- Thank you very much
for inviting me tonight.
And I thank you for the
very kind introduction.
By the way, my daughter
did go to NYU undergrad,
so I have lots of purple clothing.
Sorry, I didn't come here for law school.
In looking at the audience,
some of this will be stuff everyone knows,
some of it may not be
stuff some people know.
Hopefully I can give you a few insights
that are unique from my perspective
about these two cases I'm
gonna talk about tonight,
Corwin, and the Trulia case.
In October 2015, the
Delaware Supreme Court
issued it's decision in Corwin,
and it holds, and I'll just quote it:
The business judgment rule is invoked
as the appropriate standard of review
for a post-closing damages action,
when a merger that is not subject
to the entire fairness standard of review,
has been approved by a fully
informed uncoerced majority
of the disinterested stockholders.
That decision gave birth
to what practitioners
now refer to as Corwin cleansing,
a doctrine that provides
a potential off-ramp
for early stage dismissal of
post-closing damages cases,
challenging M and A transactions
that don't involve a
controlling stockholder.
In January 2016, about three months
after the Supreme Court's
decision in Corwin,
I issued what's called
the Trulia Decision,
it's like a real-estate,
online real estate company,
in response to the proliferation
of disclosure-only settlements
we were seeing in the Court of Chancery.
Trulia did change the paradigm in Delaware
with respect to deal litigation.
It sent a message that the
court would be more rigorous
when evaluating
disclosure-only settlements,
and it expressed a preference
that disclosure claims either
be litigated or mooted,
as opposed to being
presented to the court,
in a non-adversarial settlement process.
Now it's been about four years
since Corwin and Trulia were decided,
and I believe it's fair
to say they have changed.
They've had a significant impact.
In fact, some would say, a profound impact
on the deal litigation landscape.
And so that begs the question
what did we learn over the last four years
now that we have a lot
of law that has developed
since that time,
and naturally the question
I wanna explore with you
tonight during the time I have.
So there are gonna be, essentially,
three parts to my talk.
First, I wanna explain
some of the background
of the Corwin decision itself,
and then we'll discuss how the
courts applied the doctrine
over the past four years.
Second, I similarly wanna provide
some background on the Trulia decision,
and then we'll discuss
the trends we have seen
in the pursuit of disclosure claims
in deal litigation since then.
And the finally I'll share
with you, time permitting,
a few take away points from my perspective
on the impact of these decisions, again,
based on what's occurred
over the last four years.
So let's start with what
Corwin itself was about,
and how it was decided.
Again, maybe be very
basic for a lot of people,
but might, you may not have
read the lower court opinion,
as much as the Supreme Court opinion.
And I have a unique perspective
on the lower court opinion
since I was trial the court judge.
The case was on my docket
when I became Chancellor
in May of 2014, and I issued the opinion
dismissing the case less than six months
after joining the bench.
So, pretty significant
case early on in my career.
Fortunately, my ruling was affirmed in,
actually an extremely gracious opinion
by the Supreme Court,
but the affirmance did not happen
in the way you might
have thought it happened
if you'd just read the
Supreme Court's decision.
Corwin involved a merger in which KKR
acquired a company called KFN
in a stock-for-stock merger in 2014.
KFN was a specialty finance company
that primarily invested
in sub-investment grade
corporate debt instruments
principally for KKR.
It previously had been a
wholly subsidiary of KKR,
but it was spun out and taken public
about seven or eight years
before the proposed merger
that was at issue in my case.
At the time of that merger, KKR and KFN
were both widely-held companies,
at least that was the record below,
and KKR owned less than one percent
of the stock of KFN.
The primary claim in the case,
as with many of deal cases,
is a claim for breach fiduciary duty
against the KFN Board of Directors
for obtaining inadequate consideration
in selling the company back to KKR.
Defendants moved to dismiss
for failure to stat a claim
under our rule 12 b six.
The plaintiffs didn't make
any effort, pre-closing,
to enjoin the transaction,
so I have a motion to
dismiss that I'm deciding
in the context of after the closing.
And my ruling, if you read it,
really considers three questions.
I'm gonna walk you through
the three questions I had,
in the order that I decided 'em.
The first question, and
the primary arguments
that the plaintiffs made,
was that entire fairness review
should apply to the transaction,
on the theory that KKR was a
controlling stockholder of KFN,
despite owning less than
one percent of KFN stock.
That theory was based on the fact
that KKR managed the
day-to-day business of KFN,
pursuant to a management
agreement for a period of time,
making KFN operationally
dependent on KKR, again,
pursuant to the management agreement.
After finding that the
plaintiffs had failed
to allege fact to support
a reasonable inference
that KKR controlled the board of KFN,
which is the key inquiry
under our case law,
not the sole focal point,
but the key inquiry,
I rejected the plaintiff's first theory
for applying entire fairness review.
So that one's off the board.
As a second line of attack,
the plaintiffs argue that
entire fairness review
should apply to the transaction
on the theory that a
majority of the 12 members
of the board at KFN who
approved the merger,
were beholden to, and not
independent from, KKR.
And there was some force to this argument,
because many of the
directors on the KFN board
had relationships with KKR dating way back
to when it had been spun out of KKR,
seven or eight years earlier.
But after going through the allegations
concerning the relationships
of these directors,
director by director,
as we do in Delaware,
I concluded that the plaintiffs
had failed to allege facts,
from which it was reasonably inferable
that a majority of the
KFN board was either
interested in the transaction,
or not independent from KKR.
Now, having rejected the
plaintiffs' two theories
for applying entire fairness
review, which meant that
the business judgment
review standard would apply,
and we would defer to the
judgment of the board,
that could have been
the end of my analysis.
