EFiled: Jan 22 2016 10:46AM EST

Transaction ID 58465364
Case No. 10020-CB

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE TRULIA, INC. STOCKHOLDER

LITIGATION

CONSOLIDATED
C.A. No. 10020-CB

OPINION
Date Submitted: October 16, 2015
Date Decided: January 22, 2016
Seth D. Rigrodsky, Brian D. Long, Gina M. Serra and Jeremy J. Riley, RIGRODSKY &
LONG, P.A., Wilmington, Delaware; Peter B. Andrews and Craig J. Springer,
ANDREWS & SPRINGER, LLC, Wilmington, Delaware; James R. Banko, FARUQI &
FARUQI, LLP, Wilmington, Delaware; Peter Safirstein, Domenico Minerva and
Elizabeth Metcalf, MORGAN & MORGAN, P.C., New York, New York; Katharine M.
Ryan and Richard A. Maniskas, RYAN & MANISKAS, LLP, Wayne, Pennsylvania;
Kent A. Bronson, Todd Kammerman and Christopher Schuyler, MILBERG LLP, New
York, New York; Juan E. Monteverde, James Wilson, Jr. and Miles D. Schreiner,
FARUQI & FARUQI, LLP, New York, New York; Counsel for Plaintiffs.
Rudolf Koch and Sarah A. Clark, RICHARDS, LAYTON & FINGER, P.A., Wilmington,
Delaware; Deborah S. Birnbach, GOODWIN PROCTER LLP, Boston, Massachusetts;
Michael T. Jones, GOODWIN PROCTER LLP, Menlo Park, California; Attorneys for
Defendants Trulia, Inc., Pete Flint, Robert Moles, Theresia Gouw, Gregory Waldorf,
Sami Inkinen, Erik Bardman and Steve Hafner.
William M. Lafferty, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington,
Delaware; Alan S. Goudiss, SHEARMAN & STERLING, New York, New York;
Attorneys for Defendants Zillow, Inc. and Zebra Holdco, Inc.
Joseph Christensen, JOSEPH CHRISTENSEN P.A., Wilmington, Delaware; Counsel for
Amicus Curiae Sean J. Griffith.

BOUCHARD, C.

This opinion concerns the proposed settlement of a stockholder class action

challenging Zillow, Inc.s acquisition of Trulia, Inc. in a stock-for-stock merger that
closed in February 2015.

Shortly after the public announcement of the proposed

transaction, four Trulia stockholders filed essentially identical complaints alleging that
Trulias directors had breached their fiduciary duties in approving the proposed merger at
an unfair exchange ratio. Less than four months later, after taking limited discovery, the
parties reached an agreement-in-principle to settle.
The proposed settlement is of the type often referred to as a disclosure
settlement. It has become the most common method for quickly resolving stockholder
lawsuits that are filed routinely in response to the announcement of virtually every
transaction involving the acquisition of a public corporation. In essence, Trulia agreed to
supplement the proxy materials disseminated to its stockholders before they voted on the
proposed transaction to include some additional information that theoretically would
allow the stockholders to be better informed in exercising their franchise rights. In
exchange, plaintiffs dropped their motion to preliminarily enjoin the transaction and
agreed to provide a release of claims on behalf of a proposed class of Trulias
stockholders. If approved, the settlement will not provide Trulia stockholders with any
economic benefits. The only money that would change hands is the payment of a fee to
plaintiffs counsel.
Because a class action impacts the legal rights of absent class members, it is the
responsibility of the Court of Chancery to exercise independent judgment to determine

whether a proposed class settlement is fair and reasonable to the affected class members.
For the reasons explained in this opinion, I conclude that the terms of this proposed
settlement are not fair or reasonable because none of the supplemental disclosures were
material or even helpful to Trulias stockholders, and thus the proposed settlement does
not afford them any meaningful consideration to warrant providing a release of claims to
the defendants. Accordingly, I decline to approve the proposed settlement.
On a broader level, this opinion discusses some of the dynamics that have led to
the proliferation of disclosure settlements, noting the concerns that scholars, practitioners
and members of the judiciary have expressed that these settlements rarely yield genuine
benefits for stockholders and threaten the loss of potentially valuable claims that have not
been investigated with rigor. I also discuss some of the particular challenges the Court
faces in evaluating disclosure settlements through a non-adversarial process.
Based on these considerations, this opinion offers the Courts perspective that
disclosure claims arising in deal litigation optimally should be adjudicated outside of the
context of a proposed settlement so that the Courts consideration of the merits of the
disclosure claims can occur in an adversarial process without the defendants desire to
obtain an often overly broad release hanging in the balance. The opinion further explains
that, to the extent that litigants continue to pursue disclosure settlements, they can expect
that the Court will be increasingly vigilant in scrutinizing the give and the get of such
settlements to ensure that they are genuinely fair and reasonable to the absent class
members.

I.

BACKGROUND
The facts recited in this opinion are based on the allegations of the Verified

Amended Class Action Complaint in C.A. No. 10022-CB, which was designated as the
operative complaint in the consolidation action; the brief plaintiffs submitted in support
of their motion for a preliminary injunction; and the briefs and affidavits submitted in
connection with the proposed settlement. Because of the posture of the litigation, the
recited facts do not represent factual findings, but rather the record as it was presented for
the Court to evaluate the proposed settlement.
A.

The Parties

Defendant Trulia, Inc., a Delaware corporation, is an online provider of

information on homes for purchase or for rent in the United States. Individual defendants
Pete Flint, Robert Moles, Theresia Gouw, Gregory Waldorf, Sami Inkinen, Erik Bardman,
and Steve Hafner were members of Trulias board of directors when the merger was
approved.
Defendant Zillow, Inc., a Washington corporation, is a real estate marketplace that
helps home buyers, sellers, landlords and others find and share information about homes.
Defendant Zebra Holdco, Inc. (Holdco), now known as Zillow Group, Inc., is a
Washington corporation that was formed to facilitate the merger at issue and is now the
parent company of Zillow and Trulia.
Plaintiffs Christopher Shue, Matthew Sciabacucci, Chaile Steinberg, and Robert
Collier were Trulia stockholders at all times relevant to this action.

B.

The Announcement of the Merger and the Litigation

On July 28, 2014, Trulia and Zillow announced that they had entered into a
definitive merger agreement under which Zillow would acquire Trulia for approximately
$3.5 billion in stock.1 The transaction was structured to include two successive stock-forstock mergers whereby separate subsidiaries of Holdco would acquire both Trulia and
Zillow. After these mergers, Trulia and Zillow would exist as wholly-owned subsidiaries
of Holdco, and the former stockholders of Trulia and Zillow would receive, respectively,
approximately 33% and 67% of the outstanding shares of Holdco.
After the merger was announced, the four plaintiffs filed class action complaints
challenging the Trulia merger and seeking to enjoin it. Each of the complaints alleged
essentially identical claims: that the individual defendants had breached their fiduciary
duties, and that Zillow, Trulia, and Holdco aided and abetted those breaches.
On September 11, 2014, Holdco filed a registration statement containing Trulia
and Zillows preliminary joint proxy statement with the United States Securities and
Exchange Commission. On September 24, 2014, one of the four plaintiffs filed a motion
for expedited proceedings and for a preliminary injunction.
On October 13, 2014, the Court granted an unopposed motion to consolidate the
four cases into one action and to appoint lead counsel. On October 14, at 10:37 a.m.,
1

