In In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB (Del. Ch. Jan. 22, 2016), the Delaware Court of Chancery rejected a proposed disclosure-only settlement because the proposed disclosures were not “plainly” material and the settlement lacked sufficient consideration to warrant the broad release sought by defendants. The court stated that litigants who pursue disclosure-only settlements can expect “increasingly vigilant scrutiny” of the fairness of the “give” and “get” of such settlements. The court also used the opinion to discuss, more broadly, the dynamics that have led to the proliferation of disclosure settlements; focusing mainly on the concern that these settlements rarely yield genuine benefits for stockholders.
This action arose from the acquisition of Trulia, Inc. (“Trulia”) by Zillow, Inc. (“Zillow”) pursuant to a stock-for-stock merger. Following the announcement of the merger, certain Trulia stockholders brought actions in the Court of Chancery, alleging that the Trulia directors breached their fiduciary duties by approving the proposed merger at an unfair exchange rate and by disseminating inadequate disclosures in connection with the solicitation of the stockholder vote on the merger.
After limited discovery, the parties entered into a memorandum of understanding to settle the litigation. The plaintiffs withdrew their motion for preliminary injunction and granted defendants an “extremely broad release” of all claims. The release encompassed, among other things, “known or unknown” claims and claims “arising under federal, state, foreign, statutory, regulatory, common law or other law or rule”. The defendants agreed to supplement the proxy materials and to not oppose plaintiffs counsel’s fee request of up to $375,000. After the court took the parties’ initial request to approve the settlement under advisement and sought supplemental briefing, unknown and foreign claims were eliminated from the ambit of the release.
In this decision, the court reviewed the four additional supplemental disclosures provided to Trulia’s stockholders and determined that none of them were material. The four supplemental disclosures consisted of: (1) the disclosure of some additional detail about a second methodology used by Trulia’s financial adviser in its value creation analysis; (2) the disclosure of individual multiples underlying the 32 precedent transactions used in the adviser’s selected transaction analysis; (3) the disclosure of individual multiples underlying the adviser’s selected public trading analysis, and (4) the disclosure of implied terminal EBITDA multiples used in the adviser’s discounted cash-flow analysis. Because the supplemental disclosures were not material, the court found that the settlement lacked consideration and declined to give it the court’s approval.
The court set forth two preferred paths for the resolution of disclosure claims outside of the settlement process. First, the parties could actually litigate a motion for preliminary injunction. Under this scenario, the plaintiffs would have to prove the materiality of their disclosures as part of an adversarial process. Second, defendants may voluntarily supplement their proxy materials by making one or more of the disclosures sought by plaintiffs, thereby mooting some or all of their claims. Plaintiffs’ counsel may then apply to the court for an award of attorneys’ fees. Under the mootness option, defendants are incentivized to oppose fee requests they view as excessive because they are not trying to secure a release. The court also noted that, in the mootness fee scenario, the parties may resolve the fee application privately without obtaining court approval; provided that notice is given to the class to protect against “the risk of buy off” of plaintiffs’ counsel.
The court concluded that it was time for the historical predisposition of approving disclosure settlements to evolve. The alternative paths set forth by the court place a greater premium on counsel ensuring that the proxy materials contain full and accurate disclosures by eschewing settlements in favor of preliminary injunction hearings and adversarial fee petitions. Preliminary injunction hearings and adversarial fee petitions are often expensive and time-consuming, but will require the court to make a full determination about the materiality of each disclosure after extensive briefing and some discovery by the parties. At the same time, the increased scrutiny on disclosure-only settlements should result in plaintiffs’ lawyers focusing on cases that present truly meritorious disclosure claims.