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The Short Form - November 13, 2015

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The State of Global Releases

Year-to-date, 2015 has seen numerous challenges to settlements of stockholder class action lawsuits for supplemental disclosures, where defendants are provided global releases.  Vice Chancellor Laster declined to approve a stipulated settlement in Haverhill Retirement System v. Omar M. Asali, et al. and Harbinger Group, Inc., C.A. No. 9474-VCL, hearing (Del. Ch. June 8, 2015), in part because the breadth of the release exceeded the narrow scope of the claims that plaintiffs explored in litigation, and in more dramatic fashion, declined to approve a stipulated settlement in Raymond Acevedo v. Aeroflex Holding Corp., et al., C.A. No. 9730-VCL, hearing (Del. Ch. July 8, 2015), in an express departure from the "peppercorn" conception of consideration necessary to support settlement discussed in Robert Solomon v. Pathe Communications Corp., et al., C.A. No. *12563-CA, memo. op. (Del. Ch. Apr. 21, 1995), finding that the benefits plaintiff purported to have obtained for the class were not sufficient to support the "intergalactic" release of claims provided defendants.  On the same day, Vice Chancellor Noble reserved judgment on a proposed stipulated settlement in In re InterMune, Inc. Stockholder Litigation, C.A. No. 10086-VCN (consol.), hearing (Del. Ch. July 8, 2015), expressing concern over the scope of the release that plaintiff granted defendants.  In George P. Assad, Jr. v. World Energy Solutions, Inc., et al., C.A. No. 10324-CB, hearing (Del. Ch. Aug. 20, 2015), the Chancellor approved the parties' stipulated settlement and awarded plaintiffs' counsel the requested fee, but cautioned that "there is going to be more scrutiny on the give and the get of these things," and that "it is definitely of concern that we are asked to approve very broad settlements."  The Chancellor declined to approve a stipulated settlement in In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB (consol.), hearing (Del. Ch. Sept. 16, 2015), and requested supplemental briefing on the standard applicable to disclosure benefits, and the inclusion of unknown claims in releases granted in class action settlements.  The following day, in In re Riverbed Technology, Inc. Stockholders Litigation, C.A. No. 10484-VCG (consol.), memo. op. (Del. Ch. Sept. 17, 2015), Vice Chancellor Glasscock approved a proposed stipulated settlement, but observed that:
 

". . . [T]he breadth of the release is troubling.  It is hubristic to believe that upon this record I can properly evaluate, and dismiss as insubstantial, all potential Federal and State claims.  If it were not for the reasonable reliance of the parties on formerly settled practice in this Court, which I have found above, the interests of the Class might merit rejection of a settlement encompassing a release that goes far beyond the claims asserted and the results achieved. . . ."
 
Most recently, in In re Aruba Networks, Inc. Stockholder Litigation, C.A. No. 10765-VCL (consol.), hearing (Del. Ch. Oct. 9, 2015), Vice Chancellor Laster dismissed the matter with prejudice as to the named plaintiffs for inadequacy of representation, on grounds that the lawsuit was not meritorious when filed, and discussed at some length his concerns with broad releases. 
 
An empirical study of filings in the Court of Chancery, presented below, suggests a sharp decline in M&A class action complaints following the Aruba holding.  Still, settlements remain pending in a number of matters -- including In re InterMune and In re Trulia -- and plaintiffs have taken a number different approaches to dealing with broad releases that the Court has disparaged, but for which no clear guidance has been provided.  In this edition, we highlight approaches that have been taken in a number of cases.  We also highlight a coincidentally-timed scholarly article on the subject of global releases.



Post-Aruba Class Action Filings in the Court of Chancery

STOCKHOLDER CLASS ACTIONS January 1 - November 13, 2015

The Chancery Daily tracks complaints involving corporate and commercial disputes filed each day in the Delaware Court of Chancery.  TCD recently observed what it believed to be a pronounced decline in the number of class action complaints filed compared to prior months in the year 2015.  To empirically test our observation, we compiled a list of all of the complaints that we have collected from January 1 through November 13, 2015, noting all stockholder class action complaints -- class actions are designated by yellow highlighting in the list linked above.  (Gaps in the sequence of civil action numbers for the complaints listed are due to the fact that TCD does not track complaints involving wills, trusts, estates, guardianships, or real property disputes.)
 
In terms of the number of filings, October saw fewer class action complaints filed than any previous month with sixteen.  The first half of November saw only five filings.  In an attempt to control for variation in the number of complaints filed, we calculated the number of class actions filed each month as a percentage of the total number of corporate and commercial complaints, and found corresponding year-to-date lows of 23% and 18% in October and the first half of November, respectively.  More telling, perhaps, is the number of filings in the first half compared to the second half of October.  Fourteen of the sixteen class action complaints were filed between October 1 and 15; only two were filed between October 16 and 31. 
 
Notably, the Court issued its oral ruling dismissing the consolidated class action in In re Aruba Networks, Inc. Stockholder Litigation, C.A. No. 10765-VCL (consol.), on October 9, 2015.  The Chancery Salvo - Nuclear Rejection of Settlement.  One might assume a causal connection between the Aruba ruling and the abrupt decline in class action filings; though variation in M&A activity could provide another possible explanation.  In an attempt to control for variation in deal volume, we calculated the number of class actions filed each month per M&A deal (greater than $100 million) announced each month.  This also suggested sharp declines from prior months to 0.69 filings per deal announced in October and 0.33 filings per deal announced in the first half of November. 
 