By closing, the transaction value had fallen to $2.5 billion, based on the value of Zillow
stock at the time. See Zillow Completes Acquisition of Trulia for $2.5 Billion in Stock;
Forms Zillow Group Family of Brands, (Feb. 17, 2015), available at
http://zillow.mediaroom.com/2015-02-17-Zillow-Completes-Acquisition-of-Trulia-for-25-Billion-in-Stock-Forms-Zillow-Group-Family-of-Brands.

plaintiffs filed a motion to expedite the proceedings in the newly consolidated case. The
Court never heard the motion, however, because the parties promptly agreed on an
expedited schedule, which they documented in a stipulated case schedule filed on October
14 at 12:12 p.m., less than two hours after the motion to expedite was filed.
Over the next few weeks, plaintiffs reviewed documents produced by defendants
and deposed one director of Trulia (Chairman, CEO, and co-founder Pete Flint) and a
banker from J.P. Morgan Securities LLC, Trulias financial advisor in the transaction.
On November 14, 2014, plaintiffs filed a brief in support of their motion for a
preliminary injunction. In that brief, plaintiffs asserted that the individual defendants had
breached their fiduciary duties by failing to obtain the highest exchange ratio available
for the Companys stockholders in a single-bidder process, failing to properly value the
Company, agreeing to preclusive provisions in the Merger Agreement that impede the
Boards ability to consider and accept superior proposals, and disseminating materially
false and misleading disclosures to the Companys stockholders . . . .2 The discussion of
the merits in that brief, however, focused only on disclosure issues. Plaintiffs provided
no argument in support of any other aspect of their claims.
On November 17, Trulia and Zillow filed a definitive joint proxy statement
regarding the transaction on Schedule 14A (the Proxy).

Pls. Op. Br. Supp. Mot. Prelim. Inj. 2.

C.

The Parties Reach a Settlement

On November 19, 2014, the parties entered into a Memorandum of Understanding

detailing an agreement-in-principle to settle the litigation for certain disclosures to
supplement those contained in the Proxy, subject to confirmatory discovery. The same
day, Trulia filed a Form 8-K with the Securities and Exchange Commission containing
the disclosures (the Supplemental Disclosures).
On December 18, 2014, Trulia and Zillow held special meetings of stockholders at
which each companys stockholders voted on and approved the transaction. Trulias
stockholders overwhelmingly supported the transaction. Of the Trulia shares that voted,
99.15% voted in favor of the transaction.

In absolute terms, 79.52% of Trulias

outstanding shares voted in favor the transaction.3

On February 10, 2015, plaintiffs conducted a confirmatory deposition of a second
Trulia director, Gregory Waldorf. On February 17, 2015, the transaction closed.
On June 10, 2015, the parties executed a Stipulation and Agreement of
Compromise, Settlement, and Release (the Stipulation) in support of a proposed
settlement reiterating the terms of the Memorandum of Understanding. In the Stipulation,
the parties agreed to seek certification of a class consisting of all Trulia stockholders from
July 28, 2014 (when the transaction was announced) through February 17, 2015 (when
the transaction closed).

The Stipulation included an extremely broad release

Trulia, Inc., Current Report (Form 8-K) (Dec. 18, 2014).

encompassing, among other things, Unknown Claims4 and claims arising under
federal, state, foreign, statutory, regulatory, common law or other law or rule held by any
member of the proposed class relating in any conceivable way to the transaction.5 The
Stipulation further provided that plaintiffs counsel intended to seek an award of
attorneys fees and expenses not to exceed $375,000, which defendants agreed not to
oppose.
Beginning on July 17, 2015, Trulia disseminated notices to the proposed class
members in accordance with a scheduling order the Court had entered.
D.

Procedural Posture

On September 16, 2015, after receiving a brief and an affidavit from plaintiffs
advocating for approval of the proposed settlement, I held a hearing to consider the
fairness of the terms of the proposed settlement.

Defendants made no submissions

concerning the proposed settlement before the hearing, and no stockholder filed an
objection to it. After the hearing, I took the request to approve the settlement under
advisement and asked the parties for supplemental briefing on whether disclosures must
meet the legal standard of materiality in order to constitute an adequate benefit to support

Unknown Claims were defined as any claim that a releasing person does not know or
suspect exists in his, her or its favor at the time of the release of the Released Claims as
against the Released Persons, and at the time of Defendants release of Plaintiffs, each
and all Class Members, and all Plaintiffs counsel from all claims as set forth in
Paragraph 9, including without limitation those claims which, if known, might have
affected the decision to enter into the Settlement. Stipulation 10.
5

Stipulation 8.

a settlement, and on the rationale and justification for including unknown claims among
the claims that would be released by the proposed settlement.
On September 22, 2015, Sean J. Griffith, a professor at Fordham University
School of Law who has researched disclosure settlements and objected to them in the
past,6 requested permission to appear as amicus curiae in order to submit a brief on the
topics for which I requested supplemental briefing. I approved this request on September
23, and the parties submitted their supplemental briefing on October 16.
Along with their supplemental briefing, plaintiffs submitted an affidavit from
Timothy J. Meinhart, a managing director of Willamette Management Associates, which
provides business valuation and transaction financial advisory services. The affidavit
addresses certain concerns about some (but not all) of the disclosures that I raised at the
settlement hearing. Plaintiffs and defendants also informed the Court that, following the
hearing, the parties had agreed to a revised stipulation with a narrower release.
Specifically, the parties removed Unknown Claims and foreign claims from
the ambit of the release and added a carve-out so that the release would not cover any
claims that arise under the Hart-Scott-Rodino, Sherman, or Clayton Acts, or any other
state or federal antitrust law. As revised, the release still encompasses any claims
arising under federal, state, statutory, regulatory, common law, or other law or rule held
by any member of the proposed class relating in any conceivable way to the transaction,

See In re Riverbed Tech., 2015 WL 5458041, at *2.

with the exception of the carve-out for claims arising under state and federal antitrust
law.7
II.

LEGAL ANALYSIS
A.

Legal Standard

Under Court of Chancery Rule 23, the Court must approve the dismissal or
settlement of a class action.8

Although Delaware has long favored the voluntary

settlement of litigation,9 the fiduciary character of a class action requires the Court to
independently examine the fairness of a class action settlement before approving it.10
Approval of a class action settlement requires more than a cursory scrutiny by the court
of the issues presented.11 The Court must exercise its own judgment to determine
whether the settlement is reasonable and intrinsically fair.12 In doing so, the Court
evaluates not only the claim, possible defenses, and obstacles to its successful

Revised Proposed Order and Final J., Oct. 16, 2015.

See Ct. Ch. R. 23(e). Court of Chancery Rule 23.1(c) similarly requires Court approval
of the dismissal or settlement of derivative actions.
9

Rome v. Archer, 197 A.2d 49, 53 (Del. 1964).

10

Kahn v. Sullivan, 594 A.2d 48, 58 (Del. 1991).

11

Rome v. Archer, 197 A.2d at 53.

12

Id.

prosecution,13 but also the reasonableness of the give and the get,14 or what the class
members receive in exchange for ending the litigation.
Before turning to that analysis here, I pause to discuss some of the dynamics that
have led to the proliferation of disclosure settlements15 and the concerns that have been
expressed about this phenomenon, and to offer the Courts perspective on how disclosure
claims in deal litigation should be adjudicated in the future.
B.

