Archive: 2016

Chancery Court Rejects Disclosure-Only Settlement and Signals Move Towards Greater Scrutiny of Disclosure-Based Settlements

By Lisa Stark and Trevor Belton

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.

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A Fiduciary’s Personal Benefit Can Preclude the Approval of A Settlement Agreement if the Personal Benefit is Not Fair and Reasonable

By: Megan Wotherspoon and Calvin Kennedy

By letter-order dated January 14, 2016, Vice Chancellor John W. Noble found that a fiduciary’s self-dealing and personal benefit may preclude the approval of a settlement agreement.  By this order, the court refused to approve the proposed settlement because of the equity buyback provision made available only to the plaintiff fiduciary.

In Smollar v. Potarazu, the plaintiff Marvin Smollar (“Smollar”) brought a derivative action on behalf of nominal defendant VitalSpring Technologies, Inc. (“VitalSpring”) against defendant Sreedhar Potarazu, VitalSpring’s Chief Executive Officer (“Potarazu”). Following litigation of the matter, a settlement agreement was agreed to between the parties and submitted to the court for approval (the “Settlement Agreement”). In addition to the relief sought on behalf of VitalSpring, the Settlement Agreement granted Smollar, but not other VitalSpring stockholders, the right to sell Smollar’s shares in VitalSpring back to VitalSpring for the same amount he had purchased it fifteen years ago (the “Buyback Provision”). Other VitalSpring stockholders accordingly objected to the Settlement Agreement and argued that Smollar engaged in a form of self-dealing while serving as a fiduciary.

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Delaware Supreme Court Affirms Financial Advisor Liability for Aiding and Abetting

By Whitney Smith and Elise Gabriel

The Delaware Supreme Court affirmed RBC Capital Markets, LLC’s (“RBC”) liability for aiding and abetting a board’s fiduciary breaches based on RBC’s undisclosed conflicts of interest and its deliberately misleading the board during the company’s sales process.  The Court also upheld the Chancery Court’s finding that RBC bore 83% responsibility for the shareholders’ damages, resulting in a $75 million award against RBC, plus pre- and post-judgment interest.

In RBC Capital Markets, LLC, the Delaware Supreme Court affirmed the Chancery Court’s holding that RBC was liable for aiding and abetting breaches of fiduciary duty by the board of Rural/Metro Corporation (“Rural”) in connection with the sale of Rural to private equity firm Warburg Pincus LLC (“Warburg”).  The Rural board’s underlying breaches of fiduciary duties were its failure to be actively and reasonably informed when overseeing the sales process and to be adequately informed about Rural’s value, and also its breach of the duty of disclosure for including RBC’s flawed valuation analysis as well as false and misleading information about RBC’s conflicts of interest in the company’s proxy statement.  RBC, in turn, knowingly induced the breaches by exploiting its own conflicted interests to the detriment of Rural and by creating an “information vacuum” for the Rural board in order to push the sale forward.

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