Two rejections by the Delaware Court of Chancery last week, on the same day, of two separate proposed settlements of two unrelated class actions challenging a merger, were reported by The Chancery Daily, Professor Bainbridge and Alison Frankel of Thomson Reuters. The two cases are Acevedo v. Aeroflex Holding Corp., et al., C. A. No. 9730-VCL transcript (Del. Ch. July 8, 2015), and In Re InterMune Inc. Stockholder Litigation, C.A. No. 10086-VCN (consol.) hearing (Del. Ch. July 8, 2015). In the InterMune case, the court reserved judgment and asked for additional submissions instead of an outright rejection.
The concern expressed by both vice chancellors was that the wide-ranging “intergalactic releases” agreed to by the corporations were given in exchange for what the court viewed as questionable value to the extent the “benefit for the class” was not quite an even quid pro quo, even though the corporations were happy to grant the releases so that the lawsuit could be settled and the deal consummated. The court, however, when asked to approve a settlement, must independently decide that the class is not waiving more claims than it should be waiving in exchange for the benefit that it supposedly is receiving from the settlement.
These two judicial events may signal a sea change to the extent they may be a sign that proposed class action settlements (and the attorneys’ fees that come with them), may not be approved in the same manner as they have been in the past–perhaps as part of a judicial effort to discourage the filing of lawsuits in over 90% of major deals (and the implication that over 90% of major deals don’t suffer from legal infirmity, so many of those suits are likely not the strongest on the merits.)
Much more can be written about the potential significance and ramifications of these rulings in connection with commentary and cases appearing on these pages about the high number of suits filed in connection with mergers, and what the judiciary can do about it. This may be an indication of what the Delaware Court of Chancery can do to regulate this type of corporate litigation. Of course, Delaware wants to discourage so-called junk cases, but as the Aeroflex transcript reveals, it cannot always be determined at the outset of a suit whether the claims will be supported by later discovery. The challenge is not to “throw the baby out with the bathwater”, and discourage meritorious suits as well.