A New York trial court has rejected a “disclosure-only” settlement in a shareholder class action, determining that the disclosures were not sufficiently beneficial to the class to support the settlement or the related plaintiffs’ fee award.  City Trading Fund v. Nye, Index No. 651668/2014 (Sup. Ct. NY County Feb. 8, 2018).

The court was considering a typical effort by a shareholder to enjoin a merger based on assertedly inadequate disclosures.  The plaintiffs sought to enjoin the transaction, but a proposed settlement was reached just prior to the hearing regarding the injunction.  The proposed settlement did not provide for any monetary relief to the putative class, but did require that certain supplemental disclosures be made, purportedly to allow shareholders to “make a more informed decision on the merger by providing them with additional useful information about the appeal.”  The settlement also called for a fee award to plaintiffs’ counsel of $500,000.  The trial court, characterizing the settlement as “worthless,” denied preliminary approval.  That ruling was reversed on appeal and remanded with instructions that the trial court hold a fairness hearing for further evaluation of the relative merits of the proposed settlement.

In considering final approval after remand, the trial court began its analysis by noting that an intervening decision, Gordon v. Verizon Communications, Inc., 46 N.Y.S.3d 557 (N.Y. App. 1st Dep’t 2017), had established a “more lenient settlement approval standard” (but also noted that the decision had been “harshly criticized” by academics as potentially making New York a forum for “cheap collusive settlements”).  Nonetheless, even applying those standards, the court rejected the settlement.

In main part, the trial court discussed whether the supplemental disclosures at issue conferred “some benefit” to the shareholders, as it determined Gordon required.  The court characterized that determination as requiring it to conclude that “the supplemental disclosure would, in fact, aid a reasonable shareholder in deciding whether to vote for the merger.”  Citing the fact that the supplemental disclosures primarily were third-party financial projections not prepared by company management in the regular course of business, the court concluded they were not material.

The court also addressed assertedly comparable disclosure-only settlements that New York courts had approved post-Gordon.  The court analyzed those cases to point out actual benefits achieved through those settlements.  The court further considered plaintiffs’ reference to other fee awards (the $500,000 awarded in Gordon), and observed that, even if the supplemental disclosures were sufficiently material to support approval, they would nonetheless be worth no more than $50,000, a figure the court observed was “the market price for minimally beneficial disclosures [that] . . . are of ‘some benefit.’”

After noting that its materiality determination was sufficient to reject the settlement, the court nonetheless addressed the other factors Gordon cited as relevant to approval:  the likelihood of success, the extent of support from the parties, the judgment of counsel, the presence of bargaining in good faith, the nature of the issues of law and fact, and whether the settlement was in the best interests of the shareholders and the corporation.  The court found that none of these factors supported the settlement.

Accordingly, the court rejected the settlement, stressing that it failed to make shareholders better off for at least two reasons.  First, that the settlement resulted in payment of counsel fees for “worthless supplemental disclosures.”  Second, while the proposed release was limited to disclosure violations (rather than being a broad-based “galactic” release), there was “no reason the shareholders should lose the right to . . . file a post-closing action” in the event that inadequate disclosures were identified at some future time.  As a result, the court refused to grant final approval of the disclosure-only settlement.

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Corporate Coverage Analysis:   Delaware’s move against disclosure-only settlements of dubious value articulated by In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016), stands in contrast to the evolving case law in New York.  Gordon failed to embrace the Delaware approach in New York and arguably adopted a settlement standard that is easier for plaintiffs to satisfy.  City Trading Fund, however, shows that Gordon can be plausibly interpreted to take a harder line against assertedly frivolous shareholder suits.  How its interpretation of Gordon is received on appeal should offer useful insights into whether New York will continue to buck the growing momentum against questionable disclosure-only settlements.