Academics: Review Ramping Up for M&A Settlements?

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By Michael Greene

Sept. 22 — The routine approval of settlements of shareholder class actions challenging merger transactions may be a thing of the past, according to academics interviewed by Bloomberg BNA.

Despite approving a disclosure-only settlement arising out of Thoma Bravo LLC's acquisition of Riverbed Technology Inc., Vice Chancellor Sam Glasscock's Sept. 17 opinion in In re Riverbed Technology Inc. Stockholders Litigation is the latest in a series of Delaware Chancery Court decisions providing notice that such settlements will be reviewed more skeptically by the court going forward.

Academics told Bloomberg BNA that the rulings may signal a step forward in addressing the “deal tax” problem, in which mergers and acquisitions are ubiquitously challenged and settled for disclosures that provide little benefit to the shareholder class.

Increased Skepticism

The significant number of lawsuits arising out of mergers and acquisition deals has sparked debate over how to address abusive shareholder litigation.

Fordham law school professor Sean Griffith, an objector to the settlement in Riverbed, told Bloomberg BNA that he believes Glasscock's opinion along with a list of transcript rulings by other chancery court judges clearly represent a move towards significantly greater skepticism of disclosure-only settlements.

The “law has changed” and the court will not “rubber stamp disclosure-only settlements moving forward,” Griffith said.

The movement appears to have been started by a July bench decision—Acevedo v. Aeroflex Holding Corp.—in which Vice Chancellor J. Travis Laster declined to approve a class action settlement on the grounds that the relief sought did not justify a global release of claims. In doing so, Laster cited a paper co-authored by Griffith, University of Pennsylvania law professor Jill Fisch and University of California, Berkeley, law professor Steven Davidoff Solomon, that suggests supplemental disclosures don't provide a substantial benefit to investors.

Approval of `Riverbed' Pact

Griffith stressed that although the Riverbed court approved the settlement, it did so because it didn't want to roil the expectations of the parties, who had entered into the settlement before the chancery court started expressing reservations toward such pacts.

Charles M. Elson, director of the University of Delaware's John L. Weinberg Center for Corporate Governance, agreed with Griffith. Even though the settlement was approved, the Riverbed decision is a “warning” to litigants that the court will review these settlements more closely, Elson told Bloomberg BNA.

According to Elson, the push toward heightened review of such settlements is not unexpected and “simply restores a balance to the process.”

“Ever so often, the plaintiffs' and defense bars move to extremes, and it requires something like this to move them back to the middle,” he said.

A judicial resolution of a merger dispute needs to be about addressing harm to investors, which doesn't always happen in disclosure-only settlements, Elson said. “Delaware protects investors and that is the bottom line,” he added.

Problems Ahead

However, whether the courts will ramp up their scrutiny of deal litigation settlements, and whether such review will ultimately resolve the “deal tax” problem remain to be seen.

One concern is whether the court will be able to scrutinize such settlements when there is not an objector to their approval, Griffith said.

Even with heightened judicial review, there still is the problem of “information asymmetry,” Griffith said. In the vast majority of these settlements, there is not an adversarial interest because both the plaintiff and defendant will argue that their settlement is highly beneficial to the shareholder class, he said.

“Having an objector is certainly helpful to guide the court,” Elson said. However, he added that the lack of an objector doesn't necessarily mean the court will not scrutinize these settlements.

Delaware judges are “pretty good at scrutinizing everything that comes before them,” Elson said. “That's why you go to Delaware.”

Another concern is whether courts in Delaware and elsewhere have the resources to closely pore over such settlements, Griffith said. “In order to dig in and figure out why each individual disclosure creates no benefit takes a lot of heavy lifting and time.”

This resource issue could be even worse in other jurisdictions, which may not have the expertise that the Delaware courts have, Griffith added. Delaware courts fully understand the minutia of financial disclosures and “I am not sure that is true elsewhere,” he said.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

The opinion is available at http://www.bloomberglaw.com/public/document/IN_RE_RIVERBED_
TECHNOLOGY_INC_
STOCKHOLDERS_LITIGATION_
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