HCBA Lawyer Magazine Vol. 29, No. 1 | Page 62

neW test for ClAss ACtion Merger disClosure settleMents
trial & litigation section
Chair: Chair: Katherine Yanes – Kynes, Markman & Felman, P.A.
the perfunctory settlement
approval process ... has
been replaced by judicial
T
he Second District
Court of Appeal,
in Griffith v. Quality
Distribution, Inc., 2018
WL 3403537 (Fla. 2d DCA, July
13, 2018), issued an opinion
designed to curtail frivolous
corporate merger litigation. The
court cited a study that found “the
percentage of transactions of $100
million or more that have triggered
stockholder litigation in this
country has more than doubled,
from 39.3 percent in 2005 to a
peak of 94.9 percent in 2014.”
The boom is largely attributed
to the form of settlements.
There is a common situation:
after a merger announcement,
a class of shareholders sues the
company and its board of directors
alleging failure to make adequate
disclosures, breach of fiduciary
duties, and failure to secure a fair
price. The class further threatens a
preliminary injunction preventing
the transaction from closing. A
common settlement requires the
companies to issue immaterial
supplemental disclosures and pay
the class’s attorneys’ fees. The
defendants agree to an early
settlement to avoid tying up the
closing with protracted litigation.
This situation arose when Quality
Distribution, Inc. announced a
proposed acquisition by Apax
Partners, LLC. After brief
litigation, the parties sought an
60
analysis of the settlement’s
value to shareholders.
© Can Stock Photo / focalpoint
order from the trial court certifying
the class and simultaneously
approving a settlement that would
require supplemental disclosures,
a release by the shareholders, and
the ability for the plaintiffs to seek
an award of fees. The trial court
ordered the parties to provide
notice of the proposed settlement
to the class members.
One member of the class,
Professor Sean Griffith with
Fordham University, objected to
the settlement. Griffith describes
himself as “an activist investor
who has served as a watchdog in
the movement to curtail abusive
[merger and acquisition] litigation.”
Griffith advocated for the adoption
of the standard applied by
Delaware courts in In re Trulia,
Inc. Stockholder Litigation, 129
A.3d 884 (Del. Ch. 2016). He
argued that the trial court should
reject the settlement on four
grounds: (1) the supplemental
disclosures were not material to
the shareholder's decision on
whether to approve the merger,
(2) the released claims had not
been adequately investigated by
plaintiffs’ counsel, (3) adequacy
of class counsel, and (4) plaintiffs’
fee request should be rejected
because the settlement did not
benefit the shareholders. The
trial court overruled Griffith’s
objections and approved the
settlement. Griffith appealed.
After thoroughly discussing the
In re Trulia decision, the Second
DCA adopted its standard. Id. at *6.
As such, when a trial court is asked
to approve a disclosure settlement
in a class action merger lawsuit,
the settlement should not be
approved unless: (1) the supplemental
disclosures correct a plainly material
misrepresentation or omission,
and (2) the proposed release is
narrowly tailored to encompass
only disclosure and fiduciary duty
claims concerning the sale.
The opinion’s impact on
curtailing frivolous merger
litigation remains to be seen.
The perfunctory settlement
approval process that largely
rewarded plaintiffs’ counsel has
been replaced by judicial analysis
of the settlement’s value to
shareholders. While this new test
may curtail some suits intended
to coerce a rapid settlement, it
also will likely
increase
defense and
transaction
costs.
Author:
Brandon Faulkner
- Holland &
Knight LLP
SEPT - OCT 2018
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HCBA LAWYER