A recent Legal Update described a fledgling trend of the Delaware Court of Chancery in which it had begun to question its decades-long practice of rubber-stamping settlements in fiduciary-duty cases brought over nearly every public M&A deal (see Legal Update, Delaware Court of Chancery Signals Stricter Approach to Approving Settlements in M&A Deals). As the court has described, attorneys for the class and for the defendant merger parties have fallen into a routine in which the defendants trade supplemental disclosures of minimal value to the stockholders—what the court has called a "peppercorn" (Solomon v. Pathe Commc'ns Corp., , at *4 (Del. Ch. Apr. 21, 1995), aff'd, 672 A.2d 35 (Del. 1996))—in return for an "intergalactic release" from the class that releases the defendants from all known and unknown claims.

This practice had taken hold because of a chain of weak links between agents and principals. From the plaintiffs' perspective, although their collective interest might be to pursue their claims through a trial, the incentive of the lead plaintiff's attorney is to obtain a quick fee and move on to the next case. The lead plaintiff's own interest, meanwhile, is too small to serve as a check against that motivation. On the defendants' side, even when they might be able to achieve complete victory by defending against the claims through judgment, their incentive is to pay the relatively minor plaintiffs' attorney's fee, add some disclosures, and buy what the court has come to call "deal insurance."

As described in the Legal Update, the court had rejected a proposed settlement in Acevedo v. Aeroflex Holding Corp., C.A. No. 9730-VCL (Del. Ch. Jul. 8, 2015) (TRANSCRIPT) and questioned the appropriateness of another in In re InterMune, Inc., S'holder Litig., Consol. C.A. No. 10086-VCN (Del. Ch. Jul. 8, 2015) (TRANSCRIPT), because of its concerns over these incentives and the resulting wave of stockholder litigation that has ensued. The Legal Update also noted that the issue was soon to come to a head in a dispute over the leveraged buyout of Riverbed Technology, Inc., with oral argument over a proposed settlement in that case scheduled for July 27, 2015. After hearing arguments on that day, the court decided to issue a written opinion rather than rule from the bench.

On September 17, the court issued its highly anticipated memorandum opinion, largely upholding the proposed settlement (In re Riverbed Tech., Inc., Consol. C.A. No. 10484-VCG (Del. Ch. Sept. 17, 2015)). As an initial matter, the court ruled on a new issue that had arisen in Riverbed. In Riverbed, the objector to the settlement was not any of the target company's pre-merger stockholders, but an academic who had bought shares in this and other target companies after various deal announcements, all for the express purpose of obtaining standing to object to peppercorn settlements. The plaintiffs urged the court to reject Professor Sean Griffith's objections, warning that if objectors in his position are permitted to be heard, "professional" objectors will "pop up like mushrooms."

The court ruled that Professor Griffith was entitled to oppose the settlement, holding that he had acquired his stake before the critical transaction, which in this case was the settlement, not the merger itself. The court expressed confidence that the doctrine of unclean hands and other tools would prove sufficient for the court to deal with the problem of professional objectors, should the need arise.

Turning to the substance of the proposed settlement, the court found that under the facts of the case, the "intergalactic" (or perhaps only "solar-systemic," the court mused) release provided by the plaintiffs to the defendants was not inappropriate, for two main reasons:

The court added that it still found the breadth of the release "troubling" and that it was "hubristic to believe" that the strength of all potential future claims now being released could be evaluated at this stage. However, the court concluded that in light of the parties' expectations, produced by years of court practice, that this type of settlement is ordinarily upheld, it was appropriate for the court to approve the proposed settlement. The court did reduce the plaintiffs' attorney's fee, however, from the proposed $500,000 to $329,881.61.

Perhaps most significantly, with regard to the notion that it was appropriate for the court to uphold the settlement in light of the parties' expectations, the court added that it was not concerned that by doing so it would harden those expectations for future litigants. On the contrary, the court predicted that in light of the bench rulings in Aeroflex, InterMune and the more recent In re Susser Hldgs. Corp. S'holder Litig., C.A. No. 9613-VCG (Del. Ch. Sept. 15, 2015) (TRANSCRIPT), as well as its views expressed in Riverbed, litigants would adjust their expectations and no longer assume that the sale of deal insurance will be rubber-stamped by the court.

The decision in Riverbed caps a two-month period in which the Court of Chancery has issued several bench rulings with views of varying intensity on the issue of peppercorn settlements and intergalactic releases. The formal opinion provides new precedent, warning that class litigation can no longer so easily be brought and dropped in return for a fee. The decision, though it upholds the particular settlement in the case at issue, can be celebrated by those lamenting the "merger tax" that is levied on nearly every major public merger. At the same time, the decision indicates that when the plaintiffs' claim is legitimately weak, the court will be willing to uphold a settlement in return for a release.