Considerations Involving Disclosure Claims in Deal Litigation

Over two decades ago, Chancellor Allen famously remarked in Solomon v. Pathe
Communications Corporation that [i]t is a fact evident to all of those who are familiar
with shareholder litigation that surviving a motion to dismiss means, as a practical matter,
that economical[ly] rational defendants . . . will settle such claims, often for a peppercorn
and a fee.16 The Chancellors remarks were not made in the context of a settlement, but

13

See id.

14

In re Activision Blizzard, Inc. Sholder Litig., 124 A.3d 1025, 1043 (Del. Ch. 2015).

15

In this Opinion, I use the term disclosure settlement to refer to settlements in which
the sole or predominant consideration provided to stockholders in exchange for releasing
their claims is the dissemination of one or more disclosures to supplement the proxy
materials distributed for the purpose of soliciting stockholder approval for a proposed
transaction. An example of a disclosure settlement in which the supplemental disclosures
would be the predominant but not sole consideration is one that, in addition to
supplemental disclosures, includes an insubstantial component of other non-monetary
consideration, such as a minor modification to a deal protection measure.
16

1995 WL 250374, at *4 (Del. Ch. Apr. 21, 1995), affd, 672 A.2d 35 (Del. 1996).

10

they touch upon some of the same dynamics that have fueled disclosure settlements of
deal litigation.
Today, the public announcement of virtually every transaction involving the
acquisition of a public corporation provokes a flurry of class action lawsuits alleging that
the targets directors breached their fiduciary duties by agreeing to sell the corporation for
an unfair price. On occasion, although it is relatively infrequent, such litigation has
generated meaningful economic benefits for stockholders when, for example, the integrity
of a sales process has been corrupted by conflicts of interest on the part of corporate
fiduciaries or their advisors.17 But far too often such litigation serves no useful purpose
for stockholders. Instead, it serves only to generate fees for certain lawyers who are
regular players in the enterprise of routinely filing hastily drafted complaints on behalf of

17

Some examples of adjudicated cases of this type arising from acquisitions of public
corporations include: In re Rural/Metro Corp. Sholders Litig., 102 A.3d 205, 263 (Del.
Ch. 2014) (finding after trial that class suffered damages of $91 million, of which the
boards financial advisor was liable for 83%, based on aiding and abetting fiduciary
breaches in sale of corporation), affd sub nom. RBC Capital Mkts., LLC v. Jervis, A.3d
, 2015 WL 7721882 (Del. Nov. 30, 2015); In re Dole Food Co., Inc. Sholder Litig.,
2015 WL 5052214, at *47 (Del. Ch. Aug. 27, 2015) (finding after trial that certain
directors were liable for $148 million in damages, based on fiduciary breaches in goingprivate transaction); In re Emerging Commcns, Inc. Sholders Litig., 2004 WL 1305745,
at *43 (Del. Ch. May 3, 2004) (finding after trial that certain defendants were liable to
stockholders for damages of $27.80 per share for fiduciary breaches in going-private
transaction). See also In re Jefferies Grp., Inc. Sholders Litig., 2015 WL 1414350 (Del.
Ch. Mar. 26, 2015) (ORDER) (approving settlement for $70 million (net of attorneys
fees) to resolve allegations involving conflicts of interest in the sale of Jefferies Group to
Leucadia National Corporation); In re Del Monte Foods Co. Sholder Litig., Cons. C.A.
No. 6027-VCL (Del. Ch. Dec. 1, 2011) (ORDER) (approving $89 million settlement of
stockholder suit alleging fiduciary duty violations in connection with leveraged buy-out).

11

stockholders on the heels of the public announcement of a deal and settling quickly on
terms that yield no monetary compensation to the stockholders they represent.
In such lawsuits, plaintiffs leverage is the threat of an injunction to prevent a
transaction from closing. Faced with that threat, defendants are incentivized to settle
quickly in order to mitigate the considerable expense of litigation and the distraction it
entails, to achieve closing certainty, and to obtain broad releases as a form of deal
insurance.

These incentives are so potent that many defendants self-expedite the

litigation by volunteering to produce core documents to plaintiffs counsel, obviating

the need for plaintiffs to seek the Courts permission to expedite the proceedings in aid of
a preliminary injunction application and thereby avoiding the only gating mechanism
(albeit one friendly to plaintiffs18) the Court has to screen out frivolous cases and to
ensure that its limited resources are used wisely.19

18

Stockholder plaintiffs who seek expedition benefit from the most favorable standard
available under our law for assessing the merits of a claimcolorabilityand from the
sensible policy of this Court to attempt to resolve disclosure claims before stockholders
are asked to vote. See Ortsman v. Green, 2007 WL 702475, at *2 (Del. Ch. Feb. 28,
2007) (granting expedited proceedings because disclosure claims were colorable and
[o]nly by remedying proxy deficiencies in advance of a vote can irreparable harm be
avoided); Morton v. Am. Mktg. Indus. Hldgs., Inc., 1995 WL 1791090, at *2-4 (Del. Ch.
Oct. 5, 1995) (granting expedition because colorability finding did not require a
determination of merits or even legal sufficiency of pleadings, and disclosures must be
made before stockholder vote rather than after the fact).
19

Notwithstanding the plaintiff-friendly pleading standard governing a motion to

expedite, the Court takes seriously its role to deny expedition in deal litigation when
warranted. See, e.g., In re Rite Aid Corp. Sholders Litig., Cons. C.A. No. 11663-CB, at
78-92 (Del. Ch. Jan. 5, 2016) (TRANSCRIPT) (denying motion to expedite); Sheet Metal
Workers Local No. 33 Cleveland Dist. Pension Plan v. URS Corp., C.A. No. 9999-CB, at
47-56 (Del. Ch. Aug. 28, 2014) (TRANSCRIPT) (same); In re Zalicus Inc. Sholder
12

Once the litigation is on an expedited track and the prospect of an injunction

hearing looms, the most common currency used to procure a settlement is the issuance of
supplemental disclosures to the targets stockholders before they are asked to vote on the
proposed transaction. The theory behind making these disclosures is that, by having the
additional information, stockholders will be better informed when exercising their
franchise rights.20

Given the Courts historical practice of approving disclosure

settlements when the additional information is not material, and indeed may be of only
minor value to the stockholders,21 providing supplemental disclosures is a particularly
easy give for defendants to make in exchange for a release.
Once an agreement-in-principle is struck to settle for supplemental disclosures, the
litigation takes on an entirely different, non-adversarial character. Both sides of the
caption then share the same interest in obtaining the Courts approval of the settlement.22
The next step, after notice has been provided to the stockholders, is a hearing in which the
Litig., Cons. C.A. No. 9602-CB, at 100-11 (Del. Ch. Jun. 13, 2014) (TRANSCRIPT)
(same).
20

See In re Riverbed Tech., 2015 WL 5458041, at *4.

21

See, e.g., id. at *5 (finding that a positive result of small therapeutic value to the Class
. . . can support . . . a settlement, but only where what is given up is of minimal value);
In re Dr. Pepper/Seven Up Cos., Inc. Sholders Litig., 1996 WL 74214, at *4 (Del. Ch.
Feb. 9, 1996) ([E]ven a meager settlement that affords some benefit for stockholders is
adequate to support its approval.), affd, 683 A.2d 58 (Del. 1996) (TABLE).
22

See Ginsburg v. Phila. Stock Exch., Inc., 2007 WL 2982238, at *1 (Del. Ch. Oct. 9,
2007) (When parties have reached a negotiated settlement, the litigation enters a new
and unusual phase where former adversaries join forces to convince the court that their
settlement is fair and appropriate.).