But I went on to address
one additional argument,
and I think I see the
corporate in the room here,
that may have made me
address that additional
argument, Mr. Savitt.
In hindsight, I think I
might have been baited
by some crafty lawyers at Wachtell Lipton
who saw an opportunity
to get clarification
on a legal issue from a new judge
who might feel he has
to decide all the issues
that were raised,
at every argument that
the parties heat up.
So whether that's true or not,
I considered, and ruled
on, the third argument,
that the defendants had advanced
for the application of the
business judgment rule,
one that was done in the alternative,
had there been any taint with the board.
That argument, of course,
concerned the legal effect
of the stockholder's approval
of the merger by a majority
of the stockholders
unaffiliated with KKR.
At the time it was an open
question in Delaware law,
at least in most peoples' mind,
whether such a vote was required.
When such a vote was required
as a statutory matter
under Delaware law, could
ratify a transaction.
And the confusion on that point
came from a decision, or a
Supreme Court decided in 2009
called Gantler versus Stephens,
where the Supreme Court, arguably,
there was a distinction
between the legal effect
of a statutorily required vote
on a merger or a transaction,
versus a vote that was imposed
just as a voluntary independent condition
of a transaction.
Some read Gantler to hold
that the only kind of vote
that could have a ratifying effect,
was one that was voluntarily imposed.
So after surveying the law,
I concluded that it did not matter
whether the vote was taken,
that was statutorily required,
or was a voluntary
condition of a transaction,
and that it's legal effect
would be the same in either case.
And to be more specific,
I held that the legal effect
of a fully informed stockholder
vote of a transaction,
that was required by the statute,
in this case the merger statute,
that did not involve a
controlling stockholder,
was the business judgment rule would apply
and insulate the transaction
from all attacks,
other than the grounds of waste,
even when a majority of
the board was tainted,
either by being interested
in a transaction
or not independent.
That was the precise holding.
The plaintiffs appealed that decision
to Delaware Supreme Court,
which is not surprising,
but what was surprising is
the plaintiffs changed their
theory on appeal in two ways,
to advance arguments they
really hadn't made to me
in a meaningful way.
First, they argued that even if KKR
was not a controlling stockholder,
and the entire fairness
standard didn't apply,
dismissal was unwarranted
because red line should apply,
which involved sales
and control of a company
to the transaction.
And if it had applied,
as a practical matter,
given the state of law at that time,
that would mean they'd likely
be able to take discovery
to test the reasonableness
of the KFN board's decision
in approving the merger.
Second, the plaintiffs now took issue
with the meaning of Gantler,
which it's sort of conceded below,
in terms of what it's
legal effect would be
and focused on whether or not
all material information was disclosed.
The Supreme Court
comments in it's decision
on the impropriety of the tactics
the plaintiffs used and advancing
new arguments on appeal.
But it didn't stop there.
Instead, they used the
opportunity to latch on
to what for me, was a
tertiary, third level argument,
as the basis for my decision
in order to weigh in
on the meaning of Gantler,
and I think to change in
a pretty fundamental way
the way Delaware law was
operating at the time.
Using extremely long
footnotes that ran for pages,
were laden with case authority
going all the way back to 1928,
I think the Chief Justice's law clerks
were working hard that day,
the court firmly endorsed
the following proposition,
which is sort of the
key holding in the case:
When a transaction, I'm
just reading a passage here.
When a transaction is not subject
to the entire fairness standard,
the long-standing policy
of our law has been
to avoid the uncertainties and costs
of judicial second-guessing,
when the disinterested
stockholder have had
the free and informed chance to decide
in the economic merits of the
transaction for themselves.
In doing so, the court created
this potential off-ramp I mentioned before
for post-closing deal challenges
where the application of
intermediate scrutiny,
enhanced scrutiny, under
cases like Revlon and Unocal,
previously had made it difficult,
if not at times practically impossible,
to achieve a pleading stage resolution
of even ostensibly weak cases.
Now looking back at it now,
it's really no surprise in my view
that the Supreme Court,
with Chief Justice Strine
leading the charge,
took this approach.
Just five months earlier in Cornerstone,
the Supreme Court revisited
its prior precedent,
and provided another
pleading stage off-ramp
to permit, and this is
in the Cornerstone case,
the dismissal of outside directors
even when the plaintiff
had plead sufficient facts
to invoke the entire
fairness standard of review,
unless the plaintiff was able to allege
a non-exculpated claim
for breech of the duty of loyalty
as each director individually.
Had to go director by director.
And of course, just one year before that,
or excuse me, just one year before Corwin,
the Supreme Court affirmed
then Chancellor Strine's
decision in MFW, that also
provides a potential off-ramp
at the pleading stage,
but in the case of controlling
stockholder transactions
and cash out mergers.
I'm not gonna get into that standard,
but the point is, the fabric of the law
with these standards and
how we evaluate cases
at the pleading stages,
was being very much redefined in this era.
So having talked about
what the case is about,
I wanna turn to how courts
have applied Corwin.
Since Corwin was decided
in late fall of 2015,
the court of Chancery has, by my count,
considered motions to dismiss
based on Corwin on 29 occasions.
I wanna discuss the results of those cases
from two perspectives.
First, from the perspective
of how the case law has
fleshed out the doctrine,
and then second, from the perspective
of considering the bottom line outcomes
of those cases.
Let's start with the doctrine.
In the wake of any new doctrine,
trial courts inevitably confront questions
to work out the nuances
of applying that doctrine,
and our experience in
the Court of Chancery
with Corwin has been no different,
and we now have the
answers to many questions
for which we weren't
sure when the doctrine
was first adopted.
