WILMINGTON, Del (Reuters) - The flood of class action litigation against Wall Street merger deals may be at a turning point after a top Delaware judge laid out new standards for settling such cases.
Friday’s ruling involves a class action lawsuit challenging the $3.5 billion takeover of Trulia Inc by Zillow Inc, two companies that offer online information to home buyers.
In rejecting a proposed class settlement, Andrew Bouchard, the chancellor or chief judge of Delaware’s Court of Chancery set a tough standard for approval of so-called “disclosure-only settlements” in his court.
“Given the rapid proliferation and current ubiquity of deal litigation,” wrote Bouchard, “the court’s historical predisposition toward approving disclosure settlements needs to be reexamined.”
Most U.S. companies are incorporated in Delaware, and the bulk of the merger class actions are filed in the Court of Chancery.
Merger class actions have flooded state courts over the last decade, becoming so common that business groups and academics have labeled them a “deal tax,” driving up the cost mergers. Judges have noted real wrong-doing by directors and bankers may never be investigated in the rush to settle.
Bouchard said the court will no longer approve a settlement that provides information, and no money, to shareholders unless the information meets the tough “clearly material” standard.
The 2014 Trulia merger is typical of how the case and disclosure-only settlements work.
Several shareholders filed class actions opposing the deal beginning in late September 2014 and settled less than two months later. The board of directors got a release that protects against future lawsuits and the shareholder attorneys sought a fee of up to $375,000.
Trulia shareholders only got information, such as the methods used by bankers to value deal synergies, which Bouchard said was not material, or “even helpful.”
Shareholder attorneys have defended the cases, saying they ensure that minority shareholders are fairly treated. Several cases in recent years have fetched more than $100 million for investors.
“Companies will face more injunctions if they don’t disclose material information,” said Juan Monteverde, a Faruqi & Faruqi attorney who represented Trulia investors, in an email.
Sean Griffith, a Fordham Law School professor, filed an amicus brief in the Trulia case and has been a critic of the cases.
“Because those settlements fuel the merger litigation frenzy, this may well be the beginning of the end of the deal tax as well,” he said.
Zillow, which acquired Trulia, declined to comment.
Reporting by Tom Hals in Wilmington, Delaware; Editing by Noeleen Walder