(Article from Securities Law Alert, February 2018)
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On February 8, 2018, the New York Supreme Court refused to approve a disclosure-only settlement based on its determination that the supplemental disclosures were “worthless.” City Trading Fund v. Nye, 2018 WL 792283 (N.Y. Sup. Ct. 2018) (Kornreich, J.) (City Trading Fund III). The court held that a disclosure-only settlement should not be approved unless the supplemental disclosures “aid a reasonable shareholder in deciding whether to vote for the merger.”
The court had previously declined to approve the settlement at issue because the supplemental disclosures were “utterly immaterial.” City Trading Fund v. Nye, 46 Misc.3d 1206(A) (N.Y. Sup. Ct. 2015) (Kornreich, J). On appeal, the First Department observed that the additional disclosures were “arguably beneficial,” and reversed and remanded. City Trading Fund v. Nye, 144 A.D.3d 595 (1st Dept. 2016) (City Trading Fund II). The First Department found the trial court’s determination was “premature” because the court had not conducted a fairness hearing before issuing its decision.
Following its ruling in City Trading Fund II, the First Department adopted a multi-factor test for evaluating disclosure-only settlements in Gordon v. Verizon Communications, 148 A.D.3d 146 (1st Dept. 2017). The Gordon court instructed that courts must consider the factors set forth in Matter of Colt Industries Shareholder Litigation, 155 A.D.2d 154 (1st Dept. 1990) for reviewing nonmonetary settlements of class action suits,[1] as well as “two additional criteria: whether the proposed settlement is in the best interests of the putative settlement class as a whole, and whether the settlement is in the best interest of the corporation.” The Gordon court indicated that the factor concerning the best interests of the class “is satisfied where the supplemental disclosures provide ‘some benefit to the shareholders.’” City Trading Fund III, 2018 WL 792283 (quoting Gordon, 148 A.D.3d 146).
The City Trading Fund III court recognized that “approval under Gordon requires a lesser showing than” that required under the Delaware Chancery Court’s decision in In re Trulia Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016).[2] The Trulia court stated that a disclosure-only settlement “was likely to be met with continued disfavor unless the supplemental disclosures address a plainly material misrepresentation or omission.” 129 A.3d 884. The Trulia court emphasized “that it should not be a close call that the supplemental information is material as that term is defined under Delaware law.”
The City Trading Fund III court then considered what the Gordon court meant when it stated that the supplemental disclosures must provide “some benefit” to the shareholders.[3] The City Trading Fund III court concluded that “while the plaintiff need not (as under Trulia) rule out all doubts as to the materiality of the supplemental disclosures, the court must be able to plausibly conclude that the supplemental disclosures would, in fact, aid a reasonable shareholder in deciding whether to vote for the merger.” The court reasoned that “[i]f the supplemental disclosures would not do so, then there is no basis to conclude that such disclosures were of any benefit to the shareholders.”
Turning to the disclosure-only settlement before it, the court found “the supplemental disclosures were not at all helpful to the shareholders.” The court explained that the disclosures were “of the ‘tell me more’ sort that countless courts have recognized are of little to no value, and which certainly do not substantially alter the total mix of available information.” For example, the court noted that the disclosures included “independent, third-party projections” which “are not considered material” as a general rule.
The City Trading Fund III court found it significant that “shareholders that own shares worth hundreds of thousands of dollars more than [plaintiff’s] nominal holding of ten shares [had] objected” to the settlement. The court concluded that the corporation and its shareholders would be “net losers” under the terms of the agreement, and therefore denied approval of the settlement.
[1] The Colt factors are: “the likelihood of success, the extent of support from the parties, the judgment of counsel, the presence of bargaining in good faith, and the nature of the issues of law and fact.” 155 A.D.2d 154.
[2] Please click here to read our prior discussion of the Delaware Chancery Court’s decision in Trulia.
[3] The court noted that it did not read Gordon, which post-dated the First Department’s decision in City Trading Fund II, “to permit approval if plaintiff merely makes a showing that the supplemental disclosures are ‘arguably beneficial.’” City Trading Fund III, 2018 WL 792283.