So here are some of the results.
Corwin not only will
apply to one-step mergers,
it can also apply to
transactions structured
with a tender offer on the front end
of a two-step transaction.
That's the Volcano decision.
Corwin can apply to aiding
and abetting claims,
and that's logically because the dismissal
of the breech of fiduciary
duty claim under Corwin
eliminates the predicate necessary
to prove aiding and abetting.
In the absence of a
controlling stockholder,
Corwin can apply to loyalty claims
that otherwise might have been subject
to entire fairness review,
due to conflicts faced by
individual members of the board.
That actually was the fact pattern
of Corwin itself below.
Under Corwin the burden
is on the plaintiff
to plead that the stockholder vote
was not fully informed by
identifying a deficiency
in the proxy statement,
at which point the burden then falls
to the defendants to establish
that the alleged deficiency
fails to state a disclosure claims.
That was a decision I issued in Solera,
which the Supreme Court later endorsed
in a footnote in some later decision.
A plaintiff can not avoid Corwin
by attempting to dress up
defective disclosure claims
as the claim for quasi appraisal,
because the underlying claim
is subsequently one for
breech of fiduciary duty.
And finally, when a motion to dismiss
based on Corwin is denied,
with the respect to our Revlon claim,
the standard to be applied at trial
will remain one of enhanced
scrutiny under Revlon.
Now I wanna focus on that
last holding for a moment.
Careful readers of the Supreme
Court decision in Corwin
may recall a passage where,
and I'm just gonna quote
part of that passage
and add a separate context.
It stated as follows:
Although the plaintiffs argue
that adhering to the proposition
that a fully informed
uncoerced stockholder vote
invokes the business judgment rule
would impair the operation
Unocal and Revlon,
or expose stockholder to unfair action
by directors without protection,
the plaintiffs ignore several factors.
First, Unocal and Revlon
are primarily designed
to give stockholders and
the Court of Chancery
the tool of injunctive relief,
to address important M and A decisions
in real time before closing.
They were not tools designed
with post-closing money
damage claims in mind.
And it goes on.
But in view of that language,
many practitioners
speculated that this passage
foreshadowed that the Supreme
Court would articulate
a more restrictive standard
then enhance scrutiny to apply,
when adjuding post-closing
claims for damages
for Revlon or Unocal claims,
and that did not come to pass.
Instead, in the RBC or Rural Metro case,
which was decided about one month later,
but interestingly enough,
without the presence of the
Chief Justice on the case,
the court endorsed the
use of enhanced scrutiny
to adjudicate a post-closing
claim for damages.
So now, I wanna turn a little bit
to what have been the
outcomes under Corwin.
That's the doctrine,
we know what the holding is,
what's the bottom line of what's happened?
Because I think this
is sort of a key point.
As I mentioned, there are 29 cases
that have been decided under Corwin,
and I'm gonna run through them quickly,
year by year, because I think you'll see
sort of a pattern.
In 2015 the Court of Chancery considered
one motion to dismiss under Corwin.
Obviously there's only
like three months left
after Corwin came down, which it granted.
And to be more specific,
Vice Chancellor Parsons
actually granted
re-argument in the Zale case
on the heels of the Corwin decision
to dismiss and aiding and abetting claim
against the financial advisor,
which the Supreme Court later affirmed
in the Tseng versus Attenborough case.
In 2016, the court considered
six motions to dismiss
under Corwin, all of which were granted.
Three of those decisions were appealed,
all of which were affirmed.
Now things start to change.
In 2017, the court considered
13 motions to dismiss under Corwin.
10 of those motions were
granted and three were denied.
Of the 10 motions that
were granted, however,
two were reversed on appeal.
This means that in net terms for 2017,
five of 13 Corwin motions to dismiss
resulted ultimately in denials.
In 2018 the court considered
six motions to dismiss under Corwin.
Five of those motions were denied,
and only one was granted.
In addition, the court denied
a motion for summary judgment
in another case where Corwin was invoked,
after finding the existence
of factual disputes
concerning whether
stockholders had received
all material information.
And finally, through the
first six months of this year,
the court has considered
three motions to dismiss
under Corwin.
Two of those motions were
granted and one was denied.
Of the two that were granted,
one has been affirmed on appeal
and the other is pending on appeal.
So to sum up, of the 29 cases in which
motions to dismiss under
Corwin have been adjudicated,
18 resulted in dismissals, and 11 did not.
Now I wanna take a look at the
reasons for those outcomes,
where the motions to dismiss were denied,
or were reversed on appeal,
and those reasons, as you might expect,
logically break down into three categories
that track the conditions
for a stockholder vote
to be effective under
Corwin in the first place.
Mainly that the vote's fully informed,
that there's not a coercive transaction,
and that the transaction doesn't involve
a controlling stockholders.
The most common reason, substantially so,
for denying a Corwin motion
concerns disclosure issues.
Specifically, seven of the 11
Corwin motions that have failed,
did so because of disclosure problems
that prevented the
stockholders from having
a fully informed vote.
And I think it's significant
and very intentional, actually,
that two of those outcomes were the result
of Supreme Court reversals in 2018.
Turning to the second category,
I think my cell phone is
buzzing, so I apologize.
My wife should know better
than to be calling me right now.
I don't know how to do the,
I might just turn the dog gone thing off.
- [Man In Audience] Available available.
- Yeah, yeah, exactly.
(all laughing)
She should know what I'm doing.
