Increased Judicial Scrutiny of Non-Monetary Settlements of Merger Litigation Threatens Business Model of Some Plaintiffs’ Lawyers

In recent years, the percentage of corporate mergers and acquisitions challenged through stockholder litigation has more than doubled. In 2007, 44% of deals valued over $100 million were the subject of stockholder lawsuits; by 2014, the number was 93%.[1] Merger litigation has become both reflexive and ubiquitous; plaintiffs’ lawyers often file complaints on behalf of stockholders within days of the public announcement of a merger, with little or no pre-suit investigation. Many of these lawsuits are accompanied by requests for preliminary injunctive relief, typically targeting allegedly inadequate disclosures as the source of purported imminent and irreparable harm, together with attending applications for expedited treatment, as to which the applicable standard is quite low.[2] Thus, even though the suit may lack merit either as to the allegedly deficient disclosures, the fairness of the process leading to the merger, or both, such applications create a troublesome and untimely distraction to merging parties focused on closing. There is thus reason for defendants to consider a quick settlement that will resolve the litigation in its entirety, and secure a wide-ranging release of claims in exchange for nothing more than the inclusion of additional disclosures in the target company’s proxy statement.

The prospect of such a resolution can give rise to conflicts for class counsel.[3] While stockholders typically will receive no payment in exchange for the accompanying release of the claims,[4] the lawyers that represent them almost certainly will, with the amount of such fee determined by the court’s evaluation of the materiality of the supplemental disclosures and informed by the extent to which defendants are willing to withhold objection. In some instances, plaintiffs’ counsel has enjoyed awards in the millions of dollars. Seldom have they amounted to less than several hundreds of thousands of dollars, often for relatively little work and in connection with relatively unimportant supplemental information.

Concerned by the proliferation of merger litigation, and the increasingly cynical approach to the interests of the plaintiff class, the Court recently served notice that it will be applying greater scrutiny to non-monetary settlements.

Over the years, the Delaware Court of Chancery has frequently expressed its disdain for these settlements, particularly in their most transparent form. Only infrequently, however, have arrangements of this sort been flatly rejected, though approval has been accompanied from time to time by derisive observations about the nature of plaintiffs’ investigation, the breadth of the release, and the questionable benefits conferred on the stockholder class. As a result, filing suits to obtain such settlements has become a business model for many plaintiffs’ firms.

In more recent years, however, that litigation model has been subjected to increasing scrutiny and criticism on the part of the Court of Chancery. Concerned by the proliferation of merger litigation, and the increasingly cynical approach to the interests of the plaintiff class, the Court recently served notice that it will be applying greater scrutiny to non-monetary settlements and related requests by plaintiffs’ counsel for attorneys’ fees where the non-monetary relief obtained for the plaintiff class of stockholders is of negligible value, particularly when compared to the global scope of the release of claims to be provided to the defendants. The Court has rejected several such settlements.[5] As explained by one member of the Court of Chancery in rejecting a proposed non-monetary settlement, the proliferation of merger litigation “undercuts Delaware’s credibility as an honest broker in the legal realm” and the “routine approval of [non-monetary] settlements carries real consequences, all of them bad.”[6] In other instances, in which approval of a settlement was secured by a narrow margin, the Court has cautioned that the parties should not continue to assume that approval will be forthcoming, and forewarned of significantly reduced attorneys’ fees for plaintiffs’ counsel in the future.[7] As one Vice Chancellor put it, litigants can no longer rely on “formerly settled practice in this Court.”[8]

It remains to be seen whether the Court’s approach will be sufficiently rigorous and consistent to have the desired effect: the reduction of baseless lawsuits motivated primarily by the hope of a quick and lucrative (to plaintiffs’ counsel) resolution. To be sure, it appears clear that, in such circumstances, the proponents of quick, non-monetary settlements will have a more difficult task convincing the Court that their efforts are sufficient to justify dismissal or to warrant a substantial fee.


The views expressed by the authors are not necessarily the views of Potter Anderson & Corroon LLP or any of its clients.

[1] Cornerstone Research, Shareholder Litigation Involving Acquisitions of Public Companies, Review of 2014 M&A Litigation (“Cornerstone Report”), p. 1 (Feb. 25, 2015).

[2] See, e.g., Box v. Box, 697 A.2d 395, 399 (Del. 1997); Giammargo v. Snapple Beverage Corp., 1994 WL 672698, at *2 (Del. Ch. Nov. 15, 1994).

[3] See, e.g., In re Riverbed Tech., Inc. S’holders Litig., C.A. No. 10484-VCG (Del. Ch. Sept. 17, 2015) (Mem. Op. at 7-8).

[4] See Cornerstone Report, p. 1.

[5] See, e.g., In re Transatlantic Holdings Inc. S’holders Litig., C.A. No. 6574-CS, 2013 WL 1191738 (Del. Ch. Mar. 8, 2013); In re Medicis Pharm. Corp. S’holders Litig., Consol. C.A. No. 7857-CS (Del. Ch. Feb. 26, 2014) (Transcript); Haverhill Ret. Sys. v. Asali, C.A. No. 9474-VCL (Del. Ch. June 8, 2015) (Transcript); Acevedo v. Aeroflex Holding Corp., C.A. No. 7930-VCL (Del. Ch. July 8, 2015) (Transcript). The Court of Chancery also has withheld decision on multiple proposed settlements recently. See, e.g., In re Trulia, Inc. S’holder Litig., C.A. No. 10020-CB (Del. Ch. Sept. 16, 2015) (Transcript); In re Intermune, Inc. S’holder Litig., Consol. C.A. No. 10086-VCN (Del. Ch. July 8, 2015) (Transcript).

[6] Acevedo, Tr. at 65-67.

[7] See, e.g., Riverbed Tech., Mem. Op. at 14, 21 (awarding only $330,000 in attorneys’ fees where $500,000 was requested by plaintiffs’ counsel and not opposed by defendants); In re OpenTable, Inc. S’holders Litig., Consol. C.A. No. 9776-CB (Del. Ch. May 27, 2015) (Transcript, p. 35) (awarding only $125,000 in attorneys’ fees where $375,000 was requested by plaintiffs’ counsel and not opposed by defendants); In re TW Telecom, Inc. S’holders Litig., C.A. No. 9845-CB (Del. Ch. Aug. 20, 2015) (Transcript, p. 52) (awarding only $150,000 in attorneys’ fees where $395,000 was requested by plaintiffs’ counsel and not opposed by defendants).

[8] Riverbed Tech., Mem. Op. at 15 (emphasis added).

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