The Death of Merger Litigation Part II – The North Carolina Business Court Puts a Nail in the Coffin
In a recent article entitled “The Death of Merger Litigation?”, we wrote about the Delaware Court of Chancery’s increasing refusal to approve disclosure-only settlements in shareholder lawsuits challenging public company merger transactions. Often described as “peppercorn” settlements because of the limited value they provide to shareholders, disclosure-only settlements typically involve an agreement by defendants to provide limited additional disclosures regarding the merger in return for a release of claims, followed by an application for attorneys’ fees by plaintiff’s counsel.
Delaware Clamps Down
The Delaware Court of Chancery’s scrutiny of disclosure-based settlements culminated in its decision in In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. Jan. 22, 2016). In Trulia, the Chancery Court refused to approve a disclosure-only settlement and warned that such settlements were likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission, and the subject matter of the release to defendants is narrowly circumscribed to claims arising out of the merger.
Practitioners have widely and correctly considered Trulia to be a bellwether case. Based on recent statistics, the effect of the decision in Delaware has been a significant drop-off in the number of merger-related lawsuits, which previously had been filed as a matter of course in virtually every transaction of any significant size.
North Carolina Follows Suit
In our article, we noted that the North Carolina Business Court had signaled it was aware of developments in Delaware and would continue to review merger litigation settlements carefully to ensure that they satisfied applicable standards of fairness under North Carolina law. In In re NewBridge Bancorp Shareholder Litigation, 2016 NCBC 87 (November 22, 2016), the Business Court has now gone a step further, expressly adopting the rationale of Trulia and issuing a similar warning that potentially bodes ill for the future of disclosure-only settlements in North Carolina.
The case involved a proposed merger between NewBridge and Navy Merger Sub Corp., a wholly-owned subsidiary of Yadkin Financial Corporation. Several NewBridge shareholders filed claims in the Business Court against Yadkin, NewBridge and the NewBridge Board of Directors, alleging that the directors breached their fiduciary duties by (1) proposing a merger that undervalued NewBridge; (2) assenting to unreasonable deal protection provisions; and (3) causing NewBridge to issue materially incomplete and misleading disclosures. The complaints also alleged that Yadkin aided and abetted these breaches. The parties agreed to a proposed settlement, pursuant to which the NewBridge Board agreed to make certain additional disclosures prior to a shareholder vote, in exchange for a broad release of claims related to the merger.
The Business Court, in reviewing the fairness of the settlement and the accompanying motion for attorneys’ fees, noted that North Carolina courts should apply “more exacting scrutiny” than they had previously in determining whether the scope of the released claims was a fair exchange for the consideration received by the class in such a disclosure-only settlement. In doing so, the Business Court heavily relied upon the Delaware Chancery Court’s recent decisions giving much greater scrutiny to the fairness of disclosure-only settlements, especially where broad releases of claims were required as part of the settlement.
Ultimately, the Business Court approved the settlement, determining that the consideration received by the class was commensurate with the scope of the released claims, particularly because the plaintiffs’ attorney admitted that both the class action claims and the released claims were of little value. While the Business Court did not apply the higher level of scrutiny adopted by Delaware courts this time, the Court expressly advised practitioners to be aware that the judges of the Business Court will be willing to apply the higher level of scrutiny in the future.
The Trulia line of cases has inspired some shareholder class action firms to begin filing merger litigation in states other than Delaware in hopes of finding a jurisdiction that will allow them to continue to pursue “peppercorn” settlements. The Business Court has now clearly signaled that such firms will not find any friendlier terrain in North Carolina.