In re Trulia, Inc. Stockholder Litigation
2016 Del. Ch. LEXIS 8, 129 A.3d 884 (2016)
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Rule of Law:
A disclosure-only settlement in a merger litigation will not be approved unless the supplemental disclosures address a plainly material misrepresentation or omission, and the release of claims is narrowly circumscribed to the claims investigated.
Facts:
- On July 28, 2014, Trulia, Inc. and Zillow, Inc. announced a definitive merger agreement for Zillow to acquire Trulia.
- The transaction was a stock-for-stock merger valued at approximately $3.5 billion.
- Under the agreement, both Trulia and Zillow would become wholly-owned subsidiaries of a new holding company, Zebra Holdco, Inc. (later Zillow Group, Inc.).
- Former Trulia stockholders were to receive approximately 33% of the new holding company's shares, while former Zillow stockholders would receive approximately 67%.
- Trulia's board of directors approved the merger agreement and recommended it to the stockholders.
Procedural Posture:
- Following the merger announcement, four Trulia stockholders, including Christopher Shue, filed separate class action complaints in the Delaware Court of Chancery against Trulia's directors, Zillow, and the holding company.
- The complaints alleged that Trulia's directors breached their fiduciary duties and that the corporate defendants aided and abetted those breaches.
- The plaintiffs sought to enjoin the merger.
- The Court of Chancery consolidated the four cases into a single action.
- After limited, expedited discovery, but before a hearing on the plaintiffs' motion for a preliminary injunction, the parties reached an agreement-in-principle to settle.
- The settlement proposed supplemental disclosures in the proxy materials in exchange for a broad release of claims and an agreement not to oppose plaintiffs' counsel's request for up to $375,000 in attorneys' fees.
- The parties submitted the proposed settlement to the Court of Chancery for fairness review and approval.
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Issue:
Is a proposed 'disclosure-only' class action settlement fair and reasonable to stockholders when the sole benefit is supplemental, non-monetary disclosures in exchange for a broad release of all claims related to a merger?
Opinions:
Majority - Bouchard, C.
No. The proposed settlement is not fair or reasonable because it does not provide meaningful consideration to the stockholder class. The court reasoned that the 'get' for the stockholders—the supplemental disclosures—was worthless, while the 'give'—a broad release of all potential claims—was significant. After a detailed analysis of each of the four supplemental disclosures concerning the financial advisor's work, the court found that none were material, or even helpful, as the original proxy statement already provided a 'fair summary' of the financial analysis as required by Delaware law. The court announced that it will no longer approve such 'disclosure-only' settlements unless the supplemental disclosures address a 'plainly material' misrepresentation or omission, meaning it is not a close call that the information would significantly alter the total mix of information available to a reasonable stockholder.
Analysis:
This opinion marks a significant turning point in Delaware corporate litigation, effectively ending the routine approval of 'disclosure-only' settlements. By establishing the 'plainly material' standard, the Court of Chancery raised the bar for settlement approval, aiming to curb the proliferation of frivolous merger litigation that provided no real benefit to shareholders while generating fees for plaintiffs' attorneys. The decision signals to practitioners that the court will now rigorously scrutinize the 'give' and 'get' of these settlements and encourages alternative resolutions, such as mootness fee applications, where no broad release of claims is involved. This has substantially reduced the volume of meritless M&A lawsuits filed in Delaware.
