Yesterday, in In re: Walgreen Co., the 7th Circuit Court of Appeals rejected a “disclosure-only settlement” involving Walgreen Co.’s 2014 purchase of Alliance Boots and the combined company’s subsequent reorganization. In a strongly-worded but divided opinion, the Court reversed the district court’s ruling, which approved (albeit reluctantly) the disclosure settlement and awarded $370,000 in attorneys’ fees. The Court called these types of disclosure settlements – which broadly extinguish class claims in exchange for minor supplemental disclosures by the company followed by an award of attorneys’ fees to plaintiffs’ counsel for minimal work – a “racket” that “must end” and that “should be dismissed [as] out of hand.” Writing for the Court, Judge Richard Posner adopted the Delaware Court of Chancery’s widely-popular decision in In re Trulia (Del. Ch. 2016), which held that disclosure-only settlements will be approved only if the added disclosures are “plainly material” and “would be likely to matter to a reasonable investor.”
Applying this standard, the Court found that none of the supplemental disclosures that were included in the proxy (which amounted to fewer than 800 new words) “would [have been] likely to matter to a reasonable investor.” The Court further noted that the disclosures probably would not have changed the outcome of the transaction, which was overwhelmingly approved by 97% of Walgreen Co.’s shares. Citing Trulia, the Court held:
“To be more specific, practitioners should expect that disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission, and the subject matter of the proposed release is narrowly circumscribed to encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process, if the record shows that such claims have been investigated sufficiently.”
The supplemental disclosures that the Court disregarded were:
- Adding language to the proxy stating that a director nominee had engaged with Walgreens prior to his nomination regarding the company’s strategic direction and prospects, which the Court said was already obvious to stockholders as that type of discussion between a company and a nominee is typical;
- Disclosure that 11.3% and 4.6% of the combined company’s stock were being allocated to two investment groups respectively, which the Court said could have been derived by “simple arithmetic” from the proxy disclosure;
- Disclosure that Walgreens’ then CFO had resigned and sued the company for defamation, which the Court found of no likely consequence to the business of the new company;
- Additional risk factors that the board had considered in the merger, which the Court said was already disclosed in various other places in the proxy;
- Disclosure that the person who was appointed to be the CEO and another board member had recused themselves from voting on the merger due to their future equity interests in the combined company, which the Court found was already disclosed in the proxy and of no likely consequence to the merger vote in any event; and
- Disclosure of additional qualifications of the appointed CEO, which the Court called, “mere frosting on the cake.”
Just two years ago, virtually every public M&A deal was accompanied by a shareholder lawsuit. A recent Cornerstone Research study notes that since Trulia was decided in January 2016, the number of merger-related lawsuits filed in a public M&A deal over $100 million has diminished significantly from over 90% in 2014 to 64% in the first half of 2016. These statistics reflect the Delaware Chancery Court’s disfavor for disclosure-only settlements, the once predominant means by which shareholder derivative claims were settled and almost always approved. The report also notes that in response to Trulia, plaintiffs are increasingly filing shareholder claims in non-Delaware forums, where disclosure-only settlements have had some success. For example, the report notes that last year, over 76% of litigated deals involving a Delaware public target were filed in Delaware. In 1H2016, only 36% of such deals were filed in Delaware. This decision directly rebuts that strategy and provides persuasive authority for other non-Delaware courts to follow. It further emphasizes the need for Delaware targets to have a Delaware exclusive-forum selection bylaw in place in advance of an M&A deal to require that any shareholder litigation arising from the deal and other intra-corporate affairs must be brought in Delaware.
See a copy of the decision in In Re: Walgreen Co. Stockholder Litigation (7th Cir. August 10, 2016).