In any event, so as you
turn to the second category,
two were denied based on the allegation
that there were not sufficient allegations
to support a reasonable
inference that the transaction,
excuse me, it was inadequate,
that there were sufficient
allegations, excuse me,
that there was existence of
a controlling stockholder,
or a controlled group of stockholders.
One was the Tesla case.
I'm sure that's opening
bad wounds for you Bill,
I'm sorry about that.
But because there was enough pled
for the existence of a
control at the pleading stage
based on the facts before the court,
it comes out of the Corwin framework.
So there's two cases to that effect.
And in the final category,
there are two cases where
the Court of Chancery
determined that it had
been sufficiently pled
that the stockholder vote was coerced
again, to render the Corwin inapplicable.
In one case, it was an issue
of situational coercion
as the court characterized it,
wherein the courts viewed the stockholders
had no practical alternative but to vote
for the proposed transaction.
And in the other case,
the court found structural coercion.
And this is a significant point,
and I think we may see more cases
where the vote to approve the transaction
was tied to and resulted
in the approval of
unrelated transactions
that favored an insider.
So having laid out the statistics,
and the rationale that
the cases have survived,
what did we learn from that?
And I would make three observations.
First and foremost, Corwin has not been
the showstopper to deal litigation
that many practitioners and
academics feared it would be.
It is not surprising that there was
a streak of dismissals early on in 2015,
late 2015 and 2016, in my view.
Most, if not all of those cases,
were in the pipeline, if you will,
of the court's docket
when Corwin was decided
by the Supreme Court, and likely, frankly,
caught the plaintiffs off guard.
But if you back those
first seven cases out,
the numbers show that
the court has decided
22 dismissal motions over
the last two and a half years
under Corwin, that's 2017,
2018, the first part of 2019,
11 of which, or half, failed,
and that's hardly a showstopping doctrine.
Second related to the first point,
plaintiffs lawyers have
become more effective
pleading cases to survive Corwin review,
and that's principally
by using section 220,
our books and records statute,
in order to plead stronger cases.
In fact, most of the 11 cases
have survived Corwin dismissal motions,
including the two cases in which
our Supreme Court reversed
Corwin dismissal motions,
reflect that the plaintiffs
obtained documents
through the use of 220
that they used to show
the material information
either was omitted from,
or misleadingly disclosed
in the proxy statement.
The path for using section
220 for this purpose,
was endorsed in 2017, in a case
called Lavin versus West Corporation
where the court rejected,
as a matter of law,
the argument that was made
that Corwin stands as an impediment
to an otherwise properly
supported demand for inspection
under section 220.
Now having said that,
there is a reality that
the stockholder plaintiff
has to move quickly,
has to act with alacrity
to exercise this right,
by filing a section 220 case
before the merger closes,
so as not to lose standing
to be able to bring a section 220 claim.
And the third observation I will offer,
is that there seems to have
been a decline since 2017
in the number of Corwin decisions,
or Corwin motions that
the court's been deciding.
I don't know if that's
gonna continue or not,
but I had a suspicion it
relates to the second part
of what I wanna talk to now,
talk about now, which
is the Trulia decision,
excuse me.
As I'm sure everyone in
this audience is aware,
when I issued my decision in
Trulia in January of 2016,
virtually every transaction
involving the acquisition
of a public corporation
resulted in a flurry of
class action lawsuits,
alleging that the target
boards of directors
breached their fiduciary duties
by agreeing to sell the
corporation for an unfair price.
Between 2005 and 2016,
the percentage of transactions
of 100 million or more
that triggered stockholder litigation
had more than doubled from 39.3% in 2005
to 96% which is the
high watermark in 2013.
On average, over 90% of deals
were the target of lawsuits
between 2009 and 2015.
Parties often resolved these lawsuits
by agreeing to what we've been calling
disclosure only settlements.
In these settlements, the
target company would agree
to include some additional information
in the proxy materials
that were disseminated to the stockholders
before they voted on the
proposed transaction.
The theory, of course,
is that those supplemental disclosures
would allow stockholders
to be better informed
when exercising their franchise rights,
but the reality suggested
very much otherwise.
In a study published in 2015,
Professors Fish, Griffith,
and Steven Davidoff Solomon
presented empirical data suggesting
that supplemental disclosures
made no difference
in stockholder voting,
and did not provide a
benefit that could serve
as consideration for a settlement.
Yet from 2005 to 2015,
plaintiff's council
extracted attorney's fees
in disclosure only settlements,
ranging up to about $600,000 per case
with a median payoff of
approximately $300,000,
and thus imposing what had been
characterized in the literature
as rents or deal taxes on virtually
every M and A transaction.
The leverage, of course, that
the plaintiff's lawyers had
to pull this off,
was to seek to threaten
a preliminary junction
or to bring a preliminary junction
to enjoin the transaction from closing
until supplemental
disclosures had been made,
putting a cloud over the deal.
In exchange for dropping that threat,
plaintiffs obtained the
supplemental disclosures
that they desired,
with the expectation of seeking
a fee for those efforts,
and agreed to provide the defendants
with a release of claims on the behalf
of the proposed class.
Typically, the breadth of these releases
far exceeded anything having to do with
what was really at issue.
For example, the release
in the Trulia case
encompassed, among other things,
unknown claims and claims
arising under federal state,
foreign statutory, regulatory, common law,
or other law or rule,
held by any member of the proposed class,
that in any way remotely related
in a conceivable way to
the proposed transaction.
There were also real down sides
to giving these releases,
because they could cut off
potentially valuable claims.
Mr. Friedlander in the audience here
knows all about one that
I'm gonna mention now,
and that I mentioned in Trulia,
which provides a good example of this,
and that's in the Rural Metro case,
a stockholder objected to a
proposed disclosure settlement,
to which the original
plaintiffs had agreed.
