A recent two-part study by Cornerstone Research has garnered significant attention for its findings that 94% of public M&A deals in 2013 were challenged in stockholder lawsuits and that only 2% of these lawsuits that settled produced monetary returns for stockholders. These findings have highlighted the "transaction tax" that has become a nearly automatic feature of all public merger transactions and that has elicited several possible responses, the most recent of which was the possibility, since thwarted, of allowing Delaware corporations to adopt fee-shifting by-laws (see Legal Update, Proposal to Limit "ATP Tour" Decision on Fee-shifting By-laws).

The Cornerstone study also found that plaintiff-attorney fees awarded in disclosure-only settlements of M&A cases continued to drop in 2013. In particular, the study found that supplemental disclosures remained the only stockholder consideration in the majority of 2013 settlements, and that average plaintiff-attorney fees requested in disclosure-only settlements were $500,000 in 2013, compared to over $700,000 in 2009.

Practical Law recently highlighted the Court of Chancery's bench decision in Medicis, an example of a case where the court rejected a disclosure-only settlement (see Legal Update, In re Medicis: Chancery Court Rejects Settlement Based on Disclosures That Only Reinforced Target Board's Merger Recommendation). In that decision, then-Chancellor Strine acknowledged that the plaintiff-attorneys' efforts had produced more disclosure, but that the disclosure simply added support for management's recommendation for the merger without materially changing the informational mix. In this regard, the focus of the Medicis decision was on the value produced by the plaintiff-attorneys and whether it justified significant compensation.

The plaintiffs' fee, however, is only one of the drivers of rising stockholder litigation and disclosure-only settlements. Target companies are also frequently willing partners in reaching quick, disclosure-only settlements, for the sake of a global release of all claims relating to the transaction. These releases even attach to theories not raised by the attorneys prosecuting the case, which can make the fee a worthwhile price to pay. Two recent bench decisions by Vice Chancellor Laster highlight that side of the stockholder-litigation equation.

In a bench decision issued on April 30 and filed on May 23, 2014, the court rejected a disclosure-only settlement in Rubin v. Obagi Medical Products, Inc., et al., C.A. No. 8433-VCL (Del. Ch. Apr. 30, 2014) (TRANSCRIPT). The Obagi lawsuit stemmed from the acquisition of Obagi by Valeant Pharmaceuticals (see What's Market, Valeant Pharmaceuticals International, Inc./Obagi Medical Products, Inc. Merger Agreement Summary). Valeant and Obagi initially agreed to a price of $19.75 per share, which they raised to $24 after a third-party bidder, Merz, made a $22 per share bid. At a hearing to confirm the settlement, counsel for the plaintiff stockholder admitted that the raise in price ameliorated their initial concerns over pricing and the tightness of the merger agreement's deal protections. Counsel also acknowledged that it did not uncover any actionable wrongdoing on the part of the Obagi board during discovery. However, counsel argued that it provided value for the target stockholders by eliciting these supplemental disclosures:

As consideration for causing production of these disclosures, counsel requested a fee in the range of $400,000 to $500,000.

In its decision, the court rejected the settlement altogether. In its view, the only disclosure that came close to justifying the settlement was the addition of the free cash flows. As the court explained, in a single-bidder transaction that had not been subject to "market action," these disclosures can justify a settlement because they are necessary for the stockholders to evaluate the bid. However, where there is market-clearing action, as in this case where a third party made a bid, the value of the supplemental disclosures on valuation are secondary compared to the real-world evidence made available to the stockholders.

In another ruling the week after the Obagi decision and also filed on May 23, 2014, Vice Chancellor Laster rejected a disclosure-only settlement in In re Theragenics Corp. Stockholders Litigation, Consol. C.A. No. 8790-VCL (Del. Ch. May 5, 2014) (TRANSCRIPT). The Theragenics decision arose from the acquisition of Theragenics Corp. by an affiliate of Juniper Investment Company at a price of $2.20 per share. The plaintiffs had made common Revlon allegations, asserting that Theragenics' board had breached its fiduciary duties by failing to obtain the best transaction reasonably available and by providing materially incomplete and misleading disclosures.

In the hearing over the settlement, plaintiffs' counsel argued that it procured the following benefits for the target company stockholders:

The court rejected the settlement, finding that several possible instances of wrongdoing had been left unexplored and that the benefits highlighted by counsel were illusory. On appraisals, the court noted that the practice for appraisal of public companies is for Cede & Co., as the record holder, to petition the target company on behalf of its beneficial owners seeking appraisal (see Practice Note, Appraisal Rights: Mechanics of Appraisal Rights). The court also considered the proxy statement misleading as to the inclusion of management's projections.

Of broader significance, the court pointed out several shortcomings in the litigation and settlement process that left it reluctant to approve the settlement and release. In particular:

The court emphasized that none of the issues with the deal process were invalidating steps per se, but that they would need to be meaningfully explored before the court could sign off on a settlement that releases all claims.

Far from capriciously rejecting settlements without employing a standard, the court in each of Obagi and Theragenics quoted from the Delaware Supreme Court's decision in Rome v. Archer, which states that because of the fiduciary character of a class action, "the court must participate in the consummation of a settlement to the extent of determining its intrinsic fairness" (197 A.2d 49, 53 (Del. 1964)). Vice Chancellor Laster explained in both decisions that he understands this rule as requiring him to determine whether the settlement falls within a range that a hypothetical reasonable client could accept or that a hypothetical attorney could recommend to his client to accept. As he added in Theragenics, "when a fiduciary action settles, I have to have some confidence that the issues in the case were adequately explored, particularly when there is going to be a global, expansive, all-encompassing release given."

This concern was also a motivator in the Obagi decision. The court acknowledged there that Delaware courts have often been "quite deferential" toward weak claims, granting settlements for weak consideration. The problem, the court said, was that there are "unknown unknowns" that a global release that plaintiff attorneys provide in return for disclosure settlements provides expansive protection for the defendants against claims that have been "completely unexplored" by the plaintiffs.

The court added that these releases are still the norm and are generally approved when accompanied by meaningful consideration for the stockholders. However, disclosures that do not provide meaningful value for the stockholders do not justify a "capacious, global, universally encompassing release."