13

Court must evaluate the fairness of the proposed settlement. Significantly, in advance of
such hearings, the Court receives briefs and affidavits from plaintiffs extolling the value
of the supplemental disclosures and advocating for approval of the proposed settlement,
but rarely receives any submissions expressing an opposing viewpoint.23
Although the Court commonly evaluates the proposed settlement of stockholder
class and derivative actions without the benefit of hearing opposing viewpoints,
disclosure settlements present some unique challenges. It is one thing for the Court to
judge the fairness of a settlement, even in a non-adversarial context, when there has been
significant discovery or meaningful motion practice to inform the Courts evaluation. It
is quite another to do so when little or no motion practice has occurred and the discovery
record is sparse, as is typically the case in an expedited deal litigation leading to an
equally expedited resolution based on supplemental disclosures before the transaction
closes.

In this case, for example, no motions were decided (not even a motion to

expedite), and discovery was limited to the production of less than 3,000 pages of
23

See In re Caremark Intl Inc. Deriv. Litig., 698 A.2d 959, 961 (Del. Ch. 1996) (Allen,
C.) ([I]n most instances, the court is constrained by the absence of a truly adversarial
process, since inevitably both sides support the settlement and legally assisted objectors
are rare.); Browning Jeffries, The Plaintiffs Lawyers Transaction Tax: The New Cost of
Doing Business in Public Company Deals, 11 Berkeley Bus. L.J. 55, 59, 89 (2014)
([D]ue to the agency costs involved in class action litigation and the lack of motivation
of any one plaintiff shareholder to monitor class counsel, these fee awards are rarely
objected to . . . .). In the rare case in which objectors are present, the question
necessarily becomes whether the objectors represent the interests of the class or instead
represent yet another set of interests. See Sean J. Griffith & Alexandra D. Lahav, The
Market for Preclusion in Merger Litigation, 66 Vand. L. Rev. 1053, 1084 n.142, 1122
(2013) (noting that in some cases objectors may also be hold-outs demanding a piece of
the settlement value).

14

documents and the taking of three depositions, two of which were taken before the parties
agreed in principle to settle and one of which was a confirmatory deposition taken
thereafter.24
The lack of an adversarial process often requires that the Court become essentially
a forensic examiner of proxy materials so that it can play devils advocate in probing the
value of the get for stockholders in a proposed disclosure settlement. Consider the
following example. During discovery, plaintiffs will typically receive copies of board
presentations made by financial advisors who ultimately opine on the fairness of the
transaction from a financial point of view. It is all too common for a plaintiff to identify
and obtain supplemental disclosure of a laundry list of minutiae in a financial advisors
board presentation that does not appear in the summary of the advisors analysis in the
proxy materialssummaries that commonly run ten or more single-spaced pages in the
first instance. Given that the newly added pieces of information were, by definition,
missing from the original proxy, it is not difficult for an advocate to make a superficially
24

Confirmatory discovery is discovery taken after an agreement-in-principle to settle a

case has been reached. Theoretically, it is an opportunity for plaintiffs counsel to
confirm that the settlement terms are reasonablethat is, to probe further the strengths
and weaknesses of the claims relative to the consideration for the proposed settlement. In
reality, given that plaintiffs counsel already have resigned themselves to settle on certain
terms, confirmatory discovery rarely leads to a renunciation of the proposed settlement
and, instead, engenders activity more reflective of going through the motions. See
Brinckerhoff v. Tex. E. Prods. Pipeline Co., LLC, 986 A.2d 370, 385 (Del. Ch. 2010)
(questioning quality of confirmatory discovery process) (Confirmatory discovery
performances ranging from the diffident to the feckless impair, rather than inspire,
judicial confidence.); In re Coleman Co., Inc. Sholders Litig., 750 A.2d 1202, 1212
(Del. Ch. 1999) ([C]onfirmatory discovery in settlement situations is hardly the
equivalent of adversarial pre-trial discovery.).

15

persuasive argument that it is better for stockholders to have more information rather than
less.

In an adversarial process, defendants, armed with the help of their financial

advisors, would be quick to contextualize the omissions and point out why the missing
details are immaterial (and may even be unhelpful) given the summary of the advisors
analysis already disclosed in the proxy. In the settlement context, however, it falls to lawtrained judges to attempt to perform this function, however crudely, as best they can.
It is beyond doubt in my view that the dynamics described above, in particular the
Courts willingness in the past to approve disclosure settlements of marginal value and to
routinely grant broad releases to defendants and six-figure fees to plaintiffs counsel in
the process,25 have caused deal litigation to explode in the United States beyond the realm
of reason. In 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 2014.26 Only recently has the percentage decreased,
falling to 87.7% in 2015 due to a decline near the end of the year.27 In Delaware, the
percentage of such cases settled solely on the basis of supplemental disclosures grew

25

See In re Sauer-Danfoss Inc. Sholders Litig., 65 A.3d 1116, 1135-43 (Del. Ch. 2011)
(discussing disclosure settlements and compiling fee awards in various disclosure-only
cases).
26

Matthew D. Cain & Steven Davidoff Solomon, Takeover Litigation in 2015 2 (Jan. 14,
2016), available at http://ssrn.com/abstract=2715890.
The sample consists of
transactions of at least $100 million with publicly traded targets, and includes both
Delaware and non-Delaware corporations. Figures for 2015 are preliminary.
27

See id. at 2-3.

16

significantly from 45.4% in 2005 to a high of 76.0% in 2012, and only recently has seen
some decline.28 The increased prevalence of deal litigation and disclosure settlements has
drawn the attention of academics, practitioners, and the judiciary.
Scholars have criticized disclosure settlements, arguing that non-material
supplemental disclosures provide no benefit to stockholders and amount to little more
than deal rents or taxes, while the liability releases that accompany settlements
threaten the loss of potentially valuable claims related to the transaction in question or
other matters falling within the literal scope of overly broad releases.29 One recent study

28

See id. at 6. The percentage of settlements in Delaware based solely on supplemental

disclosures was 63.6% in 2013 and 70.6% in 2014. Figures for 2015 appear to be too
preliminary to be meaningful.
29

See generally Jill E. Fisch, Sean J. Griffith & Steven Davidoff Solomon, Confronting
the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal
for Reform, 93 Tex. L. Rev. 557 (2015) (proposing that state courts reject disclosure
settlements and shift disclosure policing to the federal securities laws). See also J. Travis
Laster, A Milder Prescription for the Peppercorn Settlement Problem in Merger
Litigation, 93 Tex. L. Rev. See Also 129 (2015) (responding to the Fisch, Griffith &
Solomon article, acknowledging similar concerns regarding disclosure settlements, and
proposing solutions involving greater judicial scrutiny of claims at motion to expedite
stage); Matthew D. Cain & Steven Davidoff Solomon, A Great Game: The Dynamics of
State Competition and Litigation, 100 Iowa L. Rev. 465 (2015) (examining merger
litigation data and theorizing that states seeking to attract corporate litigation award
higher fees and dismiss fewer cases); Jeffries, supra note 23 (criticizing disclosure-only
settlements and suggesting legislative responses); Griffith & Lahav, supra note 23
(discussing the value for defendants of receiving release through disclosure-only
settlements and the potential usefulness of multi-jurisdiction litigation). But see Phillip R.
Sumpter, Adjusting Attorneys Fee Awards: The Delaware Court of Chancerys Answer
to Incentivizing Meritorious Disclosure-Only Settlements, 15 U. Pa. J. Bus. L. 669 (2013)
(arguing that disclosure-only settlements can have value and discussing the concept of
awarding of varying levels of fees to encourage or discourage different types of
disclosure settlements).

