Rolling into the new year, North Carolina attorneys are on notice that the ability to gain approval of class action settlements and related attorneys’ fees may become more difficult in some cases. In recent years, we have seen more class actions challenging corporate merger transactions and settlements in which the only remedy obtained by the plaintiff class was the company defendants’ additional disclosure of information related to the transaction. In exchange for the additional disclosures, the corporate defendants typically would receive a broad-based release of claims from the class members. These “disclosure-only” or “disclosure-based” settlements have received increasing criticism, including by the Delaware courts that handle much of the corporate governance and merger-related litigation in the country. Last year, the Delaware Chancery Court heightened its standard for approving disclosure-only settlements in In re Trulia, Inc. Stockholder Litig., 129 A.3d 884 (Del. Ch. 2016) and, given Delaware’s influence on corporate law, it was anticipated that Trulia would impact how other jurisdictions would approach disclosure-only settlements. Without formally adopting the Trulia standard, the North Carolina Business Court in In re Newbridge Bancorp S'holder Litig., 2016 NCBC 87 (Nov. 22, 2016) confirmed that prediction by signaling that a more exacting examination of disclosure-only settlements may be on the horizon in North Carolina. We review the reasoning for the change and the new standard that may be used by the NC Business Court moving forward.
The Influence of Trulia
The prevalence of merger-related litigation has driven courts to grow increasingly wary of disclosure-only settlements. The Delaware Trulia court noted “[i]n just the past decade, the percentage of transactions of $100 million or more that have triggered stockholder litigation in this country has more than doubled, from 39.3% in 2005 to a peak of 94.9% in 2014. Only recently has the percentage decreased, falling to 87.7% in 2015 due to a decline near the end of the year.” The perceived problems with disclosure-only settlements include the lack of meaningful benefit to the plaintiffs in the face of substantial fees being approved for plaintiffs’ counsel and potentially overbroad releases of claims against defendants. Also, plaintiffs’ counsel may be incentivized to file frivolous cases given that it is often expedient for companies to settle even meritless cases to minimize costs and negative impacts on pending mergers. The Trulia court sought to address these issues by requiring parties to craft more valuable and narrowly tailored settlement agreements. Disclosure-only settlements were once approved essentially as a matter of course and were considered an “easy give” for defendants, but Trulia now requires an unfavorable disposition of a proposed disclosure-only settlement unless:
- Plainly Material Disclosures: “the supplemental disclosures address a plainly material misrepresentation or omission,” meaning, “it should not be a close call that the supplemental information is material as that term is defined under Delaware law”; and
- Narrow Release of Claims: “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.”
The Trulia court stood behind its decision to tighten the reins despite the incentive it might create for plaintiff forum-shopping, and expressed “hope and trust that [its] sister courts will reach the same conclusion if confronted with the issue.” The North Carolina Business Court is steering in the same direction.
Trulia Coming to North Carolina?
In Newbridge, the parties filed a motion for approval of a disclosure-based settlement of several class actions that challenged a merger between two North Carolina-based banks. The proposed settlement did not include any monetary relief to the class members, and plaintiffs’ counsel sought up to $274,537.12 in attorneys' fees and $25,462.88 expenses. The NC Business Court explained that historically it has been guided by Delaware case law in class action matters involving mergers and disclosure-based settlements, and noted that Delaware courts recently have subjected motions to approve these settlements and associated attorneys’ fee requests to “much more exacting scrutiny,” citing Trulia. The Business Court then explicitly signaled that, although it did not change its standard of review in the Newbridge case, it is likely to follow Trulia in future cases:
In the absence of contrary instructions from the North Carolina appellate courts, the Court finds the recent trend in the Delaware case law requiring enhanced scrutiny of disclosure-based settlements to merit careful consideration for potential application in this State. The Court recognizes, however, that the application of Delaware’s recent case law to the Motions would represent a marked departure from this Court’s past practices in connection with the consideration of such motions.
