Trulia’s Impact

Jason M. Halper is partner, Jared Stanisci is special counsel, and Victor Bieger is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Mr. Stanisci, Mr. Bieger, Ellen HollomanNathan M. Bull, and Zack Schrieber. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery’s 2016 decision in In re Trulia, Inc. Stockholder Litigation changed the landscape for “disclosure-only” settlements in class action suits. Recognizing a trend that had been building in the Court of Chancery, in Trulia Chancellor Bouchard declared his intent to reject disclosure-only settlements unless the resulting supplemental disclosures are “plainly material” and any releases are “narrowly circumscribed. Based on the most recent data, this has led to a spike in the number of M&A transactions that have been challenged in federal courts.

While there were only 34 cases filed in federal court in 2015 before Trulia, this number increased by fivefold in 2018 with 182 cases filed. Of these challenges, approximately one-third were brought in district courts in the Third Circuit.

Trulia appears to have inspired plaintiffs’ firms to bring challenges to merger transactions in federal and state courts outside of Delaware in the hopes of escaping its effect. But other jurisdictions are divided about whether to follow the Trulia approach. This continuing jurisdictional split is likely to encourage plaintiffs to keep forum shopping in the hopes of striking a quick disclosure-only settlement, and thereby receiving a fee from the target company as part of the settlement while expending relatively little effort.

Florida Reverses Course and Follows Trulia 

In Griffith v. Quality Distribution, Inc., the Florida Second District Court of Appeal reversed a lower court, and held that “the In re Trulia standard is applicable” in Florida. In Griffith, the plaintiff objected to a settlement agreement that required the defendant, Quality Distribution, Inc., to supplement the disclosures in a proxy statement issued in connection with a merger in exchange for a release of all claims. As we observed last year, the trial court approved the disclosure-only settlement without assessing the value of the supplemental disclosures, holding that “[e]ven if the court assumes the incremental disclosure is immaterial, it can still approve the settlement because that is the better choice among the alternatives.” The appeals court held that this was error, emphasizing the same concern that motivated the Court of Chancery in Trulia: plaintiffs’ attorneys can score a fee for relatively little effort or benefit to the class while the defendants receive broad class-wide releases. Thus, the appeals court held, “when a Florida trial court is asked to approve a disclosure settlement in a class action merger lawsuit, in order for a disclosure settlement to pass muster, the supplemental disclosures must address and correct a plainly material misrepresentation or omission.” The court also held that “the subject matter of the proposed release must be narrowly circumscribed to encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process.”

New York Continues to Decline to Follow Trulia 

In City Trading Fund v. Nye, the New York Supreme Court for New York County—bound by the Appellate Division, First Department’s 2017 decision in Gordon v. Verizon Communications, Inc..—declined to apply Trulia to a disclosure-only settlement, but expressed significant reservations about Gordon’s approach. The Gordon court declined to follow Trulia and instead approved a more relaxed standard for disclosure-only settlements that permits judicial approval, as long as “some additional benefit” is obtained for stockholders. In Nye, a stockholder sought to enjoin a merger between Texas Industries, Inc. and Martin Marietta Materials, Inc. on the grounds that Martin Marietta “breached its fiduciary duties to its shareholders by making material misstatements and omissions in the definitive proxy provided to the shareholders” in advance of the proposed merger. The parties eventually settled, with Martin Marietta agreeing to provide additional supplemental disclosures and pay the plaintiffs’ attorneys a fee. The court noted that the parties settled for what was essentially a “peppercorn and a fee” and expressed concern that the Appellate Division’s refusal to adopt the Trulia standard would encourage litigants to forum-shop, observing that “the federal courts have embraced Trulia and deterred such a ‘race to the bottom,’ [but] New York has not.” In the court’s view, “unless the Court of Appeals reverses [the Gordon standard], New York will become celebrated as the jurisdiction of the judicial rubber stamp.”

North Carolina Has Cited Trulia Favorably without Formally Adopting Its Standard

The North Carolina Business Court has cited Trulia favorably in analyzing disclosure-only settlements, but has stopped short of explicitly adopting its standard. In In re Krispy Kreme Doughnuts, Inc., court stated that it “is fully in accord with Trulia‘s enhanced scrutiny to determine whether the release is narrowly circumscribed.” Accordingly, the court should conduct “a careful examination of the ‘give’ and the ‘get’ of the class settlement” to “satisfy itself that the supplemental disclosures are ‘material.’” But the court also held that it must resist “a reflexive rejection of a class settlement on grounds of immateriality or insufficient consideration.” The court cautioned that “[u]nless the value of the supplemental disclosures are plainly disproportionate to the scope of the proffered release,” the trial court is “less well-equipped to measure a disclosure’s worth than are competent and experienced counsel.” The court did find, however, that it is “generally well- equipped to conduct a reasoned inquiry into” the reasonableness of a fee award. Using this framework, the court approved the requested attorneys’ fees, but denied the request for expenses.

Using Forum Selection Bylaws to Counteract Trulia Forum Shopping

 One tool corporations have used to avoid forum shopping for jurisdictions that have not followed Trulia is to adopt forum selection bylaws that name Delaware as the exclusive forum for internal corporate disputes. These bylaws may help to cut down on forum shopping, but they cannot end it entirely. First, the provisions are “not automatically executing” and must instead be brought “to the attention of the presiding court” by a defendant corporation. This effectively “creates a defense-side option” where the corporation can opt to require that the litigation proceed in Delaware or settle in an alternative jurisdiction that is not receptive to Trulia, depending on what is most advantageous to the defendant. Second, the provisions can be sidestepped by plaintiffs’ attorneys if they “append a state merger claim” to a federal claim that is subject to mandatory federal jurisdiction, like a proxy disclosure claim under Sections 10(b) and/or 14(a) of the Exchange Act. While some federal courts have grafted Trulia’s standard onto Federal Rule of Civil Procedure 23, most have yet to consider the question.

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