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Are merger suits in Delaware poised for a drop?

October 1, 2015

Are Delaware’s judges attempting to rein in the shareholder litigation that has become an inevitable sideshow to virtually every corporate takeover?

A recent opinion from the Delaware Chancery Court, home to many of these disputes, as well as the transcript from a hearing involving the merger of Trulia Inc. and Zillow Inc., suggests that the state’s judiciary thinks it’s time to limit these suits, which often settle only for additional corporate disclosures and attorneys’ fees.

“When I started practicing, very few people sued on every deal, and we never dealt with the kind of volume of this stuff that we see nowadays,” Vice Chancellor Andre Bouchard said in the Trulia-Zillow hearing Sept. 16. “And it just can’t be that this is socially useful.”

Bouchard’s observations are backed up by the numbers. Cornerstone Research, which tracks shareholder and securities litigation, found that in 2014, 93 percent of “M&A deals valued over $100 million” resulted in shareholder litigation. In 2007, by comparison, only 44 percent of such deals were challenged.

Of the suits filed last year, 60 percent were brought in Delaware. In the deals involving Delaware-incorporated companies that resulted in litigation, 88 percent of those lawsuits were filed in state.

‘The underbellly’

The suits, which usually settle, don’t typically seek monetary damages apart from attorneys’ fees. Instead, almost 80 percent of the cases that settled required only additional disclosures by the companies – the type of settlement at issue in Trulia-Zillow as well as in the $3.6 billion acquisition of Riverbed Technology Inc., announced in December. Bouchard, in the hearing, called these “the underbelly of settlements.”

In the case involving Riverbed, stockholders claimed that the acquirers – Thoma Bravo LLC and Teachers’ Private Capital, an affiliate of the Ontario Teachers’ Pension Plan – hadn’t disclosed potential conflicts of interest with their financial advisers.

The import of the supposedly inadequate disclosures was unclear. Even the plaintiffs’ own expert couldn’t opine that the merger price was unfair or that viable federal securities-law claims existed, Vice Chancellor Sam Glasscock III said in his Sept. 17 decision.

He clearly was troubled by increase in M&A litigation. He noted generally that a named plaintiff “may have little actual stake in the outcome, her counsel may rationally believe a quick settlement and modest fee is in his best financial interest, and the defendants may be happy to ‘purchase,’ at the bargain price of disclosures of marginal benefit to the class and payment of the plaintiffs’ attorney fees, a broad release from liability.”

Glasscock nonetheless approved the settlement, in large part out of fairness. He said the parties had relied on the Chancery Court’s past practice of approving settlements in which the remedy comprises additional disclosures, a practice that informed his ultimate approval of the deal struck. But he said quite pointedly that plaintiffs’ counsel and the companies they sue should no longer bank on the past. Prior practices “will be diminished or eliminated going forward” in light of his opinion and others of the court, Glasscock said.

Fee cut

In approving the settlement, Glasscock also cut the attorney fees – the only monetary component of the settlement –- by almost 35 percent, to about $330,000 from $500,000.

The second case to grapple with the proliferation of investor suits challenging M&A deals stemmed from the merger of the two online real estate companies Zillow and Trulia that was announced in July 2014.

In the hearing this month to determine whether the settlement should be approved, Bouchard asked what benefit would be conferred on the plaintiffs by the accord, an question that he said “has been on my mind for some time.”

Bouchard said that to issue a preliminary injunction to stop a deal – what he deemed “a very serious thing” – there needs to be an absence of material information or a misleading disclosure.

Whether the disclosures at issue, involving expected “synergies” and “exit multiples,” had been material warranted further briefing, he said.

Both Bouchard and Glasscock were troubled by the settlements’ inclusion of releases for unknown claims contained in both.

‘Hubristic’

“The breadth of the release is troubling,” Glasscock said in his ruling. “It is hubristic to believe that upon this record I can properly evaluate, and dismiss as insubstantial, all potential federal and state claims.”

Bouchard asked the parties, before he approved the settlement, to include in their briefs whether “it makes sense” to endorse releases with unknown claims.

Taken together, it appears that the influential Delaware Chancery Court is putting the brakes on M&A litigation.

Sean Griffith, a professor at Fordham University School of Law, has bought small amounts of stocks in companies involved in deals so he and his students can track litigation and settlements. He objected to the Riverbed settlement, and while his status as an objector was approved, his opposition was rejected.

His involvement is quite literally academic. He thinks the Riverbed opinion, coupled with the Trulia hearing, suggests the litigation game has changed.

“Going forward there shouldn’t be an expectation of approval,” he said in an interview. “There will no longer be a rubber stamp of these settlements.”

The Riverbed case is In Re Riverbed Technology Inc. Stockholders Litigation, 10484-VCG; the Trulia-Zillow case is In Re Trulia Inc. Stockholder Litigation, 10020-CB, both in Delaware Court of Chancery (Wilmington).

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