Tag Archives: Mergers & Acquisitions

Business Court Warns of Enhanced Scrutiny for Disclosure-Only Merger Settlements

View David Wright's Complete Bio at robinsonbradshaw.com We have previously commented about “disclosure only” settlements in class action merger cases, and the increasing scrutiny provided to them by courts here and in Delaware. Judge Bledsoe entered the fray yesterday, approving a settlement of litigation involving the merger of Yadkin Financial Corporation and NewBridge Bancorp in a 44-page order. In a stark preamble to his findings, Judge Bledsoe gave warning that the Business Court would likely be joining their brethren in Delaware in strictly reviewing such settlements in the future. The Court characterized such a shift as a “marked departure from [the Business Court’s] past practices in connection with the consideration of such motions,” and therefore “decline[d] to apply enhanced scrutiny to its consideration of the Motions” in the case before it.

But that reprieve is likely short-lived. In the next sentence, Judge Bledsoe “expressly advises the practicing bar that judges of the North Carolina Business Court, including the undersigned, may be prepared to apply enhanced scrutiny of the sort exercised in In re Trulia Stockholder Litigation, to the approval of disclosure-based settlements and attendant motions for attorneys’ fees hereafter.” We characterized this Delaware authority as “sound[ing] a trumpet of skepticism concerning ‘disclosure only’ settlements.”

The Settlement Agreement reviewed by the Business Court in the NewBridge Bancorp case provided that the Defendants would not object to a fee petition up to $300,000, and—to a penny—that’s what Plaintiffs’ counsel sought in the case. In this space, we have observed that the entry into a disclosure-only settlement “is a ‘kumbayah’ occasion for plaintiffs’ and defense counsel,” and Judge Bledsoe reiterates this point, albeit it in a less colloquial manner, agreeing with the Delaware courts that “the trial court’s assessment typically occurs, as it does here, without the benefit of an adversarial process.”

The Court, after reviewing applicable authority, cut the requested fee award from $300,000 to about $160,000. There were two principal reasons for the reduction. First, the Court concluded that “collectively, the Supplemental Disclosures were only of marginal benefit to the Class.” Indeed, the Court found no “substantial evidence that any of the Supplemental Disclosures were significant to a reasonable shareholder’s decision in voting on the Proposed Transaction.” Second, the Court observed that the average hourly rate charged by Plaintiffs’ counsel was “above the hourly rate customarily charged in North Carolina for similar services” and that “the demands of the Consolidated Action did not require Plaintiffs to retain counsel from outside North Carolina in order to prosecute” the case.

The Court, in contrast to Delaware decisions like Trulia, did not closely scrutinize the claims released by class members as part of the settlement. Judge Bledsoe, in two footnotes, indicated that future requests for approval of disclosure-based settlements will involve such consideration. He stated that the scope of the release needs to be an express factor in the Court’s analysis in future cases, but that the Court was “reluctant to set aside the settlement in light of the approval of prior similar settlements by the Business Court.” In this regard, Judge Bledsoe’s Newbridge Bancorp decision is similar to the Chancery Court’s ruling in In re Riverbed Technology, Inc. Stockholders Litigation, where Chancellor Glasscock explained that, “given the past practice of this Court in examining settlements of this type, the parties in good faith negotiated a remedy—additional disclosures—that has been consummated, with the reasonable expectation that the very broad, but hardly unprecedented, release negotiated in return would be approved by this Court.”

In Delaware, the Chancery Court—having apparently concluded that counsel and the parties were sufficiently on notice following its warning in Riverbed—refused to approve a settlement outright in Trulia, just four months later. Merger challenges in Delaware have significantly declined in the months since that decision.

The effect of Judge Bledsoe’s decision on merger litigation in North Carolina remains to be seen, but this admonition from the Business Court must be reckoned with by shareholders considering class filings in future North Carolina merger litigation.

(Adam Doerr and Tommy Holderness of our firm represented the members of the NewBridge Bancorp Board of Directors in this litigation.)

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Securities Class Actions Continue To Rise

View Adam Doerr's Complete Bio at robinsonbradshaw.com Earlier this year, we reported that Multiple Studies Show Increase in Securities Class Actions. Cornerstone Research, one of the groups covered in our earlier report, recently issued its 2016 Midyear Assessment. This new analysis, which covers cases filed in January through June of this year, is consistent with several of the trends we reported previously, including the increasing number of securities class actions, the rise in the number of cases against smaller companies, and the increase in the number of Fourth Circuit cases.

Of particular interest is the significant increase in the number of merger & acquisition cases filed in federal courts. In the first half of 2016, there were 24 filings involving M&A transactions – a 167% increase from the second half of 2015. Given the size of this increase, it seems likely that this is related to significant changes in Delaware’s handling of merger objection litigation following the Trulia decision, and we will continue to monitor how this shift impacts merger litigation in federal courts in the Carolinas and the North Carolina Business Court.

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Multiple Studies Show Increase in Securities Class Actions

View Adam Doerr's Complete Bio at robinsonbradshaw.comRecent studies by PricewaterhouseCoopers, NERA Economic Consulting, Cornerstone, and Kevin LaCroix of D&O Diary have all found that federal securities class actions are on the rise. According to PwC, the data shows a trend towards more cases filed against smaller companies, especially for claims regarding accounting irregularities. Smaller companies also face a significant risk of claims regarding inadequate internal controls over financial reporting, likely due to their smaller size and more limited resources.