During the settlement hearing
Vice Chancellor Laster
considered it, quote
unquote, a very close call
to reject the settlement.
Had that settlement been approved,
over 100 million dollars in payments,
that later were obtained for the class,
never would have been realized.
In addition to providing no real value
to stockholders, and threatening the loss
of potentially valuable claims,
disclosure only settlements presented
significant challenges for the court,
because the settlement hearing often
was the first time the
court would see the case,
and have any contact with the case,
and the hearings were typically done
in a very non adversarial way.
Although it happens on occasion,
it is relatively rare
that the stockholder,
another stockholder, other than the one
that's the plaintiff in the case,
will take the time and make the effort
to object to a proposed settlement.
The lack of an adversarial process
required that the court
probe the value of the get
in the get give equation
for the stockholders
without the benefit of
opposing view points.
A horrible way to run a court.
Indeed, the court essentially
became a forensic examiner
of proxy materials,
so that it could play devil's advocate
for probing the value of the
supplemental disclosures.
I have many a vivid memory
of sitting in a conference room
early on, with a law clerk,
poring over proxy
materials before a hearing,
only to find the things
that lawyers were telling me
weren't in the proxy
actually were in the proxy
or that things that were punitively
valuable supplemental disclosures
simply repackaged other information
that was already in the proxy as well.
So given the concerns I've just discussed,
the court began to re-examine
its historical predisposition
toward approving
these kind of settlements.
In 2014 and 2015, several
judges on the court
have rejected some settlements,
including the Chancellor at the time,
Chancellor Strine, as unreasonable,
and others have cut fees in cases
that yield little, if any,
benefits for stockholders.
But the practice continued
with no real signs of letting up.
And that's the context in which
I decided the Trulia case,
to where we just simply
formulated a new framework
for evaluating these kind of settlements.
It expressed a preference
for disclosure claims
to be litigated in a
true adversarial setting,
or to be mooted, thereby keeping
the adversarial process intact as well.
And I'll elaborate on that in a minute.
It did not rule out approving,
in the appropriate case,
a disclosure settlement,
but it sent a message that
they would be scrutinized
much more rigorously than
they had been in the past.
And a critical passage of the
opinion I'll just read now
sets that up.
It states:
Practitioners should expect
that disclosure settlements
are 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 proposed release
is narrowly circumscribed
to encompass nothing more
than disclosure claims
and fiduciary duty claims
concerning the sale process,
if the record shows that such claims
have been investigated sufficiently.
To be clear, in using the
word plainly material,
it was not my intention,
or the court's intention,
for that matter, to
change the legal standard,
for what information must be
disclosed to stockholders.
That standard remains one of materiality
under Delaware law, which in turn,
just tracks federal law.
Rather, as I explained in Trulia,
the term plainly material was
intended to make the point
that when we have to evaluate as judges,
the fairness of a settlement,
by looking at the give and
the get of a settlement,
it really shouldn't be
that close of a call
when we're looking at
supplemental disclosures.
So what's happened since
Trulia's been decided,
in the post Trulia world,
I'm gonna look at this, I think,
in the same way I looked at Corwin,
really by looking at two different points.
First, by providing some statistics
on the deal case filings,
and second, by reviewing what courts
in other jurisdictions have done
when considering disclosure
settlements after Trulia.
On the statistical front,
again, I'm going to
acknowledge the excellent work
that professors I mentioned before,
have done with the help
of two other professors,
Matthew Kane and Randall Thomas,
in examining disclosure settlements
and the resolution of deal cases.
The statistics I'll share with you
come from two of their recent articles,
and from cornerstone reports
that just came out recently, actually.
And the trends that have
emerged are quite striking,
some of 'em, everybody knows,
some may be a little more obscure,
and I'm gonna highlight four of them.
First, I suspect everyone has
this one figured out by now,
there has been a clear
flight to federal court
in deal litigation, and
a concominate decline
in the filing of such cases
in the Court of Chancery.
So in 2015, pre Trulia,
60% of all litigated deals
faced a challenge in Delaware,
versus 19% in federal court.
By 2018, well after Trulia,
five percent of litigation deals
faced a challenge in Delaware,
versus 92% in federal court.
The shift from Delaware is
really not a surprise to me.
I anticipated this was likely to happen,
so long as other jurisdictions
are unwilling to clamp down
on the settlement practices
our court found so troublesome,
there will always be lawyer who will
look for another place to
file those kind of cases.
The shift to federal
court also is logical,
given that the increased adoption
of form selection bylaws
can limit the ability of
plaintiffs to file in other sates,
but cannot preclude the
filing of federal claims
in federal court, of course,
because, in particular with 14 a claims,
they can always be
brought in federal court.
Second trend, and this is the
one I didn't quite anticipate
to the extent it has occurred,
parties now resolve deal litigation
primarily through voluntary dismissals.
After defendants make
supplemental disclosures
that the plaintiffs request,
and the payment of mootness fees,
instead of pursuing the
disclosure settlement.
Indeed, disclosure
settlements appear to have
virtually disappeared.
So consider these statistics.
Out of 124 cases challenging deals
that closed in 2015, before Trulia,
46% of the cases settled,
54% were dismissed,
that gives you the 100%,
and then 14% resulted in
the payments of a mootness fee,
which obviously would be within
one of those two first categories,
presumably the dismissed.
By contrast, out of the 135 cases
challenging deals that
closed in 2017 after Trulia,
nine percent settled, 91% were dismissed,
and 65% resulted in mootness fees.
