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(Article from Securities Law Alert, September 2016) 

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Earlier this year, the Delaware Chancery Court indicated that disclosure-only settlements would likely be met with continued disfavor “unless the supplemental disclosures address a plainly material misrepresentation or omission.” In re Trulia, Inc. Stockholder Litig., 129 A.3d 884 (Del. Ch. 2016). [1]

On August 10, 2016, the Seventh Circuit explicitly “endorse[d], and appl[ied]” the Delaware Chancery Court’s decision in Trulia to reverse district court approval of a disclosure-only settlement where the supplemental disclosures provided “nonexistent” benefits to the class, in the Seventh Circuit’s view. In re Walgreen Co. Stockholder Litig., 2016 WL 4207962 (7th Cir. 2016) (Posner, J.). The Seventh Circuit stated that supplemental disclosures must not only “address the misrepresentation or omissions” but also “must correct them” for a disclosure-only settlement to merit court approval.

In the case before the Seventh Circuit, the district court approved a disclosure-only settlement of shareholder litigation arising out of Walgreen Co.’s agreement to acquire the outstanding stock of Alliance Boots and create the Walgreens Boots Alliance. Defendants agreed to six additional disclosures, amounting to a total of “fewer than 800 new words,” as well as the payment of $370,000 in attorneys’ fees to class counsel. The district court expressed doubt concerning the added value of these disclosures, but ultimately concluded that at least certain of the supplemental disclosures “may have mattered to a reasonable investor.” Id. (emphasis added by the Seventh Circuit). A Walgreens shareholder objected to the settlement and appealed the district court’s decision.

On appeal, the Seventh Circuit held the district court had erred in considering whether the supplemental disclosures “may have mattered to a reasonable investor,” finding this standard “not good enough.” The Seventh Circuit determined the proper standard is whether the supplemental disclosures “would be likely to matter to a reasonable investor.” The court reasoned that “[d]isclosures are meaningful only if they can be expected to affect the votes of a nontrivial fraction of the shareholders.”

The Seventh Circuit emphasized that “[n]o class action settlement that yields zero benefits for the class should be approved, and a class action that seeks only worthless benefits for the class should be dismissed out of hand.” Here, the Seventh Circuit found the disclosure-only settlement did not merit court approval because the supplemental disclosures “contained no new information that a reasonable investor would have found significant.”

In so holding, the Seventh Circuit adopted the standard for reviewing disclosure-only settlements set forth by the Delaware Chancery Court in Trulia. The Trulia court stated that such settlements “are likely to be met with . . . disfavor . . . unless the supplemental disclosures address a plainly material misrepresentation or omission.” Trulia, 129 A.3d 884. The Trulia court explained that the term “plainly material” means that “it should not be a close call that the supplemental information is material as that term is defined under Delaware law.” In endorsing the Trulia decision, the Seventh Circuit “add[ed] that it’s not enough that the disclosures address the misrepresentation or omissions: they must [also] correct them.” Walgreen, 2016 WL 4207962.