As a result, the Court declines to apply enhanced scrutiny to its consideration of the Motions in this case but expressly advises the practicing bar that judges of the North Carolina Business Court, including the undersigned, may be prepared to apply enhanced scrutiny of the sort exercised in Trulia to the approval of disclosure-based settlements and attendant motions for attorneys’ fees hereafter.
What will the application of Trulia look like in NC? The settlement factors currently considered to determine the fairness, reasonableness, and adequacy of a proposed class action settlement include: (a) the strength of the plaintiff's case, (b) the defendant's ability to pay, (c) the complexity and cost of further litigation, (d) the amount of opposition to the settlement; (e) class members' reaction to the proposed settlement; (f) counsel's opinion, and (g) the stage of the proceedings and how much discovery has been completed. These factors are based on Ehrenhaus v. Baker, 216 N.C. App. 59, 717 S.E.2d 9, (2011) ("Ehrenhaus I"). In a footnote, the Newbridge court noted that although balancing the nature of what the proposed class will receive against the scope of the release given by the class is included implicitly in the Ehrenhaus I factors, this balancing should be an explicit and separate factor that is considered for these settlements:
Judges of the North Carolina Business Court, including the undersigned, may apply more exacting scrutiny hereafter to the scope of a proposed release of claims as balanced against the proposed settlement consideration to be received by the class and may be prepared to reject a proposed settlement which includes a release which is significantly broader than justified by the consideration gained for the class in the settlement.
In another footnote, the court noted its concern with the breadth of release in this case, but expressed reluctance to reject the settlement given the court’s precedent of approving similar settlements and a lack of objections.
Attorneys’ Fees Scrutinized by NC Business Court
Although Trulia was not adopted and applied in Newbridge, the court was highly critical of plaintiffs’ fee request and ultimately awarded about half of that requested. Plaintiffs’ counsel requested up to $274,537.12 attorneys' fees and $25,462.88 expenses. However, the court only awarded $135,000 in attorneys’ fees and the requested expenses based on its own experience in similar cases and its assessment of the value of the additional disclosures obtained. The court’s reasoning:
- Rate was too high: the average attorney rate of $524.68 requested was higher than the hourly rate customarily charged in NC for similar services. Based on recent merger litigation, the court found typical fees charged in North Carolina for handling complex commercial litigation range from $250 to $450 per hour.
- No Need for Non-NC Counsel: the work performed by counsel could have been performed fully by NC counsel and the Consolidated Action did not require Plaintiffs to retain counsel from outside North Carolina.
- Marginally Beneficial Disclosures: the supplemental disclosures collectively were of only marginal benefit to the class, since there was no substantial evidence that any were significant to a reasonable shareholder's decision in voting on the proposed transaction. This led the Court to conclude that a fair and reasonable award of attorneys' fees should reflect the lower end of the NC attorney hourly rate range for complex business litigation.
What Does Heightened Scrutiny Mean?
Should North Carolina courts adopt a heightened standard based on Trulia, parties will need to be careful in balancing the desire to obtain a quick and favorable settlement with the risk of the settlement being rejected by the court because it either achieves no material benefit for the plaintiff class or absolves defendants of liability for a broad array of unrelated claims. Plaintiffs and their counsel must carefully assess their strategy and investment in litigating merger-related class actions, including details such as whether to use out-of-state counsel in North Carolina courts and whether to challenge a pending merger at all if the only possible remedy would be additional disclosures that are questionably material. The possibility of having to take class actions to trial if proposed settlements are not approved seems a daunting prospect for companies embroiled in merger-related litigation. These companies can take some solace in the fact that plaintiffs’ counsel is less likely to file frivolous litigation if their fees are less likely to be approved under the heightened standard. It is possible that Trulia’s reach will lead to a notable decline in the number of lawsuits challenging proposed mergers. Companies should brace themselves, however, for the reality that the more narrowly tailored releases they will need to agree to will leave them exposed to potential litigation that formerly could be disposed of through these disclosure-only settlements.
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