And out of 120 cases challenging deals
that closed last year, in 2018,
zero percent settled, 100% were dismissed,
and 63% resulted in the
payment of a mootness fee.
Now the number of
settlements in 2017 and 2018
are likely to be unrepresented
in those figures,
because some of these
cases are still pending,
but those trends, nonetheless
are extremely dramatic.
And you may recall that the Trulia opinion
supported using the voluntary
dismissal mootness fee route
as an alternative to a
disclosure settlement,
and that's me, I did support this,
because the process doesn't
involve providing a release
and it will preserve
the adversarial process
if the court is asked whether a fee
should be awarded in a case.
As I pointed out in Trulia however,
if the parties come to agreement on a fee,
that obviates the need
for judicial review,
but, and this is an important but,
in Delaware at least,
we require disclosure
to the stockholder of
the entity paying the fee
to ensure that there is
sunlight on that process
and to prevent against
abusive buy off payments.
Having said that, I must say
the magnitude of the shift,
from seeking court approval
of disclosure settlements
to voluntary dismissal mootness fees
has really surprised me,
that it's literally gone full
tilt the other direction.
Third, the overall percentage
of deals challenged
has declined, but modestly.
In 2013, which as I mentioned,
was really the high water mark,
it was 96% of deals
over 100 million dollars
that were challenged with
at least one lawsuit,
typically three or four lawsuits.
And the number of lawsuit
challenges is down,
but the percentages have
declined, but only modestly.
So in 2016 when right
on the heels of Trulia,
it was down to 74%,
but now it's leveled off
so that both 2017, 2018
83% of deals.
Fourth and finally, there's
some representatives
of the plaintiffs in this room,
I'm not gonna implicitly criticize
in the following comment.
There really is a relatively small group
of plaintiffs law firms that
appear to be responsible
for the vast bulk of these cases
that are now filed through federal court.
In 2017, 2018 about six firms
filed a highly disproportionate
number of these cases.
It's simply a cottage industry.
And those firms, I will say,
are not the ones known in Delaware
for actually achieving
meaningful damage recoveries
for stockholders.
So now I wanna turn to the
legal developments with Trulia.
So, in writing Trulia I fully anticipated
that it's effectiveness
ultimately may depend
on whether other jurisdictions
would adopt a similar approach
given the natural inclination of lawyers
who specialize in disclosure settlements
to shop for a more hospitable form.
And to simplify things
in the interest of time,
I'm gonna go over the
cases, and just group 'em
in three categories.
The first category
consists of jurisdictions
that have adopted and applied
the reasoning of Trulia.
And foremost among them is
the seventh circuit's decision
in the Walgreen's case,
which explicitly adopted the
plainly material standard
of Trulia, and in his obviously talented
and inimitable way, Judge
Posner was about to put
into two sentences,
what it took me many,
many pages to explain
about the need to apply
heightened scrutiny
to disclosure settlements when he said,
"The type of class action
illustrated by this case,
"the class action that
yields fees for class counts
"and nothing for the class
is no better than a racket.
"It must end."
Well I wish somebody
had given me those words
before, I just I spared
myself a lot of pages,
'cause it sort of gets to
the point very quickly.
Following Walgreen, two districts
and the seventh circuit,
one in Illinois, one in Indiana,
both have rejected
disclosure only settlements
by applying the Trulia standard
that Walgreen's endorsed.
I think one of those may be on appeal.
At the state court level,
courts in California,
Connecticut, Florida,
and New Jersey, have adopted
the reasoning of Trulia.
Most of them have done so in the context
of rejecting a disclosure only settlement,
although Connecticut, in one case,
approved such a settlement,
after finding that it's
supplemental disclosures
were plainly material.
That's category one.
Second category consists of jurisdictions
that have discussed but declined to adopt
Trulia's call for heightened scrutiny.
That occurred in Tennessee,
and most notably, New York.
Specifically, as the New York lawyers
in the room will know,
in Gordon versus Verizon Communications.
The first department of New York,
the New York Appellate Division,
an opinion I must say I
had a little difficulty
trying to understand what was going on.
Declined to adopt the reasoning of Trulia,
and purported to reformulate
a five-factor test
called the Colt Factors that it had
into a seven factor test,
and after they had a seven
factor test and applied it,
they determined that
supplemental disclosures
that provided only some
benefit to stockholders
were sufficient to more court approval
of a proposed settlement.
Significantly, from my perspective,
there appears to be some
tension within New York,
the New York State Courts
concerning that approach.
In city trading, the City
Trading Fund versus Nye case,
Judge Kornreich of the
New York Supreme Court
observed that although
Gordon's sum benefit yest
is less stringent than the
plainly material standard
in Trulia, there is no
reason why that test
cannot be interpreted to have some teeth.
And then the court went
on to say the following,
which I took some solace in:
Is is no secret that
the commercial division
strives to develop a reputation on par
with the Chancery Court.
To do so our corporate
law must be considered
as savvy as Delaware's.
Developing a reputation for attracting
and countenancing worthless strike suits
accomplishes the opposite result.
The third category of cases
is a big smorgasbord of cases
that neither fully adopt
nor decline to adopt Trulia.
And those cases take a
variety of approaches,
ranging from applying sort of
a slightly less stringent
version of Trulia,
but some feel a little more than
the sum benefit kind of test,
citing Trulia favorably,
but stopping short
of fully adopting it.
That happened in Michigan which had it's
idiosyncratic reasons for doing so,
as well as in North Carolina,
which has actually,
issued several decisions.
To finally continuing to approve
disclosure only settlements
without even mentioning
or discussing Trulia or any
of the cases since Trulia
that have criticized the practice.
