosure settlements, the Wall Street Journal said, Bouchard had been reserved in his comments from the bench and had yet to reject a settlement outright.

“This is really the end of the easy, automatically approved settlement,” said Sean Griffith, a professor at Fordham Law who has objected to similar deals, calling Bouchard’s decision “a nail in the coffin.”

Under Delaware law, information provided to investors is material “if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” The additional information disclosed to Trulia investors mostly detailed how Trulia’s bankers decided Zillow’s offer was financially fair.

“Given the rapid proliferation and current ubiquity of deal litigation … the court’s historical predisposition toward approving disclosure settlements needs to be reexamined,” Bouchard wrote.