Trulia and the Demise of “Disclosure Only” Settlements in Delaware

In In re Trulia, Inc. Stockholder Litigation, 2016 WL 270821 (Del. Ch.), the Delaware Court of Chancery announced that it will no longer approve “disclosure only” settlements absent certain conditions. Going forward, the supplemental disclosures supporting a proposed settlement must address material misrepresentations or omissions, and the release defendants obtain in return must be narrowly tailored to the claims relating to the disclosures. Although the court’s criticism of disclosure settlements has been intensifying for some time, Trulia represents the most definitive statement to date of the court’s intention to carefully scrutinize and, when appropriate, reject settlements of stockholder class actions when the settlement consideration does not include any monetary recovery for the class.  
The History of Disclosure Only Settlements in Delaware
Historically, the court has routinely approved so-called “disclosure only” settlements in stockholder class actions, in which the company and director-defendants obtain a broad release of known and unknown claims in exchange for their agreement to include in the proxy statement additional disclosures in advance of the stockholder vote on the transaction. Often, these additional disclosures were of questionable value, and only added to already lengthy proxy statements. Nevertheless, this historical treatment of disclosure only settlements created an expectation among counsel that such settlements were appropriate and would continue to be approved by the court. That expectation likely fueled the filing in Delaware of many cases challenging deals that might otherwise have appeared free from criticism. For plaintiffs’ counsel, the prospect of a disclosure only settlement presented the opportunity for a hefty fee. Defendants, on the other hand, could avoid the cost and distraction of litigation and, as importantly, obtain a broad release. As the court once noted, this “peppercorn and a fee” approach offered defendants the opportunity to secure so-called deal insurance by paying a relatively small fee in relation to the overall magnitude of the deal. Solomon v. Pathe Commc’ns Corp., 1995 WL 250374, at *4 (Del. Ch.), aff’d, 672 A.2d 35 (Del. 1996).
But, as M&A litigation proliferated and disclosure settlements became the norm, the myriad problems associated with this approach became apparent. At the forefront was the issue of what the court has described as “divided loyalties.” In re Riverbed Tech., Inc. S’holders Litig., 2015 WL 5458041, at *3 (Del. Ch.). Specifically, plaintiffs’ counsel and the putative class represen