A highly anticipated Delaware Court of Chancery opinion has formalized a recent series of bench rulings that had warned that the end of routine approval of disclosure-only settlements in public merger litigation was near. In In re Trulia, Inc. Stockholder Litigation, the court established a new standard for the approval of disclosure-only settlements, calling for supplemental disclosures that address a "plainly material" misstatement or omission in the proxy statement in return for a narrowly tailored release that encompasses only disclosure claims and fiduciary duty claims concerning the sale process ( (Del. Ch. Jan. 22, 2016)). The court warned that it would be "increasingly vigilant" when scrutinizing the "give" and "get" of these trade-offs, and that disclosures that are a "close call" on the question of their materiality would not qualify as plainly material.

The court's opinion represents the culmination of its recent efforts to stem the tide of rote stockholder lawsuits that challenge virtually every public M&A deal, a practice that has resulted in the advent of a "transaction tax." As the court explained in Trulia at some length, the announcement of the acquisition of a public company almost always triggers a flurry of class action lawsuits that allege that the target's board of directors breached its fiduciary duties by agreeing to sell the company for an unfair price. These lawsuits, though occasionally revealing genuine wrongdoing, far more often devolve into a quick trade-off in which the defendant directors add some disclosures to the proxy statement in return for a broad release of all known and unknown claims in any way related to the transaction. The only money that changes hands in these settlements is the plaintiffs' attorneys' fee, which the defendants consider a price worth paying for the "deal insurance" represented by the release. Because the plaintiffs and defendants both advocate in favor of the settlement, the court loses the benefit of an adversarial process in which the plaintiffs would challenge the value of the supplemental disclosures and the defendants would challenge the size of the attorney fee. The stockholders, meanwhile, gain no meaningful benefit beyond disclosures of questionable value.

In a series of bench rulings and orders issued over the last two years, the court began rejecting settlements of fiduciary duty claims brought in various M&A deals that would have granted the defendants global releases in return for supplemental disclosures. The rulings had apparently begun to have an effect, as documented in a recent paper by Matthew Cain and Steven Davidoff Solomon (preliminary results indicating a drop in the lawsuit rate in the fourth quarter of 2015 to 21.4%). Though the bench rulings may have had their intended effect, the decision in Trulia establishes officially binding precedent on the issue (subject to appeal to the Delaware Supreme Court).

The underlying case represents a fairly typical stockholder lawsuit challenging an M&A deal. The facts, as the court noted, come from the record presented to the court and do not represent the court's own factual findings. On July 28, 2014, Zillow, Inc. announced that it would acquire Trulia, Inc. for approximately $3.5 billion in stock. (For a summary of the merger agreement, see What's Market, Zillow, Inc./Trulia, Inc. Merger Agreement Summary.) After the merger was announced, four plaintiffs filed class action complaints, alleging that Trulia's directors had breached their fiduciary duties. The four cases were consolidated and the next day, the plaintiffs filed a motion to expedite the proceedings. The court never heard the motion, however, because two hours later, the parties agreed on an expedited schedule.

A month later, the plaintiffs filed a brief in support of their motion for a preliminary injunction that addressed several issues, including the dissemination of materially false and misleading disclosures to the stockholders. However, the brief only discussed the merits of the disclosure issue, without addressing the pricing or process claims at all. Three days later, Trulia and Zillow filed a definitive joint proxy statement. Two days after that, they entered into a memorandum of understanding that detailed an agreement-in-principle to settle the litigation in return for certain additional disclosures to the proxy statement.

At the stockholders meeting, the acquisition was overwhelmingly supported by Trulia's stockholders. Of the shares that voted, 99.15% were in favor of the transaction, representing in absolute terms 79.52% of the outstanding shares. The transaction closed on February 17, 2015.

On September 16, the court held a hearing to consider the terms of the proposed settlement, which had been finalized a few months earlier. The settlement included an "extremely broad release" of claims, including unknown claims and claims arising under virtually any law or rule and somehow related to the transaction, and provided that plaintiffs' counsel would seek an award of fees not to exceed $375,000, which the defendants agreed not to oppose. After the hearing, the court sought supplemental briefs on whether the disclosures met the legal standard of materiality to justify the settlement and release of claims. Among these was an amicus curiae brief submitted by Professor Sean J. Griffith, who, as discussed in Legal Update, Delaware Court of Chancery Signals Stricter Approach to Approving Settlements in M&A Deals, has taken up the cause of objecting to disclosure-only settlements. The parties submitted their supplemental briefs and removed "unknown claims" and claims related to antitrust law from the release, but otherwise left the release unchanged.

The court declined to approve the settlement, finding that the disclosures were immaterial to the stockholders and that the settlement could not be properly evaluated outside the adversarial context. More significantly, the opinion describes the standards that must be met for the court to approve a disclosure-only settlement and the court's preference for the deal litigation process going forward.

The decision in Trulia is the culmination of years of increasing concern over the payment of a "transaction tax" on nearly every public M&A deal. Practitioners cannot have been surprised by the decision given the recent bench rulings that challenged the historical approval of disclosure-only settlements, but the formal opinion in this case presents a clearer (and precedential) presentation of the standards that the court will use going forward. In defining the "plainly material" standard and strongly implying its preference for alternative methods for the resolution of disclosure claims, the court has provided a baseline for future disclosure-only settlements.

Going forward, the decision can be expected to have the following effects:

It is also notable that while the Trulia decision raises the bar for gaining approval of disclosure-only settlements, it does not go as far as some of the court's own bench rulings on the issue. For example, in Aruba Networks, the court not only rejected the proposed settlement on the grounds of immaterial supplemental disclosures, but dismissed the case altogether on grounds that plaintiffs' counsel had no cause to challenge the transaction in the first place. The Aruba Networks decision signaled that the court would look for a colorable claim that justified the filing of a claim at the outset before approving a settlement, instead of allowing plaintiffs to file a claim first and hope to discover a basis for a claim during discovery later. The decision in Trulia does not address this potential preliminary check on the validity of the stockholder challenge. This leaves open the possibility that the court in future rulings will require evidence of a legitimate challenge at the outset, in addition to evidence of supplemental disclosures that fill a "plainly material" misstatement or omission.