Saturday, August 13, 2016
One of the more interesting aspects of state corporate law – and Delaware law in particular - is the blurring of the line between substantive regulation and procedural regulation. Delaware gives corporate directors a great deal of leeway ex ante to structure transactions as they see fit, but if they structure them in a way that arouses suspicions – like, for example, failing to create an independent committee to negotiate a deal with a controlling shareholder – Delaware increases judicial scrutiny of the transaction, which, in practical terms, means that when the inevitable class action is filed, the defendants cannot win a quick dismissal on the pleadings. The “carrot” that Delaware offers directors to adopt best practices is the possibility of a quick, cheap dismissal of claims. Delaware regulates, in part, via threats of civil procedure.
This particular mode of regulation was on full display in In re Trulia, Inc. Stockholder Litig., 129 A.3d 884 (Del. Ch. 2016). There, Chancellor Bouchard held that Delaware would only approve disclosure-only settlements in deal class actions where the new disclosures were “plainly material.” Note, this is not the substantive standard for disclosures – it is not the standard necessary to win at trial. It is not the standard that an individual plaintiff would have to meet. It is only the standard for the settlement of a merger class action.
Which immediately begged the question: What happens if another state is entertaining a merger case involving a Delaware company? Does the Trulia standard count as a substantive rule of law, subject to the internal affairs doctrine, or a procedural one, that varies based on the forum?
It’s a critical issue, obviously, because if Trulia does not apply outside of Delaware, it will be very easy for plaintiffs and defendants to reach collusive settlements in foreign fora.
Well, we now have some answers, though they point in different directions: In Vergiev v. Cooper, a New Jersey state court held that Trulia is a substantive rule of law, and thus it applies even for cases brought outside of Delaware. (Opinion here; Alison Frankel blogs here). And just a few days ago, the Seventh Circuit applied Trulia in a case involving an Illinois corporation - implicitly suggesting that Trulia is a procedural (but persuasive) rule. Either way, it appears Trulia is on its way to general acceptance in the context of merger litigation.
That said, this only partly takes care of part of the problem of destructive competition among plaintiffs’ firms; as I’ve blogged before, there is still no real cure for the problem of plaintiffs who compete by racing to a settlement. Forum selection bylaws are not necessarily a panacea, because defendants can waive them – which may allow them to strategically pick off stronger plaintiffs and settle with weaker ones. The next step, therefore, is coming up with something like an MDL process for corporate litigation (a suggestion that others have made, see, e.g., Minor Myers, Fixing Multi-Forum Shareholder Litigation, 2014 U. Ill. L. Rev. 469; Elizabeth Cosenza, The Persistent Problem of Multi-Forum Shareholder Litigation: A Proposed Statutory Response to Reshuffle the Deck, 10 Va. L. & Bus. Rev. 413 (2016)).