Disclosure-Only Settlements Will Be Subject to Increasing Scrutiny

The Delaware Court of Chancery’s Jan. 22 opinion in In re Trulia Shareholder Litigation, C.A. No. 10020-CB, follows the recent trend of judicial skepticism of disclosure-based settlements by rejecting a proposed class-action settlement arising from Zillow Inc.’s acquisition of Trulia Inc., under which Trulia agreed to provide certain supplemental disclosures in exchange for a broad release of all known and unknown claims against the defendants. The court rejected the parties’ proposed settlement because the supplemental disclosures bargained for by the plaintiffs were immaterial and therefore did not afford Trulia’s stockholders any meaningful consideration to warrant providing the defendants with such a broad release of claims. In so holding, the court made clear that, going forward, disclosure-based settlements will be subject to “increasingly vigilant” scrutiny and will only be approved where the supplemental disclosures are “plainly material,” the proposed releases are “narrowly circumscribed,” and the claims being released have been “investigated sufficiently.”

BACKGROUND

The Trulia litigation involved a proposed settlement of a stockholder class action challenging Zillow’s acquisition of Trulia in a stock-for-stock merger pursuant to which each share of Trulia stock would be exchanged for 0.44 shares of Zillow stock. After the merger was announced, Trulia stockholders, in four nearly identical class action complaints, sought to enjoin the proposed merger, alleging that the Trulia directors breached their fiduciary duties by approving the proposed merger at an unfair exchange ratio. After minimal discovery, the parties agreed in principle to a settlement in which Trulia agreed to provide certain supplemental disclosures in its proxy statement in exchange for a broad release of liability from all known and unknown claims that could be brought against the defendants by any member of the putative class. The parties’ proposed stipulation and agreement further provided that plaintiffs counsel intended to seek an award of attorney fees and expenses not to exceed $375,000, which the defendants agreed not to oppose.

THE COURT’S ANALYSIS