THE DEATH OF DISCLOSURE-ONLY SETTLEMENTS: TRYING TO FIGHT PERVERSE INCENTIVES
Historically, where there have been mergers of public companies, lawsuits have followed. In the recent past, in Delaware, if there was a merger valued over $100m, odds were good (over 90 percent) that someone would bring a suit challenging the transaction. These cases, often referred to as a ‘merger-tax’, would be brought seeking only additional disclosures (sometimes of questionable value) and attorney’s fees. Companies would receive a broad release of all other claims related to the transaction in return for their agreement to the settlement. That practice might be over in Delaware after the recent decision by the Delaware Court of Chancery, In Re Trulia, Inc. Stockholder Litigation. There, the court wrote strongly about its disfavour for disclosure only settlements with broad releases and warned against seeking their approval in the future.
Last year, the Delaware Court of Chancery ruled on two disclosure only settlement cases, In Re Riverbed Technology and In Re Aruba Networks. The court rejected the proposed settlement for lack of sufficient benefit to the shareholders in In Re Aruba Networks. However, in In Re Riverbed Technology the court ultimately approved of the disclosure only settlement. In doing so, the court stated that part of its justification was the parties’ reliance on the history of the courts approval of similar settlements. The court then stated that parties in the future should not to continue to rely on a precedent of disclosure only settlement approval and warned against reliance on this specific case as approval precedent as well.
Apr-Jun 2016 Issue
McDermott Will & Emery LLP