New Direction from Delaware on Merger Litigation Settlements

David A. Katz is a partner specializing in the areas of mergers and acquisitions and complex securities transactions at Wachtell, Lipton, Rosen & Katz; William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum, and is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In a series of rulings culminating in a recent memorandum opinion, the Delaware Court of Chancery has reset the rules for settling merger-related litigation. In re Riverbed Tech. Inc. S’holders Litig., C.A. No. 10484-VCG (Del. Ch. Sept. 17, 2015).

Nearly every public company merger now draws class action litigation, and the great majority of these suits have long been resolved by “disclosure-only” settlements in which the target company makes supplemental disclosures related to the merger in exchange for a broad class-wide release of claims. The only money that changes hands is an award of fees for the plaintiff’s lawyers. In recent bench rulings, members of the Court of Chancery have noted that these settlements seem to provide very little benefit to stockholders and questioned whether plaintiffs and their counsel had investigated their claims sufficiently to justify what some judges call the customary “intergalactic” release of all potential claims relating to a challenged merger.

The parties in Riverbed presented a familiar form of disclosure-only settlement for judicial approval. Vice Chancellor Glasscock carefully reviewed the complex incentives facing class plaintiffs and their counsel and considered an objector’s argument that the supplemental disclosures achieved by the class plaintiffs were “worthless.” The Court concluded that the supplemental disclosures were worth little more than a “peppercorn,” but approved the settlement nonetheless because the value of the released claims was even less, “more like a mustard seed.” But in an important dictum, the Court suggested that it may well not have ordered the proposed broad release of claims but “for the reasonable reliance of the parties on [the] formerly settled practice in this Court” that approved disclosure-only settlements. The Court added that this consideration “will be diminished or eliminated in light of this Memorandum Opinion and other decisions of this Court.”

While disclosure-based settlement of merger suits likely remains viable in some circumstances, the unmistakable message of Riverbed is that litigants should no longer expect ready approval of proposed settlements that feature weak supplemental disclosures and broad releases. We expect Chancery’s reevaluation of disclosure-only settlements to have gradual but significant practical consequences, including, in time, a salutary reduction in meritless merger litigation. But in the meanwhile, stockholder plaintiffs continue to sue on deal announcement, and so transaction planners and plaintiffs’ lawyers will have to seek out new go-to settlement structures.

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