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Seventh Circuit Follows Delaware Chancery’s Trulia Holding To Reverse Approval Of Settlement In Strike Suit
08/15/2016On August 10, 2016, a divided panel of the Seventh Circuit Court of Appeals reversed a district court judge’s approval of a disclosure-only settlement in a putative stockholder class action challenging the acquisition by Walgreen Co. (“Walgreens”) of Alliance Boots Gmbh (“Boots”). In re Walgreen Co. Stockholder Litig., No. 15-3799 (7th Cir. Aug. 10, 2016). Writing for the majority, Judge Richard Posner rejected the proposed settlement, which contemplated $370,000 in plaintiffs’ attorneys’ fees in exchange for six additional disclosures to the stockholder class, finding it “inconceivable” that the new disclosures actually benefited the class.
The suit was brought within two weeks of the filing of the proxy statement seeking approval of Walgreens’ proposed purchase of the outstanding equity of Boots. The parties settled just eighteen days later, and less than a week before the proxy vote. The settlement yielded six supplemental disclosures, “a trivial addition” of “fewer than 800 new words,” or less than a 1% increase in total disclosures, according to the Court. The supplemental disclosures concerned the selection of a new board member around the time of the merger, a pending lawsuit by Walgreens’ former chief financial officer, and other information that the Court concluded was either already discernible from the original proxy or amounted to unnecessary “embroider[y]” or “frosting on the cake.”
In rejecting the settlement, the Court emphasized that a disclosure-only settlement should be approved only if the supplemental disclosures would “affect the votes of a nontrivial fraction of the shareholders, implying that shareholders found the disclosures informative.” The Court adopted the standard of review for disclosure-only settlements articulated by the Delaware Chancery’s recent decision in In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016), holding that such settlements would be approved only if “the supplemental disclosures address a plainly material misrepresentation or omission.” Finding the at-issue disclosures fell well short of this standard, the Walgreen Court reversed the approval, 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.”
The Walgreen decision is the latest example of courts outside Delaware adopting Trulia’s critical review of disclosure-only settlements. A New Jersey state court similarly relied on Trulia to reject a strike suit settlement for $25,000 in attorneys’ fees and limited additional disclosures that the court found added no value to the original proxy. See Vergiev v. Aguero, No. UNN-L-2276-15-TJW (N.J. Super. Ct. Law Div. June 6, 2016). If non-Delaware courts continue to follow Delaware’s lead in scrutinizing disclosure-only settlements, the new trend of increased stockholder suits filed outside Delaware may be tempered as the opportunities for easy-fee settlements narrow; conversely, any jurisdiction that evidences greater tolerance for disclosure-only settlements may see an uptick in filings. Given Delaware’s well-recognized leadership in transactional litigation, however, it seems more likely that Trulia’s impact will continue to drive down deal litigation targeted to achieve disclosure-only settlements.
