Litigation involving Delaware corporate law is undergoing major changes. Some commentators predict that Delaware will cease to be the favored forum for M&A litigation. While we disagree with that forecast, it is important to understand what is going on and how those changes may affect future litigation. There are two major evolutions and one more minor development that are worth considering.
Trulia and Disclosure-Only Settlements
First, the now-famous decision in In re Trulia Inc. Stockholders Litigation, 129 A.3d 884 (Del. Ch. 2016) has—intentionally—curtailed the filing of the usual reflexive suits attacking the vast majority of proposed mergers involving Delaware corporations. Briefly, Trulia held that the Court of Chancery would increase its scrutiny of, and no longer routinely approve, disclosure-only settlements in merger litigation. The problems with those settlements included that plaintiffs’ attorneys obtained sizable fee awards, defendants’ received global releases in return as a form of deal insurance, and stockholders often got only disclosures of questionable value. And it was happening in a sizeable majority of merger-objection suits. As a result of Trulia, the previously routine filings attacking near every merger have fallen off in Delaware.
Since Trulia, those merger-objection suits have migrated to federal court in search of greener pastures, where plaintiffs may base jurisdiction on an alleged violation of the Securities Act proxy rules. While some federal courts have decided to follow Trulia, see, e.g., In re Walgreen Co. Stockholders Litigation, 823 F.3d 718 (7th Cir. 2016), filings of this type continue in federal court, even in federal court in Delaware.
The migration of merger-objection litigation to other states may be encouraged by recent decisions declining to adopt the Trulia approach at this point. For instance, decisions by the state courts of New York in Litigation Trading Funds v. Nye, 144 A.D. 3d 595 (1st Dept. 2016) and Gordon v. Verizon Communications, Inc., 148 A.D.3d 146 (1st Dept. 2017) declined to follow Trulia and upheld the approval of disclosure-only settlements. It remains to be seen how many other state courts will follow Trulia, or decide against it, as the New York courts have done.
Corwin and Post-Close Third-Party Deal Litigation
Second, in a series of decisions beginning with Corwin v. KKR Financial Holdings LLC, 125 A. 3d 304 (Del. 2015), Delaware courts have held that the approval by an adequately informed, uncoerced majority of a corporation’s disinterested stockholders invokes business judgment rule protection for the directors, even when the approval is statutorily required, such as with a merger. The practical result of invoking the business judgment rule under Corwin is a dismissal. Corwin’s underpinnings have been around for some time, but only recently were repackaged and clarified. And they became of increased importance post-Trulia.
Since Corwin, post-closing M&A lawsuits increasingly are being dismissed at the pleadings stage when the requisite stockholder approval is found. While there are ways to plead facts sufficient to avoid a Corwin dismissal, attempts to do so have met with little success. For example, the Delaware Supreme Court and Court of Chancery, applying the established “materiality” disclosure standard under Delaware law, have rejected attempts by stockholder plaintiffs to argue a stockholder vote was uninformed and thus Corwin did not apply. While there are a handful of well-established disclosure violations, such as failing to disclose reliable management projections on which a banker relied, it is not an area the courts are willing or necessarily able to draw many clear boundaries, and that may make plaintiffs’ lawyers unhappy.
Nonetheless, observers should be hesitant to prejudge the Delaware courts’ receptiveness to post-close M&A litigation after Corwin. The recent landslide of Corwin dismissals might have more to do with the types of merger-objection suits left pending as the plaintiffs’ bar absorbed Trulia, rather than a true predictor of likely success rates in a more delineated post-Trulia, post-Corwin landscape.
“No-Pay” Bylaws
On a more minor level, there continues to be a push to discourage stockholder litigation by adopting “no-pay” bylaws. In short, a bylaw of this type aims to cut off the doctrines under which Delaware courts have rewarded plaintiffs’ counsel with fee awards for taking on litigation risk while conferring a benefit on a larger stockholder class. While Delaware has squarely rejected “loser-pays” fee-shifting bylaws, Delaware has not yet proscribed “no-pay” bylaws. Thus, some corporations have adopted them, and their existence may discourage suits, even a suit challenging their adoption.
Where Does This Take Delaware Law?