17

provides empirical data suggesting that supplemental disclosures make no difference in

stockholder voting, and thus provide no benefit that could serve as consideration for a
settlement.30 Another paper, written by a practitioner, provides examples of cases in
which unexplored but valuable claims that almost were released through disclosure
settlements later yielded significant recoveries for stockholders.31 A particularly vivid
example is the recently concluded Rural/Metro case.32

In that case, the Court of

Chancery initially considered it a very close call33 to reject a disclosure settlement that
would have released claims which subsequently yielded stockholders over $100 million,
mostly from a post-trial judgment, after new counsel took over the case.34
Members of this Court also have voiced their concerns over the deal settlement
process, expressing doubts about the value of relief obtained in disclosure settlements,
and explaining their reservations over the breadth of the releases sought and the lack of

30

Fisch, Griffith & Solomon, supra note 29, at 582-87.

31

See generally Joel Edan Friedlander, How Rural/Metro Exposes the Systemic Problem
of Disclosure Settlements (U. Pa. L. Sch. Inst. for L. and Econ. Res. Paper No. 15-40,
Draft Dec. 17, 2015), available at http://ssrn.com/abstract=2689877.
32

In re Rural/Metro Corp., 102 A.3d 205, affd sub nom. RBC Capital Mkts., LLC v.
Jervis, A.3d , 2015 WL 7721882 (Del. Nov. 30, 2015).
33

In re Rural/Metro Corp. Sholders Litig., Cons. C.A. No. 6350-VCL, at 134 (Del. Ch.
Jan. 17, 2012) (TRANSCRIPT).
34

See Friedlander, supra note 31, at 16-22. The paper also examines litigation over the
sale of Prime Hospitality Corporation, which settled for $25 million after a disclosure
settlement was rejected and new counsel was appointed to litigate the case. See id. at 1114.

18

any meaningful investigation of claims proposed to be released.35 Judges outside of

Delaware have expressed similar concerns.36
Given the rapid proliferation and current ubiquity of deal litigation, the mounting
evidence that supplemental disclosures rarely yield genuine benefits for stockholders, the
risk of stockholders losing potentially valuable claims that have not been investigated
with rigor, and the challenges of assessing disclosure claims in a non-adversarial
settlement process, the Courts historical predisposition toward approving disclosure
settlements needs to be reexamined. In the Courts opinion, the optimal means by which
disclosure claims in deal litigation should be adjudicated is outside the context of a
35

See, e.g., Acevedo v. Aeroflex Hldg. Corp., C.A. No. 9730-VCL, at 60-79 (Del. Ch. July
8, 2015) (TRANSCRIPT) (rejecting settlement because relief obtained was insufficient to
support a broad release, and giving the option to reapply with a release tailored only to the
Delaware disclosure and fiduciary claims investigated by plaintiffs); In re Riverbed Tech.,
2015 WL 5458041, at *3-6 (approving settlement, but expressing concerns over agency
problems, lack of adversarial presentation, limited benefit conferred by disclosures, and
noting that broad releases may not be approved going forward); In re Intermune, Inc.
Sholder Litig., C.A. No. 10086-VCN (Del. Ch. July 8, 2015) (TRANSCRIPT) (deferring
decision on a disclosure settlement and questioning whether the releases should be limited
only to disclosure claims) (settlement later approved in C.A. No. 10086-VCN (Del. Ch.
Dec. 29, 2015) (TRANSCRIPT)); In re TW Telecom, Inc. Sholders Litig., C.A. No.
9845-CB (Del. Ch. Aug. 20, 2015) (TRANSCRIPT) (approving a settlement somewhat
reluctantly while opining that settlements going forward will receive more scrutiny and
that all but one disclosure obtained had no consequential value).
36

See, e.g., In re Allied Healthcare Sholder Litig., 2015 WL 6499467, at *2 (N.Y. Sup.
Ct. Oct. 23, 2015) (rejecting a settlement and expressing concern that in the area of
derivative litigation, a culture has developed that results in cases of relatively worthless
settlements (derivative actions are rarely tried to a verdict) that discontinue the action
(with releases) resulting in the corporate defendants not opposing an agreed upon legal
fee to class counsel); City Trading Fund v. Nye, 2015 WL 93894 (N.Y. Sup. Ct. Jan. 7,
2015) (rejecting a settlement the court regarded as exceptionally frivolous and noting that
the nature of merger tax suits incentivizes settlement regardless of a cases frivolity).

19

proposed settlement so that the Courts consideration of the merits of the disclosure
claims can occur in an adversarial process where the defendants desire to obtain a release
does not hang in the balance.
Outside the settlement context, disclosure claims may be subjected to judicial
review in at least two ways. One is in the context of a preliminary injunction motion, in
which case the adversarial process would remain intact and plaintiffs would have the
burden to demonstrate on the merits a reasonable likelihood of proving that the alleged
omission or misrepresentation is material.37 In other words, plaintiffs would bear the
burden of showing a substantial likelihood that the disclosure of the omitted fact would
have been viewed by the reasonable investor as having significantly altered the total mix
of information made available.38
A second way is when plaintiffs counsel apply to the Court for an award of
attorneys fees after defendants voluntarily decide to supplement their proxy materials by
making one or more of the disclosures sought by plaintiffs, thereby mooting some or all
of their claims. In that scenario, where securing a release is not at issue, defendants are
incentivized to oppose fee requests they view as excessive.39 Hence, the adversarial

37

Gantler v. Stephens, 965 A.2d 695, 710 (Del. 2009).

38

Id. (quoting Arnold v. Socy for Sav. Bancorp, Inc., 650 A.2d 1270, 1277 (Del. 1994)).

39

If defendants do not oppose a mootness fee application, then the Court presumably
would not have the benefit of any opposing position when considering the application
unless an objector appeared. But, in that case, the Court would have some indication of
the reasonableness of the fee request.

20

process would remain in place and assist the Court in its evaluation of the nature of the
benefit conferred (i.e., the value of the supplemental disclosures) for purposes of
determining the reasonableness of the requested fee.
In either of these scenarios, to the extent fiduciary duty claims challenging the
sales process remain in the case, they may be amenable to dismissal. Harkening back to
Chancellor Allens words in Solomon, the Court would be cognizant of the need to apply
the pleading test under Rule 12 with special care in stockholder litigation because the
risk of strike suits means that too much turns on the mere survival of the complaint.40 In
that regard, both the litigants and the Court are aided today by thirty years of
jurisprudence that now exists interpreting the principles enunciated in Unocal and Revlon
that often are central to reviewing fiduciary conduct in deal litigation.41
The preferred scenario of a mootness dismissal appears to be catching on. In the
wake of the Courts increasing scrutiny of disclosure settlements, the Court has observed
40

1995 WL 250374, at *4.

41

That jurisprudence includes the Delaware Supreme Courts recent express confirmation
that the business judgment rule is invoked as the appropriate standard of review for a
post-closing damages action when a merger that is not subject to the entire fairness
standard of review has been approved by a fully informed, uncoerced majority of the
disinterested stockholders. Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 305-06 (Del.
2015).
In this case, because the disputed transaction involved a stock-for-stock merger of widely
held, publicly traded corporations, plaintiffs claims presumably would not benefit from
the enhanced scrutiny of Revlon and instead would need to overcome the business
judgment presumption. Paramount Commcns, Inc. v. QVC Network, Inc., 637 A.2d 34,
46-47 (Del. 1994) (quoting Paramount Commcns Inc. v. Time Inc., 1989 WL 79880, at
*23 (Del. Ch. July 14, 1989), affd, 571 A.2d 1140 (Del. 1989)).

