The End of Disclosure Only Settlements in M&A Cases? Not So Fast.

by Orrick - Securities Litigation and Regulatory Enforcement Group
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Disclosure-only settlements have been popular in the past – last year, about 80% of settlements in M&A-related lawsuits were for disclosures only, according to Cornerstone Research – but lately they have come under scrutiny.  The Delaware Court of Chancery has issued opinions refusing disclosure-only settlement agreements before, noting that at times in these cases “there is simply little to commend the process of weighing the merits of a ‘settlement’ of litigation where the only continuing interest is that of the plaintiffs’ counsel in recovering a fee.”  The incentives of attorneys on both sides can be such that “the potential claims belonging to the class [are not] adequately or diligently investigated or pursued.”

Vice Chancellor J. Travis Laster landed another blow against M&A litigation disclosure only settlements with his decision in In re Aruba Networks Inc. Stockholders Litigation where he refused to approve a disclosure-only settlement that would have resulted in a $387,500 payment to plaintiffs’ counsel.  Vice Chancellor Laster criticized the plaintiffs’ for conducting only a “superficial investigation” that would not have uncovered whether there were actual problems with the transaction.  He then dismissed the case on the grounds that the attorneys failed to adequately represent shareholder’s interests.

In his decision rejecting the agreement, Vice Chancellor Laster noted that the proposed settlement disclosures, which showed that HP offered Aruba Chief Executive Dominic Orr a new employment contract earlier than originally revealed in regulatory filings, could have been sufficient to sustain a lawsuit seeking damages.  Laster had previously criticized similar disclosure-only deals for glossing over misconduct that might be revealed under more rigorous scrutiny.  Here, the plaintiffs took a few depositions and followed an expedited discovery schedule, but could not make a case that the price paid to Aruba shareholders should have been higher.

Vice Chancellor Laster chastised the attorneys for the “weak” discovery record and stated his belief that the case was not meritorious when filed.  He suggested that the broad release agreed upon by the parties could not be justified by the record and stated that plaintiffs had failed to pursue legitimate claims, instead settling for a “release for nothing” and focusing on the disclosure and the fee.  Finally, he stated he did not think there was “an adequate get for the give” and refused plaintiffs’ counsel’s assurances that they had looked at the released claims.  Vice Chancellor Laster’s scathing criticism of the plaintiffs’ counsel in this case may be seen as even more striking given that he oversaw the only M&A litigation to proceed to trial in 2014 and awarded damages of $75.8 million.  Per Cornerstone Research, only 8% of settlements reached in 2014 provided any monetary consideration to shareholders.

Courts are increasingly emphasizing the duty to “balance the policy preference for settlement against the need to insure that the interests of the class have been fairly represented,” as noted in a similar decision earlier this year by Vice Chancellor Sam Glasscock.  Like Vice Chancellor Laster, Vice Chancellor Glasscock observed that these disclosure-only settlements are creating “agency problems” and potential conflicts of interest, stating that “counsel may rationally believe a quick settlement and modest fee is in [counsel’s] best financial interest, and the defendants may be happy to ‘purchase,’ at the bargain price of disclosures of marginal benefit to the class and payment of the plaintiffs’ attorney fees, a broad release from liability.”  Although Glasscock ultimately approved the settlement, he reduced the attorneys’ fees from the requested (and unopposed) $500,000 to $329,881.

Despite these warnings from the bench, disclosure-only settlements have held steady over the past several years.  While courts are reluctant to award large fees where little work by plaintiffs is involved, these settlements are still being approved.  As these negative decisions continue to increase, it remains to be seen whether they will have a real impact on the overall M&A litigation landscape.  One trend we expect to see is disclosure only settlements where the release provided is limited to disclosure based claims thus leaving open the possibility of post-closing price claims.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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