Delaware’s courts have recently made it clear that the days where they would routinely approve disclosure-only settlements in merger objection lawsuits may be over (as discussed here). It now appears that other states also are no longer willing to approve these kinds of settlements. In a blistering October 23, 2015 opinion (here), New York (New York County) Supreme Court Judge Charles E. Ramos refused to approve the disclosure-only settlement proposed in the Allied Healthcare merger objection lawsuit, saying that courts’ willingness to approve these kinds of settlements “reflects poorly on the profession and on those courts that, from time to time, have approved these settlements.”
The litigation arose out of the proposed merger between Allied Healthcare, Saga Group Limited, and AHL Acquisition Corp. After the lawsuit was announced, five separate lawsuits were filed objecting to the merger. The consolidated complaint alleged, among other things, that the sale price and process were flawed, that material information was withheld from shareholders, and that the officers and directors of the deal parties had breached their fiduciary duties or aided and abetted those breaches.
Plaintiffs’ counsel took three depositions and reviewed documents, after which, pursuant to an agreement with plaintiffs’ counsel, the defendants included supplemental disclosure in the proxy, though, as Judge Ramos put it, “all of the terms of the merger offer remained completely unchanged.” Judge Ramos added that “not one of the disclosures … could be characterized as significant nor would the failure to make any of the additional disclosures have resulted in this Court issuing a preliminary injunction.”
As summarized by Ramos, the parties’ settlement agreement included a release of all claims for the defendant and for the plaintiffs’ counsel an opposed legal fee of $375,000. As Ramos summarized, “this proposed settlement offers nothing to shareholders except that attorneys they did not hire will receive a $375,000 fee and the corporate officers who were accused of wrongdoing will receive general releases.”
Ramos observed that in the area of derivative litigation “a culture has developed that results in cases of relatively worthless settlements … that discontinue the action (with releases) resulting in the corporate defendants not opposing an agreed upon legal fee.” This practice of “rewarding plaintiffs’ counsel without any meaningful recovery” is purportedly justified by the argument that this litigation serves a “societal purpose” or has a “prophylactic effect,” justifications which Ramos called “Horse-hockey.”
Ramos was not done yet. He said that “putting aside any concerns of collusion, (and there are many)…this practice of compensating class counsel no matter how meaningless the result is, creates the impression with most objective observers that these actions are brought merely for the purpose of generating legal fees.” The willingness to “rubber stamp” these settlements “reflects poorly on the profession and on those courts that, from time to time, have approved these settlements.”
Ramos concluded by saying that “the settlement in this matter is not worthy of any further consideration.” He said that the parties could file a stipulation of discontinuance or prepare the matter for trial or for a dispositive motion.
While Ramos is only a trial court-level judge, he is well-respected, particularly in these kinds of business cases. He is the Senior Justice in the Commercial Division of the New York County Supreme Court. His strongly worded opinion strongly suggests that, just as in Delaware, the game may be over for disclosure- only settlements in merger objection lawsuits. This development in New York is significant for the obvious reason that a lot of business litigation gets filed in New York, but now that so many public companies have adopted forum selection bylaws designating Delaware as the forum for shareholder litigation, this development is less significant than it otherwise might have been. Nevertheless, the ruling represents a strong signal that courts increasingly do not want to be made a party to the lawyer-game that merger objection litigation has become.
Eventually this growing judicial hostility to disclosure-only settlements in merger objection lawsuits will deter a certain number (perhaps many) of the prospective lawsuits from even being filed. In the meantime though, it will be challenging for litigants in existing lawsuit to come up with a way to resolve these lawsuits efficiently; in particular, defendants will struggle to come up with a way to quickly put these suits down without incurring hefty additional fees but while trying to get the kind of release that caution, habit and experience compel them to try to seek.
In a certain number of cases, the plaintiffs might be willing to just walk away. Leaving empty-handed has to be a preferable to taking a public beating and being sent home empty-handed. Where the plaintiffs won’t just walk away but where they have little more of substance than the plaintiffs here, they will likely have to be prepared to accept much more reduced fees, and defendants will have to accept narrower releases.
Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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