(Article from Securities Law Alert, September 2015)
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On September 17, 2015, the Delaware Chancery Court indicated that parties to disclosure-only settlements of merger litigation should no longer expect that the court will automatically approve settlements pursuant to which plaintiffs obtain marginal additional disclosures and counsel fees in exchange for a broad release of future claims. In re Riverbed Technology Inc. S’holdrs. Litig., 2015 WL 5458041 (Del. Ch. 2015) (Glasscock, V.C.). The court reasoned that “[t]he interests of the individual litigants and their counsel may not be fully aligned with the class.” In the typical class action merger suit, “the individual plaintiff may have little actual stake in the outcome, her counsel may rationally believe a quick settlement and modest fee is in his best financial interest, and the defendants may be happy to ‘purchase,’ at the bargain price of disclosures of marginal benefit to the class and payment of the plaintiffs’ attorney fees, a broad release from liability.” The court found that this “agency problem” “mandates [judicial] scrutiny of [disclosure-only settlements] . . . in [merger-related] class actions.”
Background
At issue before the court was a proposed settlement of litigation brought in connection with the acquisition of Riverbed Technology, Inc. by Thoma Bravo, LLC and Teachers’ Private Capital, an affiliate of Ontario Teachers’ Pension Plan. Riverbed stockholders initially sought to enjoin the merger, and also asserted disclosure claims. Plaintiffs eventually agreed to settle the suit in exchange for supplemental disclosures in an SEC filing prior to the stockholder vote, as well as attorneys’ fees (the “Settlement”). As consideration, plaintiffs agreed to “forgo the substantive process claims alleged in the complaint and to release all claims arising from the merger.”
Following the announcement of the merger, Professor Sean J. Griffith of Fordham Law School purchased Riverbed stock “for the specific purpose of making an objection” to the proposed settlement. The Chancery Court rejected plaintiffs’ contention “that a party taking exception to a potential settlement must be a stockholder before the underlying transaction is announced.” The court found that Professor Griffith was “clearly a member of the Class who [would] be affected by the Settlement” and was therefore “entitled to oppose the Settlement.”
Chancery Court Finds Disclosure-Only Settlements Warrant Particular Judicial Scrutiny Because the Incentives of Plaintiffs’ Counsel and Individual Plaintiffs May Be at Odds with the Interests of the Class
The Chancery Court stated at the outset that when considering whether to approve a proposed settlement of class action litigation, it must “balance the policy preference for settlement against the need to ensure that the interests of the class have been fairly represented.” Because class action litigation is “particularly fraught with questions of agency,” the court found that it must “ensure that divided loyalties have not influenced the actions of the [c]lass representative and counsel, and that the settlement reached is reasonable in light of the facts alleged and the record developed, and in light of the proposed release of claims.”
The court explained that “[a] plaintiff’s attorney may favor a quick settlement where the additional effort required to fully develop valuable claims on behalf of the class may not generate an additional fee as lucrative to the plaintiffs’ attorney as accepting a quick and moderate fee, then pursuing other interests.” Defendants, on other hand, are typically focused on “the consummation of the deal and the termination of any further litigation threat.” If defendants can negotiate “a broad release” in exchange for “inexpensive disclosures and a modest . . . fee award,” defendants have “little incentive . . . to engage in further litigation even if the claims are weak.”
The court found that “[i]n combination, the incentives of the litigants may be inimical to the class.” Although “the aggregate interest of the class in pursuing litigation may be great,” “the individual plaintiff may have little actual stake in the outcome.” The court explained that this “well-known agency problem” “mandates [judicial] scrutiny of settlements . . . in class actions.” Before approving a proposed settlement, a court “must scrutinize the claims being given up, the value of the settlement, and, in the case of a broad release, the potential value of unknown claims being surrendered in connection with the settlement.”
Chancery Court Approves Disclosure-Only Settlement of Riverbed Merger Litigation Based on the “Minor” But “Tangible” Nature of the Supplemental Disclosures and the Parties’ “Reasonable Expectation” of Court Approval
Turning to the proposed disclosure-only settlement at hand, the court found that the additional disclosures negotiated by plaintiffs’ counsel “had tangible, although minor, value to the [c]lass.” The court determined that these additional disclosures were effectively “a peppercorn, a positive result of small therapeutic value to the [c]lass.” Given this “rather meager benefit achieved by the Settlement for the [c]lass,” the court found that Professor Griffith had raised a meritorious objection to the “broad release” of “valuable unknown claims” set forth in the proposed settlement. The court agreed with Professor Griffith that “the breadth of the release [was] troubling” and stated that “[i]n another factual scenario, it might well carry the day.”
Based on “the specific facts here,” however, the court concluded that the Settlement was “appropriate.” The court noted that plaintiffs’ counsel had “carefully considered” the federal claims and found them “not viable,” and further observed that no other class member besides Professor Griffith had objected to the Settlement. The court also reasoned that “the parties [had] in good faith negotiated a remedy ― additional disclosures ― that [had] been consummated, with the reasonable expectation that the very broad, but hardly unprecedented, release negotiated in return would be approved by this [c]ourt.” While the court found that the parties “reasonable expectation[s]” of settlement approval bore “some equitable weight” in this case, the court cautioned that “this factor . . . will be diminished or eliminated going forward.”
Although the court approved the proposed settlement, the court reduced plaintiffs’ counsel fees from $500,000 to approximately $330,000. The court found that the result plaintiffs’ counsel achieved was “too modest a benefit to justify the fee sought here.”