21

an increase in the filing of stipulations in which, after disclosure claims have been mooted
by defendants electing to supplement their proxy materials, plaintiffs dismiss their actions
without prejudice to the other members of the putative class (which has not yet been
certified) and the Court reserves jurisdiction solely to hear a mootness fee application.42
From the Courts perspective, this arrangement provides a logical and sensible framework
for concluding the litigation. After being afforded some discovery to probe the merits of
a fiduciary challenge to the substance of the boards decision to approve the transaction in
question, plaintiffs can exit the litigation without needing to expend additional resources
(or causing the Court and other parties to expend further resources) on dismissal motion
practice after the transaction has closed. Although defendants will not have obtained a
formal release, the filing of a stipulation of dismissal likely represents the end of fiduciary
challenges over the transaction as a practical matter.
In the mootness fee scenario, the parties also have the option to resolve the fee
application privately without obtaining Court approval. Twenty years ago, Chancellor
Allen acknowledged the right of a corporations directors to exercise business judgment
to expend corporate funds (typically funds of the acquirer, who assumes the expense of
defending the litigation after the transaction closes) to resolve an application for
42

See, e.g., In re Family Dollar Stores, Inc. Sholder Litig., C.A. No. 9985-CB (Del. Ch.
Aug. 4, 2015) (ORDER) (dismissing case with prejudice to plaintiffs and without
prejudice to class, where supplemental disclosures had mooted certain claims, and setting
schedule for mootness fee application); In re Zalicus, Inc. Sholder Litig., C.A. No.
9602-CB (Del. Ch. Nov. 12, 2014) (ORDER) (dismissing action without prejudice after
defendants had mooted certain disclosure claims, and setting schedule for mootness fee
application).

22

attorneys fees when the litigation has become moot, with the caveat that notice must be
provided to the stockholders to protect against the risk of buy off of plaintiffs
counsel.43 As the Court recently stated, notice is appropriate because it provides the
information necessary for an interested person to object to the use of corporate funds,
such as by challeng[ing] the fee payment as waste in a separate litigation, if the
circumstances warrant.44 In other words, notice to stockholders is designed to guard
against potential abuses in the private resolution of fee demands for mooted
representative actions. With that protection in place, the Court has accommodated the use
of the private resolution procedure on several recent occasions and reiterates here the
propriety of proceeding in that fashion.45
Returning to the historically trodden but suboptimal path of seeking to resolve
disclosure claims in deal litigation through a Court-approved settlement, practitioners
should expect that the Court will continue to be increasingly vigilant in applying its
independent judgment to its case-by-case assessment of the reasonableness of the give
43

In re Advanced Mammography Sys., Inc. Sholders Litig., 1996 WL 633409, at *1 (Del.

Ch. Oct. 30, 1996); see also In re Cellular Commcns Intl, Inc. Sholders Litig., 752
A.2d 1185, 1188 (Del. Ch. 2000).
44

In re Zalicus, Inc. Sholders Litig., 2015 WL 226109, at *2 (Del. Ch. Jan. 16, 2015)
(quoting Hack v. Learning Co., 1996 WL 633306, at *2 (Del. Ch. Oct. 29, 1996)).
45

See, e.g., Swomley v. Schlecht, 2015 WL 1186126, at *1-2 (Del. Ch. Mar. 12, 2015)
(setting forth class notice procedure for mootness fee, after defendants mooted certain
disclosure claims and successfully moved to dismiss rest of case); In re Zalicus, 2015 WL
226109, at *1-2 (supporting private mootness fee resolution procedure while requiring
that adequate notice be provided to stockholders); Astex Pharm., Inc. Sholders Litig.,
2014 WL 4180342, at *1-2 (Del. Ch. Aug. 25, 2014) (same).

23

and get of such settlements in light of the concerns discussed above. To be more
specific, practitioners should expect that disclosure settlements are likely to be met with
continued disfavor in the future unless the supplemental disclosures address a plainly
material misrepresentation or omission, and 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.46 In using the term plainly material, I mean that it should not
be a close call that the supplemental information is material as that term is defined under
Delaware law. Where the supplemental information is not plainly material, it may be
appropriate for the Court to appoint an amicus curiae to assist the Court in its evaluation
of the alleged benefits of the supplemental disclosures, given the challenges posed by the
non-adversarial nature of the typical disclosure settlement hearing.47

46

In contrast to the settlement context, the Court does not need to weigh the get of the
supplemental disclosures against the give of a release when determining whether to
grant an award of fees in the mootness fee scenario discussed above. Accordingly, an
award of fees in the mootness fee scenario may be appropriate for supplemental
disclosures of less significance than would be necessary to sustain approval of a
settlement. The amount of the fee in the mootness scenario, however, would be
commensurate with the value of the benefit conferred. Thus, for example, a supplemental
disclosure of nominal value would warrant only a nominal fee award.
47

See Hoffman v. Dann, 205 A.2d 343, 345 (Del. 1964) (noting that the Chancellor
appointed an amicus curiae to report to him on the relevant issues to be tendered at the
hearing on the proposed settlement, and as to proof which would be of assistance to him
in passing on the fairness of the settlement.). The costs of the amicus curiae may be
taxed to the parties, as appropriate, in the Courts discretion. See 3B C.J.S. Amicus
Curiae 6 (Where the court appoints an amicus curiae who renders services which prove
beneficial to the solution of the question presented, the court may properly award
compensation and direct it to be paid by the party responsible for the situation that
24

Finally, some have expressed concern that enhanced judicial scrutiny of disclosure
settlements could lead plaintiffs to sue fiduciaries of Delaware corporations in other
jurisdictions in the hope of finding a forum more hospitable to signing off on settlements
of no genuine value. It is within the power of a Delaware corporation to enact a forum
selection bylaw to address this concern.48 In any event, it is the Courts opinion, based on
its extensive experience in adjudicating cases of this nature, that the historical
predisposition that has been shown towards approving disclosure settlements must evolve
for the reasons explained above. We hope and trust that our sister courts will reach the
same conclusion if confronted with the issue.
With the foregoing considerations in mind, I consider next the give and the get
of the proposed settlement in this case.
C.

The Supplemental Disclosures Are not Material and Provided no

Meaningful Benefit to Stockholders

Under Delaware law, when directors solicit stockholder action, they must disclose
fully and fairly all material information within the boards control.49 Delaware has

prompted the court to make the appointment.). Cf. Chapin v. Benwood Found., Inc.,
1977 WL 2583, at *1 (Del. Ch. June 28, 1977) (describing appointment of individual
trustee defendant as amicus curiae with costs paid by defendant corporation, as agreed by
the parties). Scholars have proposed a similar solution in which the Court may appoint
an objector as a kind of guardian ad litem for the class. See Griffith & Lahav, supra
note 23, at 1122 n.309 (compiling sources for proposal).
48

See Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 963 (Del. Ch.
2013) (upholding statutory validity of forum selection bylaw).
49

Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992).

