'The Last Nail In The Coffin': Delaware Chancery Court Rejects Another Disclosure-Only Settlement

As discussed in our prior alerts,1 several decisions by the Delaware Chancery Court during the second half of 2015 signaled that the historical practice of Delaware courts routinely approving disclosure-only settlements in stockholder litigation over a merger and acquisition (M&A) transaction would no longer be followed. If any doubt remained that the tide has irrevocably turned against the routine approval of such settlements, the recent decision by Chancellor Bouchard of the Delaware Chancery Court to reject the proposed disclosure-only settlement in In re Trulia, Inc. Stockholder Litigation2 should extinguish it.

In rejecting the settlement, Chancellor Bouchard noted that "the Court's historical predisposition toward approving disclosure settlements needs to be reexamined" and laid out the very narrow circumstances under which a disclosure-only settlement could possibly be approved going forward. He also offered his perspective that "the optimal means by which disclosure claims in deal litigation should be adjudicated [was] outside the context of a proposed settlement," indicating the ideal contexts for consideration of disclosure claims was a mootness fee application or a preliminary injunction motion.

Prior to In re Trulia, a report analyzing preliminary statistics on 2015 M&A litigation noted that the M&A litigation rate in 2015 dropped for the first time in eight years from 94.9% of transactions of $100 million or more in 2014 to 87.7% in 2015.3 Even more surprisingly, the report noted that in the wake of the Delaware Chancery Court's increasing unwillingness to approve disclosure-only settlements, the litigation rate for completed and uncompleted M&A transactions during the fourth quarter of 2015 plummeted to 21.4%.

These developments make clear that the M&A litigation landscape in Delaware has irrevocably changed. If the litigation rate in the fourth quarter of 2015 is any indication, this latest decision should result in a continuing reduction in the number of meritless M&A lawsuits filed. However, this will also result in companies losing the ability to obtain the relatively cheap deal "insurance" provided by the plaintiffs giving a global release in exchange for defendants making additional disclosures and agreeing to pay the plaintiffs' attorneys fees.

In re Trulia, Inc.

Only disclosure settlements involving "plainly material" disclosures and "narrowly circumscribed" releases will likely be approved in the future. Chancellor...