Rural/Metro and Disclosure Settlements

Joel E. Friedlander is President of Friedlander & Gorris, P.A. This post relates to Mr. Friedlander’s recent article, How Rural/Metro Exposes the Systemic Problem of Disclosure Settlements. This post is part of the Delaware law series; links to other posts in the series are available here.

There is no aspect of merger and acquisitions litigation more pervasive or significant than the disclosure settlement. It is the mechanism by which stockholder claims are conclusively resolved for approximately half of all public company acquisitions greater than $100 million. [1] For that half of major acquisitions, the contracting parties and their directors, officers, affiliates, and advisors receive a court-approved global release of known and unknown claims relating to the merger in exchange for supplemental disclosures to stockholders prior to the stockholder vote. [2] The supplemental disclosures have no impact on stockholder approval of the merger. Nevertheless, in almost every such case, class counsel for the stockholder plaintiff receives a court-approved six-figure fee award for having conferred a benefit on the stockholder class.

Over the past year, the possible elimination of disclosure settlements has become a topic of discussion among academics, jurists, and the bar. The seeming impetus for this potential upheaval in merger and acquisition litigation was a law review article based on an empirical study finding that supplemental disclosures have no effect on stockholder voting, [3] plus the litigation efforts of a co-author of that article, Professor Sean J. Griffith. He has objected to disclosure settlements on the grounds that the supplemental disclosures are worthless and the global releases are pernicious.

A December 2014 decision by the Supreme Court of the State of New York stridently rejected a proposed settlement. Professor Griffith represented the objector, and the opinion cited a draft of the law review article he co-authored. [4] A month later, the Supreme Court of the State of New York rejected another disclosure settlement, following the reasoning of the earlier opinion. [5]

In July 2015, Vice Chancellor Laster of the Delaware Court of Chancery rejected on broad grounds a proposed disclosure settlement involving Aeroflex Holding Corporation (“Aeroflex“). [6] That transcript ruling referenced the same law review article co-authored by Professor Griffith and the two decisions in New York. It also urged continuation of a recent “trend in which the Court of Chancery looks carefully at these settlements.” [7] In September 2015, Vice Chancellor Glasscock approved a disclosure settlement that Professor Griffith had objected to, but stated that the global release might have been rejected as overbroad but for “the reasonable reliance of the parties on formerly settled practice in this Court.” [8] When rejecting a disclosure settlement involving Aruba Networks, Inc. (“Aruba Networks“) in October 2015, Vice Chancellor Laster referred to disclosure settlements as a “real systemic problem” in which “pseudo-litigation” has created a “misshapen legal regime.” [9]

In Section I of my article, How Rural/Metro Exposes the Systemic Problem of Disclosure Settlements, I place the current controversy over disclosure settlements in a wider historical frame. For a generation, disclosure settlements have flourished despite widespread recognition that supplemental disclosures have little value. I surmise that Vice Chancellor Laster’s call in Aeroflex and Aruba Networks for a halt to the routine approval of disclosure settlements was influenced in significant part by his oversight of In re Rural/Metro Corporation Stockholders Litigation (“Rural/Metro”) from early 2012 through early 2015.

In Rural/Metro, my law firm, currently named Friedlander & Gorris, P.A., but then named Bouchard Margules & Friedlander, P.A. (“F&G”), and co-counsel, Robbins, Geller, Rudman & Dowd LLP (“Robbins Geller”), objected to a seemingly routine disclosure settlement presented by Faruqi & Faruqi LLP (“Faruqi”) in connection with the June 2011 sale of Rural/Metro Corporation (“Rural/Metro”) to an affiliate of Warburg Pincus, LLC. We identified unexplored liability issues and submitted an expert affidavit on valuation. Vice Chancellor Laster issued a January 2012 transcript ruling rejecting the disclosure settlement, but characterizing the question as a “very close call.” [10]

Upon replacing Faruqi as class counsel, F&G and Robbins Geller litigated damages claims at significant expense. On the eve of a May 2013 trial, we entered into partial settlements for a total of $11.6 million. In 2014, we obtained post-trial rulings that the sole non-settling defendant, RBC Capital Markets, LLC (“RBC”), aided and abetted breaches of fiduciary duty by the director defendants and was liable for damages of $76 million plus pre- and post-judgment interest (i.e., over $93 million as of February 2015). RBC’s appeal of that final judgment has been fully briefed and argued in the Delaware Supreme Court and is now sub judice.

The outcome of the Rural/Metro litigation in the Court of Chancery calls into question the major premise of disclosure settlements—that a global release of claims in exchange for supplemental disclosures is justified, supposedly because it safely can be assumed that the released damages claims challenging the transaction under Revlon and its progeny (i.e., claims that a board of directors failed to act reasonably or in good faith during a sale process to obtain the highest price reasonably available) [11] have been investigated and analyzed and have been found to be weak. In Rural/Metro, original class counsel recommended the release of damages claims in exchange for supplemental disclosures (and payment of a legal fee not to exceed $475,000). Replacement class counsel spent over $1,683,000 [12] investigating the same facts and litigating the same damages claims, and recovered, subject to appeal, over $105 million.

In Section I of this article, I discuss the history of disclosure settlements and postulate that the Rural/Metro litigation prompted a decisive break with an era of routine approval of disclosure settlements. I believe the progress of the Rural/Metro litigation helps explain the sua sponte rejection of two disclosure settlements by Vice Chancellor Laster in 2014, [13] as well as his subsequent call in Aeroflex and Aruba Networks for the end of the routine approval of disclosure settlements.