25

adopted the standard of materiality used under the federal securities laws. Information is
material if there is a substantial likelihood that a reasonable shareholder would consider
it important in deciding how to vote.50 In other words, information is material if, from
the perspective of a reasonable stockholder, there is a substantial likelihood that it
significantly alter[s] the total mix of information made available.51
Here, the joint Proxy that Trulia and Zillow stockholders received in advance of
their respective stockholders meetings to consider whether to approve the proposed
transaction ran 224 pages in length, excluding annexes. It contained extensive discussion
concerning, among other things, the background of the mergers, each boards reasons for
recommending approval of the proposed transaction, prospective financial information
concerning the companies that had been reviewed by their respective boards and financial
advisors, and explanations of the opinions of each companys financial advisor. In the
case of Trulia, the opinion of J.P. Morgan was summarized in ten single-spaced pages.
The Supplemental Disclosures plaintiffs obtained in this case solely concern the
section of the Proxy summarizing J.P. Morgans financial analysis, which the Trulia
board cited as one of the factors it considered in deciding to recommend approval of the
proposed merger.52 Specifically, these disclosures provided additional details concerning:

50

Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (adopting materiality
standard of TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
51

Arnold v. Socy for Sav. Bancorp, 650 A.2d 1270 at 1277.

52

Proxy at 118.

26

(1) certain synergy numbers in J.P. Morgans value creation analysis; (2) selected
comparable transaction multiples; (3) selected public trading multiples; and (4) implied
terminal EBITDA multiples for a relative discounted cash flow analysis.
Relevant to considering the materiality of information disclosed in this section of
the Proxy, then-Vice Chancellor Strine observed in In re Pure Resources, Inc.
Shareholders Litigation that there were conflicting impulses in Delaware case law
about whether, when seeking stockholder action, directors must disclose investment
banker analyses in circumstances in which the bankers views about value have been cited
as justifying the recommendation of the board.53 The Court held that, under Delaware
law, when the board relies on the advice of a financial advisor in making a decision that
requires stockholder action, those stockholders are entitled to receive in the proxy
statement a fair summary of the substantive work performed by the investment bankers
upon whose advice the recommendations of their board as to how to vote on a merger or
tender rely.54 This fair summary standard has been a guiding principle for this Court
in considering proxy disclosures concerning the work of financial advisors for more than
a decade.55

53

808 A.2d 421, 449 (Del. Ch. 2002) (discussing, among other decisions, Skeen v. Jo-Ann
Stores, Inc., 750 A.2d 1170 (Del. 2000) and McMullin v. Beran, 765 A.2d 910 (Del.
2000)).
54

Id.

55

See, e.g., In re Netsmart Techs., Inc. Sholders Litig., 924 A.2d 171, 203-04 (Del. Ch.
2007) ([W]hen a bankers endorsement of the fairness of a transaction is touted to
27

A fair summary, however, is a summary. By definition, it need not contain all

information underlying the financial advisors opinion or contained in its report to the
board.56 Indeed, this Court has held that the summary does not need to provide sufficient
data to allow the stockholders to perform their own independent valuation.57 The essence

shareholders, the valuation methods used to arrive at that opinion as well as the key inputs
and range of ultimate values generated by those analyses must also be fairly disclosed.).
56

See, e.g., In re Micromet, Inc. Sholders Litig., 2012 WL 681785, at *11 (Del. Ch. Feb.
29, 2012) (rejecting claim that the board failed to disclose underlying assumptions and
bases for probabilities of success of clinical trial drugs) (Stockholders are entitled to a
fair summary of the substantive work performed by the investment bankers, but Delaware
courts have repeatedly held that a board need not disclose specific details of the analysis
underlying a financial advisors opinion.) (internal quotation marks omitted); In re
Cogent, Inc. Sholder Litig., 7 A.3d 487, 511 (Del. Ch. 2010) (holding stockholders are
entitled to fair summary, but not to minutiae, and rejecting requests for additional
disclosures); Ryan v. Lyondell Chem. Co., 2008 WL 2923427, at *20 & n.120 (Del. Ch.
July 29, 2008) (finding that fair summary did not require disclosure of all projections, as
long as it disclosed description of valuation exercises, key assumptions, and range of
values generated; but noting that the failure to disclose that the financial advisor used a
significantly higher WACC in its calculation than managements WACC estimate, even
when it was using managements other financial projections, could constitute a disclosure
violation), revd on other grounds, 970 A.2d 235 (Del. 2009). See also David P.
Simonetti Rollover IRA v. Margolis, 2008 WL 5048692, at *9-10 (Del. Ch. June 27, 2008)
(distinguishing Pure Resources as a case in which a proxy statement was deficient
because it did not disclose any substantive portions of the bankers work) (internal
quotation marks omitted); In re MONY Grp. Inc. Sholder Litig., 852 A.2d 9, 28 (Del. Ch.
2004) (The plain meaning of summary belies the Stockholders interpretation.).
57

See Globis Prs, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *12-13 (Del.
Ch. Nov. 30, 2007) (rejecting disclosure claims for various details that may have been
helpful in determining accuracy of analysis) (Delaware law does not require disclosure
of all the data underlying a fairness opinion such that a shareholder can make an
independent determination of value.); In re Gen. Motors (Hughes) Sholder Litig., 2005
WL 1089021, at *16 (Del. Ch. May 4, 2005) (rejecting claim for information that would
amount to the raw data behind the advisors updated summaries) (A disclosure that
does not include all financial data needed to make an independent determination of fair
value is not, however, per se misleading or omitting a material fact. The fact that the
28

of a fair summary is not a cornucopia of financial data, but rather an accurate description
of the advisors methodology and key assumptions.58

In my view, disclosures that

provide extraneous details do not contribute to a fair summary and do not add value for
stockholders.59
With the foregoing principles in mind, I consider next whether any of the four
specific Supplemental Disclosures that plaintiffs obtained here were material or whether
they provided any benefit to Trulias stockholders at all.

financial advisors may have considered certain non-disclosed information does not alter
this analysis.), affd, 897 A.2d 162 (Del. 2006).
One important qualification bears mention. Although management projections and
internal forecasts are not per se necessary for a fair summary, this Court has placed
special importance on this information because it may contain unique insights into the
value of the company that cannot be obtained elsewhere. See In re Netsmart Techs., 924
A.2d at 203 (noting that management projections can be important because management
can have meaningful insight into their firms futures that the market [does] not).
58

See In re 3Com Sholders Litig., 2009 WL 5173804, at *2-3 (Del. Ch. Dec. 18, 2009)
(rejecting claim for omission of financial projections because an adequate and fair
summary of the work performed by [the advisor] [was] included in the proxy); In re
CheckFree Corp. Sholders Litig., 2007 WL 3262188, at *3 (Del. Ch. Nov. 1, 2007)
(distinguishing Netsmart and rejecting disclosure claim based on omission of
management financial projections, because proxy statement fairly summarized financial
advisors methods and conclusions); In re Pure Res., 808 A.2d at 449 (noting in fair
summary discussion that stockholders would find it material to know the advisors basic
valuation exercises, key assumptions of those exercises, and range of values produced).
59

See In re PAETEC Hldg. Corp. Sholders Litig., 2013 WL 1110811, at *8 (Del. Ch.
Mar. 19, 2013) (citing In re Pure Res., 808 A.2d at 449) (declining to award settlement
fees for disclosures that provide a level of detail beyond what the law of Delaware
requires).

