Nearly three years ago, the Delaware Court of Chancery issued its landmark opinion in In re Trulia, Inc. Stockholder Litigation, in which Chancellor Bouchard strongly criticized the use of disclosure-only settlements in class-action merger challenges and subjected such settlements to a heightened level of judicial review. In a disclosure-only settlement the merging parties agree to enhance their disclosures about the challenged merger in exchange for a broad release from a settlement class comprised of their shareholders. According to Chancellor Bouchard, all too often the enhanced disclosures in such settlements provide little, if any, value to the shareholders, while class counsel get large fee awards and the corporations get “deal insurance” because their shareholders have released them and their boards from liability arising from the transaction. Because disclosure-only settlements so rarely give meaningful relief to the shareholders, Chancellor Bouchard held that a court should approve them only if “the supplemental disclosures address a plainly material misrepresentation or omission and the subject matter of the proposed release is narrowly circumscribed.”
In the first published New Jersey state court opinion addressing the Trulia standard, the Chancery Division in Strougo v. Ocean Shore Holding Co. followed Trulia in holding that disclosure-only settlements are to be subject to “more exacting scrutiny,” but it is doubtful that the Chancery Division scrutinized the settlement to the degree envisioned by Chancellor Bouchard in Trulia. According to the Chancery Division in Strougo, when a court is asked to approve a disclosure-only settlement, the court should determine whether the supplemental disclosure was “material,” meaning that “there is a substantial likelihood that a reasonable stockholder would consider it important in deciding how to vote.” Trulia requires more: it requires that the supplemental disclosure be “plainly material,” meaning that “it should not be a close call that the supplemental information is material.” Reflecting the Strougo court’s lower standard of materiality, it found that supplemental disclosures providing additional information about the fairness opinions supporting the transaction were material even though the Trulia court was critical of such supplemental disclosures and found that they rarely add value for the shareholders.
Trulia also requires the court to ensure that the release given by the shareholders is narrow—“encompass[ing] nothing more than the disclosure claims and the fiduciary duty claims”—and that the released claims have been adequately investigated by plaintiff’s counsel. But, in approving the settlement in Strougo, the Chancery Division never even mentioned the scope of the release given by the shareholders as part of the settlement. And, although the Strougo court mentioned in passing the plaintiff’s counsel’s pre-suit investigation activities and post-settlement confirmatory discovery efforts, it never analyzed whether those efforts were sufficient to allow the court to assess whether the settlement was fair and reasonable.
Although New Jersey case law dealing with court approval of disclosure-only settlements is still developing, the Strougo opinion suggests that New Jersey courts will be more accommodating to such settlements than their sister courts in Delaware. As a result, New Jersey may become a favored venue for shareholders challenging corporate mergers.