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Feb. 4 — The Delaware Chancery Court's closer scrutiny of settlements challenging mergers and acquisition deals, rather than decreasing such pacts, may in fact lead to new abusive claims, the business community is arguing.
The U.S. Chamber of Commerce, while applauding the court's heightened review of disclosure-only settlements, said the ruling may not address corporate concerns over the high number of M&A lawsuits.
“Rejecting those settlements should deter unjustified claims, but it may also produce new demands for cash payments and even more shareholder harm,” U.S. Chamber Institute for Legal Reform President Lisa A. Rickard said in a Jan. 29 statement. “And unfortunately, the Court’s endorsement of attorneys’ fees for dismissed cases creates a new incentive for abusive claims.”
The Chamber urged the court to do more to curb actions challenging M&A deals.
“The only way to stop baseless lawsuits is for the Court to use its authority to impose financial penalties on lawyers and plaintiffs who insist on pursuing such claims,” Rickard said.
The high number of investor lawsuits challenging M&A deals has sparked debate over what is sometimes referred to as the “deal tax” problem, in which there is a broad release of the claims in exchange for supplemental disclosures.
The Chamber was commenting on the Delaware Chancery Court's Jan. 22 ruling in In re Trulia Inc. Stockholder Litig., in which it rejected a stockholder class action challenging Zillow Inc.'s acquisition of Truilia Inc. In its decision, the court also said that its “historical predisposition toward approving disclosure settlements needs to be reexamined” .
In a Jan. 29 interview, former Chief Justice of the Delaware Supreme Court Myron T. Steele, who now is a partner at Potter Anderson & Corroon LLP, told Bloomberg BNA that in Trulia and other recent cases, the court has issued a clear message that it doesn't want its process “trivialized” by disclosure-only pacts. The court is making a policy judgment that it wants to spend its time on substantive cases, and doesn't want attorneys leaping at what some have described as “therapeutic settlements,” he said.
Steele also suggested that it's still too early to gauge what impact Trulia will have. Nobody knows how the plaintiffs' or defense bars will react to this development, he said. “I'm a great believer in gathering data over a period of time before trying to conclude that x, y or z is going to happen. It's got to play out.”
In response to the Chamber's call for additional action, Steele observed that Delaware's constitution allows litigants with credible grievances to bring their claims to the court's attention. Such plaintiffs shouldn't be discouraged from coming forward, he said.
Steele also said it remains unclear how the court's ruling will affect multi-jurisdictional litigation. That would depend on how the use of forum selection clauses plays out during the court's heightened review, he said.
Meanwhile, speaking from the perspective of a plaintiffs' attorney, Gustavo Bruckner, a New York-based partner at Pomerantz LLP who heads the firm's corporate governance practice, warned that the Delaware Chancery Court's latest move may lead to a longer settlement process.
“To the extent the court is adopting a new standard in order to approve settlements, one that arguably is higher than what is needed to prevail at preliminary injunction, it will lead to full blown merits arguments at every hearing,” Bruckner told Bloomberg BNA in a Feb. 4 e-mail. “That runs counter to the purpose of settlements providing an efficient way to adjudicate disputes.”
More importantly, there are many instances of valuable information provided to stockholders that may not meet the legal definition of materiality, Bruckner said. “Without this information, stockholders will suffer, and over time directors will become less forthcoming with information.”
Bruckner also warned that in cracking down on frivolous litigation, the Delaware courts must take care not to preclude meritorious actions. “Stockholders will ultimately suffer if we hamstring vigilant plaintiffs’ lawyers,” he said.
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