In In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB (Del. Ch. Jan. 22, 2016), the Delaware Court of Chancery refused to approve a class action settlement that called for marginal disclosures in exchange for a broad release of stockholder claims. In so doing, the Court announced that moving forward it would review such “disclosure settlements” with increased scrutiny.
The case arose from the stock-for-stock merger between online real estate companies Zillow, Inc. and Trulia, Inc. Shortly after the merger was announced in July 2014, four plaintiffs filed class action complaints seeking to enjoin the merger and alleging that the directors of Trulia breached their fiduciary duties by including misleading disclosures in the joint proxy statement. Within days, however, the plaintiffs agreed to release their claims if Trulia would provide supplemental disclosures about the financial opinion the Trulia directors relied upon when approving the transaction. Trulia provided the disclosures, and the stockholders of both companies subsequently adopted the merger agreement. A formal settlement agreement was then submitted to the Court for approval, which (i) sought certification of a class consisting of all Trulia stockholders as of the date the merger was first announced through the closing date; (ii) included a broad release of “any claims arising under federal, state, statutory, regulatory, common law, or other law or rule” held by members of the proposed class relating in any way to the merger (with a limited carve-out for antitrust claims); and (iii) permitted plaintiffs’ counsel to seek an award of attorneys’ fees totaling $375,000.
The Court rejected the proposed settlement because the supplemental disclosures failed to provide a material benefit to the Trulia stockholders and were insufficient to justify the broad release of claims. In reaching this decision, the Court held that certain disclosures were immaterial because they contained information that was already publicly available, while other disclosures, which restated specific data points used by Trulia’s financial advisor, were immaterial because Delaware law only requires companies to provide a summary of the financial advisor’s opinion and not every detail necessary to recalculate the advisor’s analysis.
In addition to its ruling, the Court unambiguously announced its intention to review “disclosure settlements” in the future with heightened scrutiny. The Court acknowledged that defendants involved in deal litigation have strong incentives to settle quickly—particularly if such settlements can be obtained by offering minimal disclosures in exchange for a broad release of stockholder claims. The Court explained, however, that its prior willingness to approve settlements calling for marginal disclosures, sweeping releases of stockholder claims and six-figure attorney fees had led to an explosion of lawsuits that “serve no useful purpose.” Stressing how it can be problematic to adjudicate disclosure claims in the context of settlement-approval proceedings, the Court further explained that such proceedings are non-adversarial, leaving the Court to determine the materiality of supplemental disclosures without the benefit of a full record or consulting opposing briefs. Given the surge in deal litigation and the risk that stockholders are losing potentially valuable claims that have not been adequately investigated, the Court proposed two solutions.
First, the Court recommended that disclosure claims be litigated outside of a settlement-approval proceeding and in an adversarial context. One such context would be a preliminary injunction motion, where plaintiffs would bear the burden of showing that disclosure of the omitted fact would likely have been material to a reasonable investor. Another context is when plaintiffs’ counsel apply to the Court for an award of attorneys’ fees after defendants voluntarily decide to supplement their proxy materials by making one or more of the disclosures sought by plaintiffs, thereby mooting some or all of their claims. In this situation, defendants are incentivized to oppose excessive fee requests.
Second, to the extent parties continue to pursue disclosure-based settlements, the Court warned that such settlements are “likely to be met with continued disfavor” by the Court unless the supplemental disclosures address a “plainly material misrepresentation or omission,” and the subject matter of the proposed release is narrowly circumscribed to encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process.
Should supplemental information not be “plainly material,” the Court recommended appointing an amicus curiae, paid for by both parties, to assist the Court in evaluating the alleged benefits of the supplemental disclosures. Finally, to mitigate the risk that parties will seek out forums willing to approve disclosure settlements of no genuine value, the Court also called on its sister courts in other states to adopt similar practices.
Following the settlement hearing, the Court noted that the parties agreed to narrow the release to exclude unknown claims, foreign claims, and claims arising under state or federal antitrust law. However, the Court held that this narrowed release was still overbroad as it was not limited to solely disclosure claims and fiduciary duty claims concerning the decision to enter into the merger.