To begin with, it is clearly a good thing for Delaware to reject disclosure-only settlements when little value has been generated for the stockholders. Trulia is a good decision given the current legal landscape. Under it, clearly meritorious disclosure settlements still will be approved. Other cases can proceed on the merits to a pre-close injunction hearing, and may be resolved through voluntary supplemental disclosures that can benefit stockholders, or through post-close litigation where damages may be pursued. Moreover, Corwin will not affect post-close litigation where the challenged transaction is among the most scrutinized under Delaware law: deals involving a conflicted, controlling stockholder. Nor will Corwin affect post-close litigation in third-party deals where the stockholder vote was uninformed, or coerced. E.g., In re Saba Software, Inc. S’holder Litig., Cons. C.A. No. 10697-VCS (Del. Ch. Mar. 31, 2017).
Over the long run, we expect that the courts of other states, including the New York Court of Appeals, will adopt the Trulia rationale or something like it to discourage disclosure-only settlements. Given how the disclosure-only settlement era led to the proliferation of M&A strike suits, followed by widespread, harsh, and oft deserved criticism, we are confident in that prediction.
As to Corwin’s impact, it may result in less post-close litigation for third-party deals. That is not a bad result in itself. After all, Corwin encourages full disclosures to stockholders, discourages efforts to impermissibly influence their choice, and does not encroach on litigation involving a conflicted controller, where Delaware courts assume coercion is inherent. When the disinterested owners of the company are armed with all material information and vote to approve free from coercion, it is easy to appreciate the logic that their approval should be enough to accept a transaction as appropriate. Who is to say otherwise? Certainly, judicial second-guessing of an increasingly sophisticated stockholder base may be less than desirable.
The battles under Corwin at this juncture probably will continue to revolve around the issue of disclosure claims. On this point, while disclosure claims are highly fact-dependent, there is a deep reservoir of decisions in Delaware addressing what disclosures are adequate or inadequate under a materiality standard, and thus plenty for the courts and litigants to draw from in bringing and assessing disclosure objections. And the materiality question should be clarified further as the case law continues to develop. Moreover, a recent wrinkle added by defendants is under what circumstances the Delaware courts will decline to hear disclosure claims aimed at avoiding a Corwin defense based on the stockholder’s approach to those claims pre-close. So far, while observing waiver might be appropriate, the Delaware courts have been willing to consider all pled but unpursued disclosure claims. That might not hold true under all circumstances, but for now stockholder plaintiffs can choose between pressing their disclosure claims pre-close, or preserving them for purposes of avoiding a Corwin defense in a post-close action seeking damages for other fiduciary breaches. That could be an attractive strategy. Thus, it’s not all bad for the plaintiff’s and their counsel under Corwin.
Finally, it is too soon to evaluate the impact of “no-pay” bylaws. One survey showed only nine corporations have adopted such bylaws. Given the wide variety these bylaws may take, it is appropriate to wait and see what, if anything, companies actually adopt. So far, at least, “no pay” bylaws should have no sizable impact on Delaware litigation.
Delaware is a chosen forum for many reasons. Principally, its rich precedent and the sophisticated and well-versed jurists serving on its specialized business court ensure a level of outcome predictability for intra-corporate disputes. Moreover, the importance of the judicial treatment afforded to the litigants and the matters presented, both to Delaware and the larger shareholder-corporation enterprise, is not lost on those privileged to sit as a Chancellor or Vice Chancellor of the Court of Chancery. In short, the Court will take you and your case seriously and give you its fullest attention. In addition, Delaware courts will not let a good case go stale. The Court of Chancery and the Delaware Supreme Court always are prepared to expedite litigation, and otherwise will ensure an appropriately prompt schedule. A good plaintiff’s case even absent expedition can go to trial in a year or so. Decisions typically are rendered within 60 to 90 days of final submissions. Not many other courts can match these advantages.
Delaware also is the compelled choice of forum in some circumstances. Even with developments like Trulia and Corwin that some members of the plaintiff’s bar view negatively, the increasingly popular tool of a Delaware exclusive forum by-law somewhat limits their migration. Whether the favored or the compelled choice of forum, Delaware can expect to retain a significant level of M&A litigation despite Trulia and Corwin. While it might lose many reflexive merger-objection lawsuits, and even some more well-considered ones, so long as a majority of the quality cases stay in Delaware, the State will maintain its prominence.
