The Delaware Court of Chancery has become increasingly hostile of late to lawsuits that challenge corporate mergers on fiduciary grounds. This is important, because the course of recent decades certain boilerplate sorts of lawsuits have become a regular feature of the mergers-and-acquisitions landscape in the U.S. The law has allowed certain attorneys to make a regular and lucrative practice out of challenging acquisitions, then quickly settling their challenges on terms that involve some additional undramatic disclosures, six-figure fees for the plaintiffs’ attorneys, and little or nothing else.
If the Chancery Court can force a cut back on that practice, it will have redefined the M&A world, and the sorts of arb play that operate within that world.
I’ve written on this trend before, but now we have a new precedent on point, one in which the language at the expense of the plaintiffs’ attorneys’ racket is quite sweeping.
Zillow and Trulia
In the Trulia case, issued Jan. 22, the court continued this trend, rejecting a disclosure-only settlement of a stockholder class-action lawsuit challenging Zillow’s acquisition of Trulia. Each was an online real-estate database company. They announced the acquisition in July 2014.
Soon after that public announcement, four Trulia stockholders filed what the court calls “essentially identical complaints” saying that Trulia’s directors had breached their fiduciary obligation by approving the deal. Before four months had passed, though, the parties reached an agreement-in-principle on settlement.
The complaints, and the settlement, are of a sort that has become suspect because … well, it doesn’t seem to help anybody other than the plaintiff’s lawyers. The settlement agreement provides for the lawyers’ fees, but otherwise no money changes hands.
Does something else valuable change hands? Like, say … information? The settlement is structured to give that impression, anyway. It’s a disclosure settlement: Trulia agreed to supplement the already-released proxy materials with some additional information.
But Chancellor Andre Bouchard concluded in his review of the proposed settlement that “none of the supplemental disclosures were material or even helpful to Trulia’s stockholder’s, and thus the proposed settlement does not afford them any meaningful consideration to warrant providing a release of claims to the defendants. Accordingly, I decline to approve the proposed settlement.”
Morgan’s Analysis
The supplemental disclosure involved an analysis of the deal drafted by JPMorgan. What it added to the proxy disclosure that had come about regardless of the lawsuit were the releases of certain “synergy” numbers, comparable transaction multiples, public trading multiples, and implied terminal EBITDA multiples for a relative discounted cash flow analysis.
Some of that new information was not really new. Let’s look at the first item. There were two synergies figures involved in Morgan’s analysis. One was used as part of its “intrinsic value approach” to valuation, the other as part of its “market based approach.” Both figures were present in the original proxy materials, although the market based figure of $100 million was easier to find. The $175 million figure, pursuant to the intrinsic value approach, was present in a table titled “Trulia Management Estimated Synergies.” The “disclosure” of the $175 million figure pursuant to the settlement amounted to the repetition of that figure in another, more prosaic and methodological, context.
Bouchard’s opinion rejecting the settlement in this particular case also cautioned attorneys who bring such actions, and accept such settlements, quite generally, that they can expect that the Chancery Court “will be increasingly vigilant in scrutinizing” such proposals going forward.
A Fair Summary is a Summary
Plaintiffs originally made sweeping charges, going far beyond the disclosure issue. They maintained that Trulia’s board had failed to get the highest exchange ratio available in the stock-for-stock deal, and that it had agreed to preclusive provisions that impeded its ability to consider alternative, possibly superior proposals. But, Bouchard observes, the brief filed in support of the motion for an injunction against the acquisition didn’t argue for the other issues, it focused entirely on the disclosure claims, as if seeking simply to provide a platform for the disclosure-centered settlement.
In December 2014, Trulia’s shareholders provided overwhelming support for the deal: 79.52% of the shares outstanding, and 99.15% of those that were voted, voted in favor. The deal closed in February 2015.
This is, for Bouchard, a token of a type. He writes that his court’s “willingness in the past to approve disclosure settlements of marginal value and to routinely grant broad releases to defendants and six-figure fees to plaintiffs’ counsel in the process have caused deal litigation to explode in the United States beyond the realm of reason.”
Was the J.P Morgan data that became public as a consequence of this lawsuit of value to Trulia’s stockholders in making up their minds how to vote? Chancellor Bouchard cited a 2002 decision in which the court found that when a board of directors relies on an advisor in making a decision that then requires shareholder approval, those shareholders are entitled to receive “a fair summary of the substantive work performed by the investment bankers.” But the fair summary is still a summary. It need not involve all the information on which the investment bank, Morgan in this case, relied.
Bouchard found that “the supplemental disclosure may have added confusion more than anything else, because it lacks explanatory context and does not clearly describe the nature of management’s estimate of synergies that was described in the original Proxy.”