Orrick Herrington & Sutcliffe – byWilliam Foley Jr., Jason Halper, Katie Lieberg Stowe The past decade has seen an incredible rise in M&A litigation. According to Cornerstone, in 2014, a whopping 93% of announced mergers valued over $100 million were subject to litigation, up from 44% in 2007. As Delaware Supreme Court Chief Justice Leo Strine explained several years ago, “the reality is that every merger involving Delaware public companies draws shareholder litigation within days of its announcement.”
These lawyer-driven class action suits, which typically allege breaches of fiduciary duty by directors and insufficient disclosures, overwhelmingly end in settlement, with corporate defendants agreeing to provide additional disclosures in exchange for a broad release, and plaintiffs’ counsel walking away with attorneys’ fees for the theoretical “benefit” they conferred upon the class.
On September 17, 2015, the Delaware Court of Chancery issued an opinion in In re Riverbed Technology, Inc. Stockholders Litigation that could signal the end of disclosure-only settlements, or at least a marked decrease in the number of such settlements being approved.
In re Riverbed arose out of the acquisition of network equipment manufacturer Riverbed Technology for $3.6 billion ($21 per share). After the transaction was announced, plaintiff-shareholders quickly filed suit, alleging that the sales process undervalued Riverbed and was tainted by conflicts of interest, and that Riverbed had not made sufficient disclosures about the transaction. Soon thereafter, Riverbed filed its definitive proxy, which mooted many of the disclosure claims. Ten days later, the parties agreed to a settlement of plaintiffs’ claims in which Riverbed made additional disclosures in exchange for the “broadest possible release” of all federal and state claims in connection with the transaction. Plaintiffs’ counsel also sought $500,000.00 in attorneys’ fees for the “benefit conferred” on the class. When the parties sought the court’s approval of the settlement, a Riverbed shareholder (who is also a Fordham Law School professor specializing in corporate and securities law) objected, noting that the supplemental disclosures were “essentially valueless.”
Vice Chancellor Glasscock began his opinion by explaining that his role was to insure “that those acting for the benefit of others perform with fidelity, rather than doing what comes naturally to men and women—pursuing their own interests.” He went on to describe the “agency problem” inherent in representative litigation: a plaintiff’s attorney may favor a quick settlement where further litigation will “not generate an additional fee as lucrative” to the attorney as “accepting a quick and moderate fee, then pursuing other interests.” The Court noted that the interest of the individual shareholder-plaintiff is often so small “that it serves as scant check on the perverse incentive” of the plaintiff’s attorney. And while the adversarial system would usually help ameliorate this agency problem, the Court observed that, in M&A litigation, defendants’ primary goal is to consummate the transaction, which requires terminating the litigation. Where the interests of the defendant and plaintiff are aligned, it is incumbent upon the court to determine whether the proposed settlement is actually fair to the class.
The Court first examined the benefit that was supposedly conferred upon the class as a result of the litigation. Riverbed’s supplemental disclosures showed, among other things, that Riverbed’s financial adviser for the transaction, Goldman Sachs, had engagements and relationships with the purchasers, i.e., a potential conflict of interest. The Court found that while the supplemental disclosures were “not of great importance,” they had “tangible, although minor, value to the Class.” Glasscock held that this relatively insignificant benefit could only support a settlement if “what is given up”—the release of claims against Riverbed—“is of minimal value.”
In examining the “meager benefit” achieved by the settlement vis-à-vis the broad release that defendant received, Vice Chancellor Glasscock stated that “in another factual scenario,” he would be inclined to reject the settlement. But, he noted that, given “the past practice” of the Chancery Court to approve settlements that confer an insignificant benefit but permit a broad release, the parties had “a reasonable expectation” that this settlement would be approved. In particular, the Court held that “[i]f it were not for the reasonable reliance of the parties on formerly settled practice in this Court . . . the interests of the Class might merit a rejection of a settlement encompassing a release that goes far beyond the claims asserted and the results achieved.”
While the Court approved the settlement on the basis of the parties’ reasonable expectation of approval, it noted that this factor “will be diminished or eliminated going forward in light of this Memorandum Opinion,” as well as other recent Chancery Court decisions. In other words, In re Riverbed places parties on notice that, going forward, disclosure-only settlements and/or associated six-figure attorneys’ fees awards may not be approved as a matter of course, at least where the disclosures are deemed “insignificant.”
The Court also rejected plaintiffs’ counsel’s fee request, finding that the benefits achieved were “too modest” to justify an award of $500,000.00. Therefore, counsel’s fee award was reduced to $300,000.00.
In re Riverbed is the latest example of the Chancery Court’s enhanced scrutiny of disclosure-only settlements that provide no monetary value to a shareholder class. See, e.g., In re Susser Holdings Corp. S’holder Litig., No. 9613 (Del. Ch. Sept. 15, 2015); Acevedo v. Aeroflex Holding Corp., No. 9730 (Del. Ch. Jul. 8, 2015); In re Intermune, Inc., S’holder Litig., No. 10086 (Del. Ch. Jul. 8, 2015). In the future, it is possible that only highly significant additional disclosures will support a broad release and substantial attorneys’ fees award. For companies subject to such litigation, this will be a mixed blessing. On the one hand, such a trend could reduce the number of or frequency with which such suits are filed. On the other hand, when litigation is commenced, merging companies may no longer have the option of a relatively inexpensive method for easy disposition of frivolous merger litigation.