The use of “disclosure settlements” to resolve dissenting shareholder suits is increasingly raising eyebrows among judges. This skepticism found full expression in a recent decision in which the Delaware Court of Chancery rejected a settlement whose only benefit to the plaintiff stockholders was additional valuation-related information.
Too much information: The case involved the real estate site Zillow and its acquisition of Trulia, an online provider of information on homes for purchase or rent. Trulia stockholders filed a class action, claiming Trulia’s board of directors breached its fiduciary duty when it approved the merger. The transaction went through, and the parties subsequently worked out a settlement, which the plaintiffs asked the court to approve. The agreement included a very broad release of claims.
Prior to voting on the proposed merger, the Trulia and Zillow stockholders received a 224-page proxy statement that discussed the board’s reasons for supporting the transaction and explained the opinions of the financial experts advising the boards. It included a summary of Trulia’s financial advisor, J.P. Morgan, which was 10 single-spaced pages long.
The disclosures the plaintiffs would obtain from the settlement gave additional detail regarding the financial analysis, including: (1) synergy numbers in J.P. Morgan’s value creation analysis; (2) selected transaction multiples; (3) selected public trading multiples; and (4) implied terminal EBITDA multiples for a relative discounted cash flow analysis.
Word of caution: The court found that the additional information was neither material nor did it provide a meaningful benefit to stockholders. Much of it was trivial and would not affect the “total mix” of available information. The proxy already provided a “more-than-fair” summary of the financial analysis underlying the transaction. Therefore, the proposed settlement was of no “genuine” value to the plaintiffs, the court decided.
It added the court should rethink its propensity to approve disclosure settlements given the mounting evidence suggesting supplemental disclosures rarely yielded a real benefit to stockholders and the increasing risk that stockholders are being made to give up on valuable claims too soon. And it noted that “practitioners should expect that the Court will continue to be increasingly vigilant in applying its independent judgment” when assessing such settlements.
Takeaway: In a shareholder class action, the Chancery finds a settlement requiring the plaintiffs to agree to a broad release of claims in exchange for additional valuation-related information does not meet the applicable “fair and reasonable” standard.
Find an extended discussion of In re Trulia Stockholder Litig., 2016 Del. Ch. LEXIS 8 (Jan. 22, 2016) in the April edition of Business Valuation Update; the court’s opinion will be appear soon at BVLaw.