Cornerstone Research’s recent report on merger objection lawsuit filings showed what many of us expected to see – that in the wake of Delaware Chancellor Andre Bouchard’s rejection of the disclosure only settlement in the litigation arising out of Zillow’s acquisition of Trulia, there would be a decline in the number of merger objection lawsuits filed. The report also showed that the filing decline was particularly steep in Delaware, but not as sharp elsewhere. In other words, the plaintiffs’ lawyers still active in pursuing this type of litigation increasingly are filing their merger objection lawsuits outside of Delaware. With these kinds of cases now relatively more likely to be heard outside Delaware, the question of whether or not judges in other jurisdictions will follow the lead of Delaware’s courts in rejecting disclosure only settlements takes on relatively greater importance.
As I noted in prior blog posts (most recently here), there are reasons to be concerned that judges in other jurisdictions may not follow Delaware’s lead and may continue to approve disclosure-only settlements of these kinds of cases. Indeed, Alison Frankel noted in an August 4, 2016 post on her On the Case blog (here), Fordham Law Professor Sean Griffith, who has appeared in several proceedings to object to disclosure-only settlements, has found that some judges outside Delaware remain willing to approve disclosure-only settlements.
However, a sharply written August 10, 2016 Seventh Circuit opinion written by Judge Richard Posner overturning the district court’s approval of the disclosure-only settlement in the lawsuit objecting to Walgreen’s acquisition of Alliance Boots could provide objectors a substantial boost. Judge Posner’s opinion not only expresses deep skepticism about this type of litigation and of disclosure-only settlements, but it references with approval Chancellor Bouchard’s opinion in the Trulia case. The Seventh Circuit opinion can be found here.
In 2014, Walgreen announced its plan to acquire the remaining portion of Alliance Boots (it had previously acquired a 45 percent equity stake in the company). The announcement was followed by what Judge Posner called “the inevitable class action,” which the parties settled 18 days later based on the company’s agreement to provide additional disclosures to shareholders and its agreement not to object to the plaintiffs’ attorneys’ request for $370,000 in attorneys’ fees. The district court approved the settlement. An objector to the settlement appealed the district court’s ruling to the Seventh Circuit.
Judge Posner’s opinion is primarily focused on the additional disclosures to which the company had agreed as part of the settlement. The disclosures, Judge Posner said “represented only a trivial addition to the extensive disclosures already made in the proxy statement.” Judge Posner specifically reviewed each of the additional disclosures, finding one to be “worthless,” others to be mere restatements of information already presented in the proxy. After reviewing the disclosures, Judge Posner said that “the value of the disclosures in this case appears to have been nil,” adding that the supplemental disclosures “contained no new information that a reasonable investor would have found significant.” The $370,000 paid to class counsel “bought nothing of value for the shareholders.”
Judge Posner then turned his attention to merger objection litigation in general, observing that “the type of class action illustrated by this case – the class action that yields fees for class counsel and nothing for the class – is no better than a racket. It must end.” He added that “No class action settlement that yields zero benefits for the class should be approved and a class action that seeks only worthless benefits for the class should be dismissed out of hand.”
Judge Posner then criticized the district court’s approval of the settlement despite “misgivings” and uncertainty about the value of the disclosures, and based on mere speculation about what might have mattered to a reasonable investor. Judge Posner expressly noted that the Delaware Court of Chancery sees a great deal more of this type of deal litigation than do other courts, observing that “we should heed” the words of Chancellor Bouchard in the Trulia case, which Judge Posner quoted from extensively and with approval.
Judge Posner then turned his attention to the plaintiffs’ lawyers. He observed that “the only concrete interest suggested by this litigation is an interest in attorneys’ fees, which of course accrue solely to class counsel and not to any class members.” He added that “certainly class counsel, if one may judge from their performance in this litigation, can’t be trusted to represent the interests of the class.”
The appellate court reversed the district court’s judgment and remanded the case to the district court. Judge Posner added as a parting shot that on remand the district court “should give serious consideration to either appointing new class counsel or dismissing the suit.”
While Judge Posner’s opinion was both comprehensive and devastating, it is interesting to note that it was written as a majority opinion, not as a unanimous opinion for the three-judge panel. The opinion notes that Southern District of Illinois Judge Staci Yandle, who was sitting by designation on the Seventh Circuit panel, dissented from the panel opinion, adding that “Her dissent will be issued separately in due course.”
As a federal appellate decision and as ruling by a high-profile jurist like Judge Posner, the Seventh Circuit’s ruling in the Walgreen litigation could be very influential on other courts, particularly with respect to the deference and respect Judge Posner showed to the Delaware Chancery Court on this issue. Armed with an opinion like this, objectors to disclosure-only settlements in the courts in other jurisdictions may be able to make it harder for those other courts to disregard the kinds of concerns the Chancery Court has noted. To be sure, it remains to be seen what Judge Yandle may say in her dissent. Although it is unlikely to eliminate the potential impact that Judge Posner’s opinion could have on other cases, a dissent that questions Judge Posner’s assertions and conclusions could at least potentially undercut the opinion’s impact.
The likelihood is that Judge Posner’s opinion will cause more judges in other jurisdictions to proceed more cautiously when it comes to reviewing settlements in merger objection lawsuits. If, as seems likely to me at least, judicial skepticism of disclosure-only settlements become more widespread, the decline in merger objection litigation that Cornerstone Research observed may become more generalized, and the drop off in merger objection lawsuit filings outside of Delaware could come to resemble the decline in these suits in Delaware.