One approach I found particularly amusing
comes from the federal
district court in my own state.
Confronted with disclosure
only settlements
in two of his cases, Judge Andrews,
this is a District Court of Delaware,
Federal District Court of Delaware judge,
gave the litigant two options.
Option one was that each
party could retain an expert
to submit a report and to testify
as to the significance of the disclosures
with an evidentiary hearing
to be held thereafter.
Option two was that the
court would appoint an expert
to assist them in deciding
whether the disclosures
conferred a substantial
benefit to the stockholders.
And under the second option,
the parties would split
the cost of the expert,
but the prevailing part would be allowed
to recover its cost from the loser.
Now to no surprise, both of those motions
were withdrawn and dropped in those cases
after that practical solution, I guess.
So, to close out.
How am I doin' on time here, Ed?
I'm all right?
Two more minutes?
To close out I'm gonna leave you with
two final observations,
from my perspective,
on the aftermath of Corwin and Trulia
based on this four year
experience that we've seen.
And the first is on Corwin.
You know for over 100
years, Delaware courts,
Court of Chancery and the Supreme Court
since it was established as a
separate institution in 1951,
have crafted a deep body of common law
that attempts to balance, at its core,
the economic and societal benefits
of affording businesses
the freedom to take risks
and make decisions without
judicial second-guessing
against the need for guardrails
to protect investors from
exploitation and self dealing.
That's fundamentally our mission.
And we accomplish that
mission in a significant way
by crafting and applying
standards of review situationally,
to evaluate the conduct of fiduciaries.
Corwin as I see it, is simply an evolution
of our standards of review,
that affords a potential
pleading stage off-ramp
to non-controller deal litigation
where the stockholders
have ratified a transaction
free of coercion after receiving
all material information.
One can legitimately debate
whether relying on the outcome
of the stockholder vote
is the best gating mechanism
to use at the pleading stage
to decide which deals
should precede discovery
and which should not.
And discovery is very expensive.
That's a legitimate debate
Ed Roche has written about,
and many others in the academic community
have written about, given the reality
of institutional share ownership,
institutional voting behaviors,
the motivations and
influences of arbitrageurs
whenever a deal is announced,
and a whole host of other factors
that are beyond the scope
of what I'm gonna talk about today.
My point is that if you accept,
as I think most people do accept,
that there should be some gating mechanism
before a post-closing
deal case for damages
should move into discovery,
which as I said, is a
very expensive enterprise,
the record shows that
Corwin has not become
a lopsided, one-sided affair.
And at least at this early stage,
seems to be performing the gating function
in a balanced manner.
My second observation concerns Trulia.
In 1996 Chancellor Allen famously remarked
in a case called Solomon.
I don't know if that's Path or Pathe
Communications Corporation, the following:
It is a fact evident to all of those
who are familiar with
stockholder litigation
that surviving a motion to dismiss means
is a practical matter that
economically rational defendants
will settle such claims, often
for a peppercorn and a fee.
And as brilliant as Bill Allen was,
I'm not sure that even
he could have imagined
the explosion in
disclosure only settlements
that occurred over the next 20 years
after he wrote those words,
and led to the Trulia decision.
The refusal of the Court of Chancery
to abide the status quo
that culminated in Trulia
had to happen, in my opinion,
as a matter of good corporate hygiene,
if nothing else.
And even if it did come at the cost
of having lawyers take cases elsewhere.
And now, having essentially
four years of cases
to grade our performance,
I'm generally pleased to see that courts
in other jurisdictions,
largely seem to agree with Trulia.
Virtually nobody argues against the idea
that there needs to be a
higher level of scrutiny
with one or two notable exceptions.
And the practices have shifted
from a world of disclosure
only settlements,
in a non-adversarial setting,
to one of voluntary
dismissals without releases.
A concern I do have though,
is that the mootness fee
by agreement approach,
outside of the buy agreement
approach, I should say,
appears to be occurring in federal courts,
and perhaps other jurisdictions
without any disclosure to stockholders
of the type we require in Delaware.
Sorry, I misspoke, I'm
talking about the context
where it is by agreement.
If people can't agree, it comes to court,
we decide the mootness fee,
it makes perfect sense.
That will be adversarial.
The company always has a choice.
I don't wanna pay a mootness fee.
I'll fight it out.
We can figure out the merits.
But if they agree,
which I fundamentally an issue
that Delaware law views
as a business judgment
of a corporation to decide
do I wanna pay a fee
to get rid of a lawsuit.
That's presumptively a business
judgment rule decision.
But in problematic cases,
and they can arise,
where there's circumstances suggesting
it could be a buy off
for some bad practice,
there needs to be some
sunlight on that process.
And that's why long ago Chancellor Allen
in a case called Advanced Mammography,
required, as a condition of
a mootness fee situation,
when it's done privately by parties,
that there nonetheless must
be disclosure to stockholders.
We do it in form AKs, we
adhere to it rigorously today.
But I have a great
concern that that process
is not adhered to in many other courts,
where the mootness fee practices
have really gone full throttle.
And that is a concern I hope that they'll
take action to change,
whether it's by case law,
and perhaps legislatively,
particularly in the federal courts,
I think it would be in order.
Those are my comments, and I thank you
for your time and patience.
(audience applauding)
Well thank you.
- [Man In Audience] Thank
you, thank you, good job.
- Ah, if there's any questions,
I certainly have questions.
Questions for the chancellor?
Come on, two?
David--
- Sure.
- [Woman] But I'd rather--
- No, no.
(man standing mumbling)
- [Woman] I'm tryin' to get you primed.
