Chancery's disclosure-only correction: what Trulia changed
A court that had become a clearinghouse for settlement fees has started saying no
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or most of this decade, a public-company merger announcement was followed, almost as a matter of scheduling, by a class-action complaint in the Court of Chancery. The complaint would allege that the board had breached its duties and that the proxy was missing material disclosures. Within a few weeks the parties would settle. The company would add a handful of paragraphs to the proxy, the plaintiffs would release all claims on behalf of the class, and plaintiffs' counsel would collect a fee in the mid six figures. The class recovered nothing in cash. That pattern broke in January 2016, when Chancellor Bouchard refused to approve one of these settlements in In re Trulia, Inc. Stockholder Litigation. Ten months on, Chancery's docket and the geography of merger litigation both look different.
What the disclosure-only settlement was
The mechanics were simple and, for a long time, unchallenged. Nearly every merger of a Delaware public company drew multiple stockholder suits, often filed within days of the announcement, sometimes within hours. The theories were familiar: inadequate price, a flawed sale process, conflicted advisors, deficient proxy disclosure. The suits rarely went anywhere on the merits. What they produced instead was a negotiated settlement in which the defendants agreed to supplement the proxy — a few additional line items about projections, a clearer description of the banker's fees, a fuller account of the sale process — in exchange for a release of all claims the class might have relating to the deal.
The release was the valuable consideration. Defendants got peace. Plaintiffs' counsel got a fee, because the court would then certify that the supplemental disclosures conferred a benefit on stockholders. The stockholders themselves got the supplemental disclosures, which few read, and gave up any chance of litigating the merger later.
By 2014 and 2015 this had become close to automatic. Studies of merger litigation over that period found that more than ninety percent of public-company deals above a modest size drew at least one suit, and the great majority of those suits that survived past the first hearing resolved as disclosure-only settlements. Chancery was approving them at a steady clip, and the rest of the country's courts were following Delaware's lead.
Trulia
Zillow's acquisition of Trulia produced the usual cluster of suits. They settled in the usual way, with supplemental disclosures and a proposed fee to plaintiffs' counsel in the mid six figures. What was different was the opinion Chancellor Bouchard wrote in January 2016 when the settlement came up for approval. He declined to approve it.
The reasoning was not new so much as it was finally said out loud. For a release of class claims to be worth something, the supplemental disclosures had to be "plainly material" — meaningful enough that a reasonable stockholder would want them before voting. The Trulia supplements were not. They added texture around the banker's analyses and the deal process, but nothing a stockholder would plausibly have voted on differently. The court observed what practitioners had been saying privately for years: the disclosure-only settlement had become a tax on transactions, collected by plaintiffs' counsel with the acquiescence of defense counsel who preferred a small, certain fee to any residual litigation risk.
The opinion announced a going-forward standard. Disclosure-only settlements would be viewed "with disfavor." To earn approval, the disclosures had to be plainly material, and the release had to be narrowly tailored to the claims the disclosures actually addressed. Broad releases covering every possible claim — the kind that had been standard — would not be approved in exchange for incremental disclosures.
What it has done to the docket
The effect has been faster than most observers expected. Merger-related complaint filings in Chancery have fallen materially over the course of 2016. Deals that a year earlier would have drawn three or four complaints in Wilmington are drawing none there. Plaintiffs' firms that built practices around the disclosure-settlement model have either stopped filing these cases or have moved them.
Where they have moved is mostly federal court, on a theory under Section 14(a) of the Securities Exchange Act and Rule 14a-9: that the proxy contained materially misleading statements or omissions in connection with the stockholder vote. The same supplemental-disclosure complaints, in other words, reframed as federal securities claims. Federal judges are not bound by Trulia and have their own, older body of law on what materiality means in a proxy. Some have been willing to approve mootness-fee awards — payments to plaintiffs' counsel after defendants voluntarily supplement disclosures and the case is dismissed as moot — which preserves part of the old economics without the class release. Others have been less hospitable.
It is too early to say whether federal court becomes the durable forum of convenience. The early signs are mixed: the Seventh Circuit has written skeptically about mootness fees in this context, and other circuits have not yet had to take up the question.
Second-order effects for people forming entities
The Trulia effect is not limited to public-company deals. It changes some of the background assumptions that have pushed companies toward Delaware incorporation.
For a venture-backed company planning an eventual sale or IPO, Delaware's attraction has always included Chancery's willingness to resolve merger disputes quickly and on a developed body of law. That attraction is intact. What has changed is the assumption that Chancery will also absorb, quietly, the nuisance litigation that follows every deal. Boards and their counsel had come to treat the disclosure settlement as a cost of transacting in Delaware — predictable, budgetable, and in practice indistinguishable from any other closing expense. That cost is smaller now and falling.
The direction of travel cuts both ways. On one hand, Delaware looks marginally more attractive as an incorporation choice for a company that expects to be acquired, because the expected value of nuisance merger litigation has dropped. On the other hand, the forum-selection bylaw provisions that many Delaware companies adopted in the last few years — requiring stockholder suits to be brought in Chancery — look less like a shield and more like a narrowing. If the real litigation risk has moved to federal court under Section 14(a), a bylaw pinning suits to Chancery routes plaintiffs somewhere else rather than eliminating them.
Some practitioners report boards asking, for the first time in a while, whether there is a reason other than path-dependence to incorporate in Delaware. The answer is usually still yes — the Chancery opinions on fiduciary duty, controller transactions, and appraisal remain the best worked-out corpus in the country — but the question is being asked more plainly than it was a year ago.
What is not yet clear
Several things. Whether federal courts settle into a consistent posture on mootness fees, or whether the practice fractures circuit by circuit. Whether plaintiffs' firms recalibrate toward cases with real merits — conflicted sale processes, inadequate price with a credible alternative bidder — and away from pure disclosure claims. Whether the gap left by the disclosure-only settlement is filled by appraisal litigation, which has its own distinct economics and which Chancery has been reshaping separately. And whether the Delaware Supreme Court, when it next has occasion, reinforces Trulia or softens it at the margins.
For a company incorporating now and thinking ten years out, the useful reframing is this. Chancery is returning to being a court that decides merger cases rather than a court that processes them. That is closer to what sophisticated parties said they wanted when they picked Delaware in the first place. Whether the rest of the system adapts gracefully is the open question of the next year.