Disclosure-Only Settlement Over Walgreens Boots Deal Nixed

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By Michael Greene

Aug. 10 — The settlement of a shareholder class action over the deal that created Walgreens Boots Alliance Inc. was rejected by a divided federal appeals court Aug. 10 ( In re Walgreen Co. Stockholder Litig. , 2016 BL 258303, 7th Cir., No. 15-3799, 8/10/16 ).

The U.S. Court of Appeals for the Seventh Circuit, in a 2-1 decision, reversed a lower court's approval of the settlement that released the shareholder plaintiffs' disclosure claims and awarded $370,000 in fees to the plaintiffs' counsel.

The decision may be the first by a federal appeals court to apply the Delaware Chancery Court's In re Trulia Inc. Stockholder Litig. standard.

Judge Richard Posner, writing for the Seventh Circuit majority, found that the supplemental disclosures sought by the plaintiffs didn't address a plainly material misrepresentation or omission by the defendants. “The value of the disclosures in this case appears to have been nil,” he said.

The plaintiffs' attorneys and Walgreens Boots representatives declined to comment on the ruling.

Increasing Vigilance

In January, the Delaware Chancery Court said in Trulia that it will be “increasingly vigilant” in reviewing disclosure-only settlements of shareholder class actions challenging merger and acquisition deals (31 CCW 25, 1/27/16).

In such settlements, shareholders agree to broadly release the company from their lawsuit in exchange for supplemental disclosures. While they don't receive any money in the resolution, their lawyers are paid attorneys' fees by the defendants.

Ted Frank, director of the Competitive Enterprise Institute’s Center for Class Action Fairness, which objected to the settlement, described the Seventh Circuit decision as a “tremendous victory” for shareholders.

Lawsuits challenging proposed mergers that are brought for the purpose of quickly obtaining fees for plaintiffs’ lawyers rather than producing any benefit for shareholders cost companies millions of dollars, Frank said in a statement. “We hope other courts follow Delaware and the Seventh Circuit in taking steps to shut down this racket,” he said.

Changing Landscape

Since the Trulia ruling, the landscape for M&A-related litigation has changed substantially (31 CCW 241, 8/10/16).

According to recent Cornerstone Research reports, there has been a significant decrease in M&A-related claims filed in Delaware and a corresponding increase in such actions brought in federal court.

Walgreen Co. acquired a 45 percent stake in Alliance Boots GmbH in 2012. Walgreen agreed to purchase the rest of the Swiss company in 2014. The reorganization was approved by 97 percent of Walgreen's shareholders.

Expert Testimony

The Seventh Circuit majority said the district court judge who approved the settlement should have appointed her own expert to explain the significance of the supplemental disclosures given her doubts about the lawyers' explanation.

“The district judge was handicapped by lack of guidance for judging the significance of the disclosures to which the parties had agreed,” Posner wrote.

The court majority also faulted the award of plaintiffs' counsel fees in the settlement, noting that they “devoted less than a month to the litigation, a month’s activity that produced no value” for shareholders.

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

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