So I was curious about
whether you thought,
maybe an unfair question,
but the court that decided Tesla,
particularly in light of the new cases,
the recent cases on what
counts as an interest,
or a conflict on the board.
I mean, it's really been an expansion
on how deep we look.
Loyalty, I gave you my first job,
and those kind of issues.
- Yeah.
- [Woman] Would you take the same approach
to the fundamental question in Corwin,
which was did KKR have
control or domination,
and would it take a different approach?
- If you're asking, I mean--
- [Woman] My KKR looked like
a controlling stockholder
to the Tesla court.
- No, I don't know all the facts in Tesla,
and I'm not gonna comment on Tesla,
'cause there are variations
of that case that's pending,
but I know it's stock
ownership threshold's
significantly higher,
I mean it's in the 22%
if I recall correctly,
something in that ballpark.
That's a different place.
You're literally talking
under one percent,
KKR had at the time.
There were also like seven
or eight stockholder meetings
that occurred between when it was spun out
and the time of this
transaction when people
had the chance to change the board
a whole bunch of times.
So it was just sort of a
bread and butter analysis
for each of these directors.
Are they beholden for some reason,
based in the inferences you can make
from the facts that are pled.
They didn't really have any
unique financial interests
in the transaction, per say.
They were similarly
situated to everybody else,
if I recall correctly.
No question that we
apply more rigor, I do,
now in examining independence questions,
and particularly when
controllers are involved,
for I think, a lot of good reasons.
I wrote a decision recently
called the BGC decision
that discusses some of that,
particularly in that rule 23.1 context.
If I were applying the
more robust, if you will.
Let's assume it's more
robust hypothetically,
standard that recent
times seem to be applying,
back to the KKR facts, it
could come out the same way.
I don't think there's
any question on that.
The more interesting question is,
I didn't really discuss it
in terms of being an LLC,
it wasn't really teed up that way.
LLCs can have some
different considerations
in their governance structures.
The real issue was, was
there such a choke hold
by virtue of contractual arrangement
that they just, maybe they
didn't a lot of stock,
but they operationally had
control over this company.
And that's really not the key focal point.
I mean there's some subsequent
cases of the library,
like the Basho decision
by Chancellor Laster,
elaborated on like seven different factors
you can consider and control now.
But the case law as I read it,
as the time of KKR, it was really a focus
on a board controlled decision.
And if the board had
optionality to reject the deal,
and they certainly did,
potentially pursue other alternatives,
but they candidly were limited,
because this was always sort of spun out
as something that was gonna
do a lot of work for KKR
and they would manage,
and everybody knew it up front.
But they had the power
to say no to a deal.
And when you look at control the board
as the primary consideration,
I would have come out the same way anyway.
- [Man] Is there a question?
- I'm sure Bill Savitt's relieved.
(speaker chuckling)
- [Man] Hi, thank you.
So I was just wondering,
when you're thinking about
the disinterested stockholder vote,
do you consider and should you consider
how sophisticated that
firm's shareholders are?
- Well like I said, and it's sort of
beyond the scope of my talk, we don't.
We look at a number.
It is the balance after
you remove the controller,
and I'm not looking at
individual stockholder profiles
to make some assessment of
institutional ownership,
savvy stock holders.
We're just looking at
a number, a percentage.
Should we do it differently?
It'd be a very hard thing
to do as a practical matter,
and I'd maybe, this is
a larger conversation,
implicit in looking at this variable,
we are, I guess, assuming
some level of sophistication,
or that it really is
the will of the people
that own the company.
But we don't look further.
- [Man] Thank you.
- All right.
- [Man] Lemme ask a question.
- Yeah.
- [Man] So, where you
have a district board
making decision on a deal--
- Yep.
- [Man] The first defense
is this is judgment.
The second defense is 102 b 7--
- Yeah.
- [Man] And one might have thought
those were sufficient defenses,
and certainly if you got to trial
they would be sufficient
defenses, I will tell you.
And even if you get the summary judgment,
they're probably sufficient defenses.
Do I take you to be saying that
the big innovation of Corwin,
is that it means they're
able to dismiss the cases
where they don't think there's a problem
at the pleading stage, rather than into--
- Well in the Revlon Unocal context.
I mean, if it was the true
stock-for-stock merger
you would be in a basic shareholder case.
But if you have a Revlon circumstance,
where you're buying control,
taking out the shareholders for cash,
it's enhanced scrutiny,
which is reasonableness.
You're measuring the reasonableness
of director judgment.
It's not too hard to plead a case,
on reasonable conceivability
as our pleading standard--
to get past a motion--
Even when--
- To dismiss.
- The post merger
damages that?
- Yes, yes, I mean that
was the whole point.
It wasn't that difficult to plead a case,
so we get you past the motion to dismiss.
And I think the point of Corwin,
I mean Chief Justice here,
he can tell us what he thinks,
but I think he point of Corwin is
if you have the vote behind it,
and it has this ratifying effect,
and many old cases have
fought along these lines,
you should get business
judgment protection.
And it works, I think,
most effectively in the
context of Revlon Unocal cases.
Business judgment rule is
business judgment rule.
That's not an issue.
It's really when you have higher scrutiny,
and it can even work, like I said,
in the Corwin pattern itself,
if a majority of the board was interested,
and it would be presumptively
entire fairness,
you have to disclose all those facts.
Most people don't disclose all that,
all the conflicts, all the dirty laundry,
but if it's all out there,
and they make the choice,
then you can get business judgment review.
- [Man] Anymore questions,
or shall we adjourn
and have a drink.
Please join me in thanking him.
- Yeah, my pleasure.
(audience applauding)