NERA found that standard federal securities class actions – complaints alleging violations of Rule 10b-5, Section 11, or Section 12 – increased for the third straight year. Both PwC and NERA determined that the number and proportion of federal cases challenging mergers and acquisitions also increased in 2015. It is unclear whether this is a result of Delaware’s increased scrutiny of merger litigation settlements, but we will monitor this trend, which also affects merger litigation in state courts, including the North Carolina Business Court.

Cornerstone analyzed the timing and progress of cases and found that the time to resolution appears to be increasing. Fewer cases were dismissed within the first year after they were filed, and the percentage of cases settled within three years also decreased. Despite this, only a small proportion of cases – just 26% — made it to a motion for class certification. The other 74% of cases were dismissed or resolved prior to class certification. When courts actually decided class certification motions, they granted them 75% of the time.

The studies were not consistent in identifying the number of cases filed in the Fourth Circuit, but all agreed that filings here are well behind those filed in the Second and Ninth Circuits, which saw more than 60% of securities class action filings. Although the Fourth Circuit did not see as much volume as these courts, one of the 10 largest settlements of 2015, a $146.3 million settlement of misrepresentation claims against an energy company, took place in the Western District of North Carolina.

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Merger Litigation Continues in North Carolina

View Adam Doerr's Complete Bio at robinsonbradshaw.comLast month, we previewed the challenge to a settlement of litigation involving the Reynolds-Lorillard merger. The Business Court has helpfully made available the transcript of the hearing on approval of the settlement, which took place on February 12. At the hearing, the Court made clear that it was quite familiar with recent changes in merger litigation in Delaware, including the Trulia case, and stated that it was reviewing the settlement under “strict scrutiny,” not a “rubber stamp standard.” Notwithstanding a shareholder objection supported by Professor Sean Griffith, a Fordham professor who has been involved in the recent Delaware cases, the Court approved the settlement.

During the hearing, the Court also raised an interesting issue regarding the risk that plaintiffs’ counsel face in bringing merger cases in North Carolina. As we have previously discussed,  North Carolina does not recognize the common benefit doctrine, meaning that plaintiffs’ counsel in a class action can only receive attorneys’ fees by obtaining a monetary award for the class or entering into a settlement agreement. The Court indicated that this distinction from Delaware law might create a higher contingent risk in bringing such cases in North Carolina. The Court did not rely on this point because the negotiated fee in Reynolds was equivalent to an hourly rate of $325, well within the range the Court has previously approved, but it will be interesting to see whether the Business Court takes an approach similar to the Delaware Chancery Court, which appears inclined to award significant fees for meritorious claims while cutting down or eliminating fees for routine merger challenges.

Merger cases continue to be filed in North Carolina. Just last week, a shareholder sued PowerSecure, an electric and utility technology company incorporated in Delaware and headquartered in Wake Forest, over its proposed merger with Southern Company. See Michael Morris v. PowerSecure International Inc. et al. We will continue to keep you posted on new developments in this interesting and rapidly changing area.

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Disclosure-Only Settlements Face Scrutiny in Business Court

View David Wright's Complete Bio at robinsonbradshaw.comWhen two public companies announce an intention to merge, class litigation follows like the night the day. These complaints usually request some sort of preliminary injunctive relief which, if successful, can derail the merger. Rarely, however, do plaintiffs press for this relief. Instead, they opt to resolve the claims, which requires court approval under Rule 23. The resolution can involve the payment of money to shareholders, but many times it does not and instead takes the form of “programmatic relief,” consisting principally of additional disclosures to the class members regarding information related to the merger. Accompanying that resolution, inevitably, is a request for attorney’s fees on behalf of plaintiffs’ counsel and – on the defendants’ side – a release of claims.

The entry into such a settlement frequently is a “kumbayah” occasion for plaintiffs’ and defense counsel: the plaintiffs’ counsel gets a pay day and defense counsel is able to validate the merger and obtain a release against future claims. That’s not to say that such settlements are necessarily collusive: disclosure of material information is the life-blood of the securities laws and can represent real value to shareholders. But it can be hard to distinguish sometimes between information that is truly valuable and minutiae that is simply redundant. A recent case from Delaware’s Chancery Court,  involving the Trulia and Zillow merger, sounds a trumpet of skepticism concerning “disclosure only” settlements.

By design, one person sits betwixt and between these opposing forces: the trial judge. Judge Gale will soon confront this issue at a hearing in the Business Court. James Snyder, the former General Counsel for Family Dollar, submitted an objection to a proposed disclosure-only settlement in the Reynolds-Lorillard merger litigation. Citing the Trulia decision, Snyder asks the Court to eliminate or reduce the fee award proposed by Plaintiffs and not to approve the form of the release. A law professor at Fordham Law School, Sean J. Griffith – who has actively opposed many of these settlements — has supported Snyder’s objection with his own affidavit.

Judge Gale declined Snyder’s request to postpone the fairness hearing, so we should get the benefits of his views on the subject soon. He recently touched on the subject, noting that “the value of such disclosure-only settlements . . . has generated substantial debate.” Stay tuned.

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