CLIENT ALERT: Delaware Court of Chancery Adopts Materiality Standard For Approval Of “Disclosure Only” Settlements Of Stockholder Litigation
In re Trulia, Inc. Stockholder Litigation, Consolidated C.A. No. 10020-CB (Del. Chancery)
In this opinion, the Delaware Court of Chancery announced that it will not approve “disclosure only” settlements unless the underlying litigation identifies, and the supplemental disclosures address, material misrepresentations or omissions. This likely spells an end to such settlements in Delaware. In the context of a proposed settlement of a stockholder class action challenging Zillow, Inc.’s acquisition of Trulia, Inc., Chancellor Bouchard rejected the settlement, concluding that the negotiated supplemental disclosures to Trulia stockholders were not material and, thus, did not constitute sufficient consideration to warrant the broad release of claims provided in the settlement to defendants.
This opinion provides the most definitive statement to date of the Court’s intention to scrutinize settlements of stockholder class actions where the settlement consideration does not include any monetary recovery for the class. The opinion describes the proliferation of “disclosure only” settlements, and the Court’s historic willingness to approve such settlements, in which stockholders receive supplemental disclosures of questionable value in exchange for a broad release of defendants from any conceivable claim relating to the challenged transaction. Such settlements are problematic from the Court’s perspective because they are often reached early in the litigation, before the compromised claims and the supplemental disclosures are exposed to the adversarial process. As a result, the Court faces the unenviable task of attempting to weigh the relative values of the supplemental disclosures and the release without the benefit of opposing merits arguments.
This opinion makes clear that going forward, if litigants elect to resolve disclosure claims in stockholder class actions through the “historically trodden but suboptimal path of . . . a Court-approved settlement, [they] should expect that the Court will continue to be increasingly vigilant in applying its independent judgment to its case-by-case assessment of the reasonableness of the ‘give’ and ‘get’ of such settlements in light of the concerns” the Court identified. The Court specifically described the standard by which future disclosure settlements would be scrutinized, stating that
[D]isclosure settlements are likely to be met with continued disfavor…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 sales process, if the record shows that such claims have been investigated sufficiently.
Applying this standard to the proposed settlement before it, the Court found that none of the supplemental disclosures were “material, or even helpful to Trulia’s stockholders.” As such, those supplemental disclosures did not provide adequate consideration in exchange for the broad release to the defendants and the Court therefore declined to approve the proposed settlement.
Though not surprising given the spate of rejected “disclosure only” settlements in recent months, the Trulia decision underscores a seismic shift in the Court’s policy relating to such settlements. One certain result of this shift will be a dramatic reduction in the number of “disclosure only” settlements presented to the Court, caused in part by a simultaneous decline in the filing in Delaware of the type of lawsuits that give rise to such settlements. Indeed, the Trulia decision notes that such a trend already appears to have started. What remains to be seen is whether class counsel will increasingly seek to press injunction applications and the extent to which the Court will now be entertaining more fee applications on mootness grounds. Undoubtedly, the Court’s recognition that stockholders are not served by including in proxy statements the type of minutia that disclosure only settlements often provide is a positive development in the law.