While not conclusive, the decline in class action filings in October and the first half of November in the absence of corresponding declines in total filings or deal volume is consistent with plaintiffs' reluctance to file in Delaware following the Aruba holding.  A more complete picture would take into account the total number of M&A class actions filed in all U.S. courts -- data that TCD regrettably lacks. 



Party Submissions Addressing Global Releases

In re InterMune, Inc. Stockholder Litigation, C.A. No. 10086-VCN (consol.), pl. br. (Del. Ch. Sept. 29, 2015)
  • Vice Chancellor Noble previously reserved judgment on approval of the proposed stipulated settlement in this matter, questioning the scope of the release that plaintiffs granted defendants.  Plaintiffs submitted a "Supplemental Brief in Support of Proposed Settlement," linked above, urging approval of the settlement by citing recent approval of other comparably broad releases, and emphasizing the Court's holdings in In re Susser Holdings Corp. Stockholder Litigation, C.A. No. 9613-VCG (consol.), transcript (Del. Ch. Sept. 15, 2015; filed Sept. 28, 2015), and In re Riverbed Technology, Inc. Stockholders Litigation, C.A. No. 10484-VCG (consol.), memo. op. (Del. Ch. Sept. 17, 2015), which placed significant weight on the parties' "reasonable expectation that the broad, but hardly unprecedented, release negotiated in return would be approved by this Court."  Plaintiffs also explain why it is unlikely that any unknown securities or antitrust claims would be released.

In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB (consol.), pl. br. (Del. Ch. Oct. 16, 2015; red. Oct. 23, 2015)
 
In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB (consol.), def. br. (Del. Ch. Oct. 16, 2015)
  • Chancellor Bouchard reserved judgment on approval of the proposed stipulated settlement of this putative class action, requesting additional briefing on (1) the standard applicable to the determination of the benefit of a supplemental disclosure, and (2) why the Court should permit releases that include unknown claims.  As noted in defendants' supplemental brief, the parties submitted a revise release for the Court's consideration:
     
    ". . . [T]he release now excludes language related to unknown claims from the definition of 'Released Claims' and specifies that the 'Released Claims' are those claims that 'have been, could have been, or in the future can or might be asserted' in any court or proceeding by the Plaintiffs or Class members 'in their capacity as a Trulia stockholder, which have arisen, could have arisen, or arise now or hereafter may arise out of or relate to' the present action and the subject matter thereof, including claims relating to the allegations in the Complaint, the Merger Agreement, the Transaction, etc.  The paragraph defining 'Unknown Claims' has been struck, and claims 'aris[ing] under the Hart-Scott-Rodino, Sherman, or Clayton Acts, or any other state or federal antitrust law,' have been carved out of the definition of 'Released Claims.'"
     
    Although an amicus curiae also submitted briefing, In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB (consol.), amicus br. (Del. Ch. Oct. 16, 2015), the parties assert that the modified release mooted the second issue for which the Court requested supplemental briefing.

In re Concur Technologies, Inc. Stockholder Litigation, C.A. No. 10167-CB (consol.), letter (Del. Ch. Oct. 30, 2015)
  • Plaintiffs, in a letter to the Court, note that "the parties have conferred and amended the Stipulation of Settlement" previously submitted in this putative class action.  The parties submitted a redline showing edits made to the stipulation, which The Chancery Daily examines below.

In re BTU International, Inc. Stockholders Litigation, C.A. No. 10310-CB (consol.) letter (Del. Ch. Nov. 6, 2015)
  • The parties previously postponed the settlement hearing in this this putative class action to resolve an issue involving mailing of the settlement notice.  In a latter to the Court, plaintiffs note that "[s]ince that time, the parties agreed to narrow the scope of the release contained in the Stipulation and Agreement of Compromise and Settlement, by removing certain forward-looking language in the definition of 'unknown claims,' and file an Amended Stipulation and Agreement of Compromise and Settlement."  The Chancery Daily examines differences between the previous stipulation and the amended stipulation below.



Legal Scholarship

How Rural/Metro Exposes the Systemic Problem of Disclosure Settlements (Friedlander)

"The outcome of the Rural/Metro litigation in the Court of Chancery calls into question the major premise of disclosure settlements – that a global release of claims in exchange for supplemental disclosures is justified, supposedly because it safely can be assumed that the released damages claims challenging the transaction under Revlon and its progeny have been investigated and analyzed and have been found to be weak.  In Section I of this article, I discuss the history of disclosure settlements and postulate that the Rural/Metro litigation prompted a decisive break with an era of routine approval of disclosure settlements.  In Section II of this article, I discuss the contrast between the disclosure settlement phase and the post-disclosure settlement phase of Rural/Metro and how that contrast sheds light on policy issues raised by the routine approval of disclosure settlements.  I argue that a generation of routine disclosure settlements has undermined in various respects the proper functioning of a system for the judicial enforcement of fiduciary duties."