M&A Report – Delaware Court of Chancery Signals End to Disclosure-Only Settlements with Full Releases in Delaware

September 24, 2015

In an opinion last week, the Delaware Court of Chancery, following other recent decisions from that Court, strongly signaled that stockholder lawsuits in Delaware attacking mergers may no longer be resolved by a corporate defendant providing additional disclosures to stockholders in exchange for a broad release of claims against all defendants.  Signaling the end to what has become common practice in stockholder litigation routinely challenging mergers, Vice Chancellor Glasscock noted in his decision approving a settlement in In re Riverbed Technologies that, "in light of this Memorandum Opinion," expectations that the court will approve such broad releases in exchange for additional disclosures "will be diminished or eliminated going forward."

The settlement arose out of stockholder litigation concerning a going-private transaction.  In the settlement, Riverbed agreed to make supplemental disclosures in an SEC filing prior to the stockholder vote and pay plaintiffs’ attorney’s fees, in exchange for defendants receiving a full release from liability for all claims arising out of the merger.

Exercising its duty to "balance the policy preference for settlement against the need to insure that the interests of the class have been fairly represented," the Court recognized that "the incentives of the litigants may be inimical to the class: the individual plaintiff may have little actual stake in the outcome, her counsel may rationally believe a quick settlement and modest fee is in his 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."

The Court weighed the value of the disclosure to the class against the value the class gave up through the broad release, and concluded that "under the specific facts here," the settlement was "appropriate."  The Court noted that its decision to approve the settlement was influenced by "the reasonable reliance of the parties on formerly settled practice in this Court."  At the same time, however, the Court warned that similar settlements–where the class obtained arguably minimal benefit in exchange for a global release–would not be approved going forward because such releases extend "beyond the claims asserted and the results achieved."

This decision follows a line of other decisions of the Chancery Court criticizing disclosure-only settlements with broad releases.  For example, in Acevedo v. Aeroflex Holding Corp. et al. Vice Chancellor Laster recently rejected a proposed settlement in which the defendant made additional disclosures, lowered the break-up fee, and reduced the matching rights period in exchange for a full release.  In In re InterMune, Inc. Stockholder Litigation, moreover, Vice Chancellor Noble deferred ruling on whether to approve a settlement based on additional disclosures and attorney’s fees in exchange for a full release.

It remains to be seen how these decisions will impact merger litigation going forward.  Corporate defendants will hope that these cases discourage the kind of reflexive stockholder lawsuits that are commonplace after deals are announced.  Stockholder plaintiff lawyers may be encouraged to file lawsuits in jurisdictions other than Delaware, where courts may be more inclined to approve disclosure-only settlements.  But one thing is clear–litigants in merger cases cannot expect that the Court of Chancery will approve a settlement that offers the plaintiff class additional disclosures in exchange for a full release of liability for all defendants.