Tag Archives: Mergers & Acquisitions

Business Court Approves Disclosure-Only Settlement, But Postpones Consideration of Attorneys’ Fees Request

View Mark Hiller’s Complete Bio at robinsonbradshaw.comThose who follow class action law probably will be familiar with In re Trulia (2016), the seminal decision of the Delaware Court of Chancery that put the brakes on disclosure-only settlements.  Before Trulia, these controversial settlements were ubiquitous in deal litigation, in which shareholders of a company file a class action lawsuit seeking to stop the company from engaging in a merger or acquisition on the ground the company failed to disclose sufficient information about the transaction.  Under a typical disclosure-only settlement, the company agrees to supplement its disclosures and pay the (often hefty) fees of class counsel.  In return, the company obtains a release from the shareholder class, and the deal can proceed.

That changed with Trulia.  The court lamented that disclosure-only settlements are often raw deals for shareholders, who release potentially valuable claims in exchange for no monetary compensation, but only additional disclosures that may be insignificant.  Compounding the problem is that, because both class counsel and the company are aligned in supporting the settlement, the court is on its own to determine whether the settlement is fair and reasonable to absent shareholders.  True, the Trulia court noted, courts face that task any time they evaluate a proposed class action settlement that has no objectors.  But the court said the task is especially difficult in deal litigation, because disclosure-only settlements are usually reached quickly, before there has been any significant discovery into the potential value of the shareholders’ soon-to-be-released claims.  The Trulia court drew a line in the sand, holding that Delaware law looks with “disfavor” on these settlements and would allow them only if the supplemental disclosures were “plainly material” and the shareholder releases were “narrowly circumscribed.”

Court watchers viewed Trulia as the death knell to deal litigation in Delaware and have wondered whether the plaintiffs’ bar would migrate to other jurisdictions that might be more hospitable.  That is why the Business Court’s recent approval of a disclosure-only settlement in the Krispy Kreme shareholder litigation provides a significant data point.  The litigation arose from a shareholder challenge to Krispy Kreme’s proposed acquisition by another company.  The settlement called for supplemental disclosures and payment of class counsel’s fees, in return for a shareholder release.

Chief Judge Gale analyzed Trulia and discussed the standard North Carolina law should apply to review the reasonableness of disclosure-only settlements.  Judge Gale said he is “fully in accord with Trulia’s enhanced scrutiny to determine whether the release is narrowly circumscribed.”  At the same time, however, he said that “[a]s the scope of the release narrows,” the “Court’s inquiry as to the materiality of supplemental disclosures and their adequacy to support the release tends to a more traditional settlement inquiry where the judgment of competent counsel is accorded significant weight.”  Here is how he summarized the test:

In sum, the Court must examine the materiality of any supplemental disclosures and find that they provide reasonable consideration for the class release. But where there is little or no opposition by class members, the Court is reluctant to set aside a fair arm’s length settlement negotiated between competent counsel if the disclosures are not plainly immaterial and the release is reasonable. The Court is less reluctant to exercise a more searching inquiry when deciding upon a fee request that does not depend on the validity of the settlement.

Judge Gale then applied this test and concluded that the release at issue was reasonable in view of Krispy Kreme’s supplemental disclosures. He focused mainly on the company’s disclosures about the discounted cash flow (DCF) analysis performed by its financial advisor. In a nutshell, the proxy statements had disclosed that the DCF estimate was based on certain projected free cash flows, but did not disclose the cash flows themselves. As it turned out, the cash flows described in the proxy statements differed somewhat from the cash flows the financial advisor used in its actual calculation. As Judge Gale noted, “[c]ounsel acknowledged that while the differences may be slight in any particular year, the differences over time have greater significance.” Judge Gale concluded from this that the company’s supplemental disclosures, which contained cash flow information not found in the proxy statements, were material and supported the shareholder release, which was “not significantly broader than the effect of the Shareholder Vote” approving the merger.

As to the question of attorneys’ fees, Judge Gale deferred ruling on that issue. One shareholder had filed an objection opposing the award of fees but not otherwise opposing the settlement. Judge Gale concluded that he could “uncouple” the fee request from the rest of the settlement because the settlement expressly said that its approval was not dependent on a fee award. This uncoupling would have the benefit of allowing the company to advocate on the fee question without fear of jeopardizing the settlement and release.1

Takeaway

Time will tell whether deal litigation and the accompanying disclosure-only settlements, which now are disfavored in Delaware, will find a home in North Carolina. Nominally, Judge Gale’s formulation of the standard for reviewing these settlements—which favors approval so long as the disclosures are not “plainly immaterial”—seems more deferential than Trulia’s—which requires the disclosures to be “plainly material” (my emphasis). But at least arguably, the Krispy Kreme disclosures might have satisfied the Trulia standard too. And, settlement approval was facilitated by the fact that Judge Gale was able to reserve decision on the request for fees; had he been forced to rule on the reasonableness of the fees and supplemental disclosures together, he may have shown greater skepticism of the settlement. Regardless, Judge Gale’s approval of the Krispy Kreme settlement shows that North Carolina law has, at minimum, not sworn off approval of disclosure-only settlements.

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1 Judge Gale noted that the Court of Chancery has approved of a “mootness dismissal” procedure that allows the court to evaluate the fee request independent of the substantive settlement. Under that procedure, the “selling company issues supplemental disclosures, the class representative dismisses the class action with a release that binds only the named plaintiff, and class counsel applies for a fee award based on efforts to secure the supplemental disclosures.” Judge Gale explained that North Carolina law “has not expressly adopted such a process or procedure,” and he found it unnecessary to decide whether to recognize the procedure in this case.

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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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