More Pushback to Disclosure-Only Settlements

A recent decision from the United States District Court for the Southern District of New York represents a significant further development in extending into federal court the Delaware Chancery Court’s resistance to disclosure-only settlements in the M&A litigation context.  Plaintiff stockholders in a M&A target company often file lawsuits challenging disclosures made to them in proxy statements soliciting support for the M&A transaction.  Such suits have served as a vehicle for plaintiff lawyers to collect fees when they are “mooted” by the target company making additional disclosures in response to the lawsuit. The cases are very rarely litigated, allowing plaintiff lawyers to collect fees for limited effort and little risk.

In a 2016 decision by Chancellor Bouchard in In re Trulia, Inc. Stockholder Litigation the landscape for these disclosure-only settlements in Delaware Chancery Court shifted against plaintiffs with the rejection of such settlements unless the supplemental disclosures caused by the litigation were “plainly material.”  This shift resulted in greater scrutiny of these settlements in Delaware Chancery Court and higher risk to plaintiff lawyers that they would receive no fees even after the supposed disclosure issue was mooted by the company.  As a result, in the years since Trulia, plaintiffs have increasingly filed similar cases in federal court, asserting individual disclosure claims under sections 10(b) or 14(a) of the Securities Exchange Act in order to acquire federal jurisdiction. Because these cases are brought as individual actions, they do not require court approval of any settlement or payment of fees.

However, this federal court option may be getting less attractive for plaintiff’s lawyers.  In a recent decision, Judge Oetken in the Southern District of New York rejected a motion for a fee aware of $250,000 to plaintiff lawyers as compensation for a mooted disclosure-only case.  In April 2021, Nuance Communications, Inc. announced an agreement to be acquired for $56 per share.  The next month, a proxy statement was filed requesting approval of the transaction by Nuance stockholders.  Within a week, stockholders had filed suit challenging the disclosures in the proxy statement, alleging that material information had been withheld regarding the analysis conducted by Nuance’s financial advisor.  As is often the case in public company M&A transactions, a number of similar lawsuits followed.  A little over a week after the lawsuits were filed, Nuance issued a supplement to the proxy that included additional disclosure regarding a nondisclosure agreement between the target and acquiror and provided more information about the financial advisor’s analysis.  These disclosures effectively mooted the claims made in the lawsuits.  The meeting proceeded on schedule, at which 99% of Nuance’s stockholders voted to approve the transaction.

With the disclosure claims mooted, the plaintiff’s lawyers moved the court for an award of attorneys’ fees to compensate them for the supposed “substantial benefit” conferred on Nuance stockholders by the supplemental disclosures.  In making such a motion, plaintiff has the burden to demonstrate that a substantial benefit was conferred, and defendant has the burden to establish the lack of any causal connection between the lawsuit and the supplemental disclosures.  As often happens in these situations, defendants did not contest that the supplemental disclosures were made in response to the lawsuits.  The supplemental proxy itself indicated that Nuance made additional disclosures to moot the lawsuits.

But Judge Oetken rejected the fee award, holding that the supplemental disclosures themselves did not provide a substantial benefit to Nuance stockholders.  This decision is particularly significant because the supplemental disclosures made by Nuance about its financial advisor’s analysis are the type of additional disclosure often made in these circumstances to moot disclosure-only lawsuits.  Specifically, plaintiff pointed to additional disclosure about the financial advisor’s multiple analysis and research analyst price targets.  For the multiple analysis, the financial advisor had compared Nuance to thirty-five peer companies.  The original proxy only disclosed the mean and median multiples across various metrics, while the supplemental disclosure provided the individual multiples for each of the peer companies.  Nuance argued that this additional disclosure did not provide a substantial benefit because the stockholders had already been provided a detailed summary of the multiple analysis and nothing more was necessary.  The court agreed.  Similarly, the court rejected the purported substantial benefit from the disclosure of individual research analyst price targets instead of a general range.  Plaintiff argued that the original proxy only disclosed a range of research analyst price targets for Nuance and misleadingly omitted that seven of the eight analysts had price targets above the transaction price of $56 per share.  This additional information was disclosed in the supplemental proxy.  Once again, the court rejected this argument because the additional disclosure did not alter the total mix of information available to stockholders and because the individual research analyst price targets were publicly available.