In Section II of this article, I discuss the contrast between the disclosure settlement phase and the post-disclosure settlement phase of Rural/Metro and how that contrast sheds light on policy issues raised by the routine approval of disclosure settlements. I argue that a generation of routine disclosure settlements has undermined in various respects the proper functioning of a system for the judicial enforcement of fiduciary duties:

  • The widespread availability of disclosure settlements has led to the creation of a two-tier stockholder-plaintiff bar with very different approaches to litigating the same type of case. One tier of firms has adopted a business model of entering into disclosure settlements and thereby collecting risk-free fee awards near the outset of a case. These firms release Revlon claims after a purported investigation of their viability, even though they have no demonstrated track record of pursuing Revlon claims for significant monetary relief. Another tier of firms does not present disclosure settlements to the Court of Chancery, and instead litigates preliminary injunction motions and seek damages on Revlon In an unknown number of cases, firms in the disclosure settlement bar are releasing valuable Revlon claims. Firms in the disclosure settlement bar are also able to bargain for an economic share of a case in exchange for standing down in the competition for appointment of lead counsel, since otherwise a leadership contest would consume critical weeks during the pendency of a transaction that would be better utilized pursuing fact discovery.
  • The widespread availability of disclosure settlements created perverse pressures on transactional counsel and defense counsel. Lawyers for target corporations and their fiduciaries, financial advisors and purchasers rationally expect that much M&A litigation can be resolved by means of a disclosure settlement. This knowledge lessens the influence of transactional counsel to uncover or police conflicts of interest while a sale process or transaction is pending and to ensure the prompt, full disclosure of material facts. When litigation begins, defense counsel are incentivized to devote their talents to drafting supplemental disclosures amenable to a negotiated resolution, and guiding litigation along a path of least judicial oversight. Successful merits-based litigation by plaintiff’s counsel empowers transactional counsel to avoid, police, and disclose conflicts of interest. Disclosure settlements do not.
  • Routine disclosure settlements impede the development of the law. In the many cases disposed of by means of a disclosure settlement, the Court of Chancery is not deciding whether certain facts are material and must be disclosed, or whether there exists a probability of success on a Revlon claim on a motion for preliminary injunction, or whether a Revlon claim is reasonably conceivable on a motion to dismiss. Instead, the Court is generating transcript rulings impervious to appellate review about whether a given disclosure is “helpful” and what fee award it is worth. In the absence of definitive adjudication, the law of disclosure settlements remains unclarified, the same disclosure issues recur, and numerous opportunities to develop Revlon law are lost.

Disclosure settlement practice operates as a shadow, parallel legal system within the Court of Chancery competing for judicial resources with a full docket of adversarial litigation. The institutionalization of routine disclosure settlements parodies the procedures for adjudicating claims of breach of fiduciary duty.

The complete publication is available here.


[1] See Olga Koumrian, Cornerstone Research, Shareholder Litigation Involving Acquisitions of Public Companies—Review of 2014 M&A Litigation. 1 & fig.1, 4 & fig. 5, 5 & fig. 6 (2015). (Discussed on the Forum here).
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[2] Typically, supplemental disclosures are the sole form of settlement consideration. Such settlements are sometimes known as “disclosure-only” settlements. In a relatively small number of cases, supplemental disclosures are accompanied by minor changes to the acquisition agreement. These settlements are sometimes known as “disclosure-plus” settlements. For convenience, I refer to both types of settlements as “disclosure settlements.”
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[3] Jill E. Fisch, Sean J. Griffith & Steven Davidoff Solomon, Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform, 93 Tex. L. Rev. 556 (2015) [hereinafter, “Confronting the Peppercorn Settlement”].
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[4] Gordon v. Verizon Communications, Inc., 2014 WL 7250212 (Sup. Ct. N.Y. Dec. 19, 2014).
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[5] City Trading Fund v. Nye, 9 N.Y.S. 592 (Sup. Ct. N.Y. 2015).
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[6] Acevedo v. Aeroflex Hldg. Corp., C.A. No. 7930-VCL, tr. (Del. Ch. July 8, 2015).
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[7] Id. at 67-68.
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[8] In re Riverbed Technology Inc. S’holder Litig., Cons. C.A. No. 10484-VCG, mem. op. at 15 (Del. Ch. Sept. 17, 2015).
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[9] In re Aruba Networks, Inc. S’holder Litig., Cons. C.A. No. 10765-VCL, tr. at 65, 70, 72 (Del. Ch. Oct. 9, 2015) [hereinafter “Aruba Networks”].
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[10] In re Rural/Metro Corp. S’holders Litig., Cons. C.A. No. 6350-VCL, tr. at 134 (Del. Ch. Jan. 17, 2012).
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[11] See Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 242 (Del. 2009) (discussing “Revlon duties” and citing Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 182 (Del. 1986)). For convenience, I refer generally to damages claims as “Revlon claims,” without regard for other standards of review or precedents that may be applicable when a corporation is sold for cash.
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[12] This sum is compiled from the following affidavits filed in Rural/Metro: Randall J. Baron Aff. (Oct. 16, 2013) ($672,498.97); Joel Friedlander Aff. (Oct. 16, 2013) ($623,712.90); Randall J. Baron Aff. (Oct. 29, 2014) ($206,020.21); Joel Friedlander Aff. (Oct. 29, 2014) ($180,849.82).
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[13] Rubin v. Obagi Medical Products, Inc., C.A. No. 8433-VCL (Del. Ch. Apr. 30, 2014); In re Theragenics Corp. S’holders Litig., Cons. C.A. No. 8790-VCL (Del. Ch. May 5, 2014).
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