29

1.

Synergy Numbers in the Value Creation Analysis

The Supplemental Disclosures provided some additional details in the sections of

J.P. Morgans analysis entitled Value Creation Analysis Intrinsic Value Approach and
Value Creation Analysis Market-Based Approach. In the Intrinsic Value Approach
analysis, J.P. Morgan compared the implied equity value derived from its discounted cash
flow analysis of Trulia on a standalone basis to Trulia stockholders pro forma ownership
of the implied equity value of the combined company. In the Market- Based Approach,
J.P. Morgan compared the public market equity value of Trulia on a standalone basis to
Trulia stockholders pro forma ownership of the implied equity value of the combined
company.
As supplemented, the disclosure concerning the Intrinsic Value Approach reads in
relevant part as follows, with the information that was added to the original disclosure in
the Proxy appearing in bolded text:
The pro forma combined company equity value was equal to: (1) the Trulia
standalone discounted cash flow value of $2.9 billion, plus (2) the Zillow
standalone discounted cash flow value of $6.2 billion, plus (3) $2.2 billion,
representing the present value of (a) Trulias management expected aftertax synergies of $2.4 billion, less (b) Trulias management estimates of
(i) the one-time costs to achieve such synergies of $65.0 million and
(ii) transaction expenses of $85 million. The present value of after-tax
synergies was based on an estimate of $175.0 million in synergies to be
fully realized starting in 2016, extrapolated through 2029 based on
assumptions provided by Trulias management.60

60

Supplemental Disclosures at 5-6.

30

Plaintiffs argue that the disclosure of the $175 million synergies figure in the quote above
was important because it is substantially different from the $100 million in synergies that
J.P. Morgan used in the Market-Based Approach, which figure already was disclosed in
the Proxy.61

According to plaintiffs, [h]ad [stockholders] initially known that the

market-based approach analysis was skewed downward by using lower synergies

numbers, their view as to the resulting implied value and reliability of [J.P. Morgans]
analysis may have changed appreciably.62 There are three fundamental problems with
this argument.
First, although plaintiffs question why J.P. Morgan used two different synergies
figures in two different analyses, they provide no explanation as to why doing so would
be inappropriate. To the contrary, it seems logical that an intrinsic value approach (which
is based on a comparison derived from a discounted cash flow analysis) would use
synergies based on long-term management projections, while a market-based approach
(which is based on a comparison to the public market equity value of Trulia) would use
synergies based on what would be publicly announced to investors. Regardless, the Proxy
accurately disclosed which synergies assumptions the financial advisor deemed
appropriate to use in each analysis.63

61

Pls. Br. Supp. Proposed Settlement at 23 (citing Proxy at 103 (noting that the synergies
are expected to be at least $100 million in annualized cost savings by 2016)).
62

Id. at 23-24.

63

Proxy at 130, 132.

31

Second, the $175 million synergies figure that plaintiffs consider so important was
not new information.

It already was disclosed in the Proxy, which contained the

following table providing information about managements synergies expectations:64

The following table presents summary estimated synergies that Trulias
management also prepared in respect of the combined company following
the completion of the mergers for the calendar years ending 2014 through
2024 in connection with Trulias evaluation of the mergers.

(1)
Total Operating Synergies means the expected EBIT effect of
revenue synergies plus the EBIT effect of cost savings/cost avoidance less
one-time costs to achieve and retain such synergies. EBIT means
earnings before interest and taxes. An assumed tax rate of 40% was
applied to Total Operating Synergies to determine estimated after-tax
synergies. Projected synergies (including costs to achieve synergies) were
prepared by Trulias management through fiscal year 2016 after discussion
with Zillows management. The management of Trulia provided J.P.
Morgan with assumptions relating to projected synergies for fiscal years
2017 through 2024 deemed appropriate by Trulias management. The
management of Trulia then directed J.P. Morgan to use these assumptions
in extrapolating such estimated synergies for fiscal years extending beyond
those for which the management of Trulia had provided projections. The
management of Trulia then reviewed and approved such extrapolation of
the synergies.65
Because the $175 million figure for 2016 synergies already appeared in this table,
inserting it into a methodological paragraph a few pages later is of no benefit to
64

Plaintiffs counsel was not aware that this information already was disclosed in the
Proxy until the Court pointed it out at the settlement hearing. See Hrg Tr. 12-15, Sept.
16, 2015. If the proposed settlement had been opposed, this fact presumably would have
been brought to the attention of plaintiffs and the Court.
65

Proxy at 123.

32

stockholders. In my view, the supplemental disclosure may have added confusion more
than anything else, because it lacks explanatory context and does not clearly describe the
nature of managements estimate of synergies that was disclosed in the original Proxy.66
Third, plaintiffs exaggerate the significance of juxtaposing the synergy figures
used in the Intrinsic Value Approach with those used in the Market-Based Approach. In
contrast to the Intrinsic Value Approach, the Market-Based Approach was placed in the
end of the summary of the financial advisors analysis in the Other Information section,
was termed an illustrative value creation analysis, and was presented merely for
informational purposes.67 As plaintiffs concede, a fair reading of the Proxy indicates
that the Market-Based Approach analysis was less important than the Intrinsic Value
Approach analysis.68 Thus, the notion that the disclosure of the $175 million synergies
figure used in one analysis (which already was disclosed in the Proxy) was significant
because it was higher than the $100 million figure used in a second, different analysis is
based on a false equivalence of the relative importance of the two analyses.
In sum, the disclosures in the original Proxy already provided a fair summary of
J.P. Morgans methodology and assumptions in its two Value Creation analyses.

66

For instance, the Supplemental Disclosures refer to the expected synergies after 2016 as
extrapolations through 2029 based on managements assumptions. But the table in the
Proxy, produced above, notes that management provided assumptions regarding synergies
through 2024. Plaintiffs do not address this ambiguity.
67

Proxy at 131-32.

68

Hrg Tr. 15, Sept. 16, 2015.

33

Inserting additional minutiae underlying some of the assumptions could not reasonably
have been expected to significantly alter the total mix of information and thus was not
material. Indeed, in my view, the supplemental information was not even helpful to
stockholders.
2.

Individual Company Multiples in the Selected Transaction Analysis

The Proxy disclosed that J.P. Morgan used publicly available information to
analyze certain selected precedent transactions involving companies engaged in
businesses that J.P. Morgan considered analogous to Trulias businesses.69 The Proxy
listed the date, the target, and the acquirer for each of 32 transactions that were
considered. It also disclosed the low and high forward EBITDA multiples for the group
of transactions. Using a narrower range of multiples falling between the low and the high
for the group, J.P. Morgan created an estimated range of equity values per share for Trulia
common stock. This methodology was summarized in the Proxy as follows:
J.P. Morgan reviewed the implied firm value for each of the transactions as
a multiple of the target companys two-year forward EBITDA immediately
preceding the announcement of the transaction. The analysis indicated a
range of EBITDA multiples of 8.0x to 69.1x. Based on the result of this
analysis and other factors that J.P. Morgan considered appropriate, J.P.
Morgan applied an EBITDA multiple range of 10.0x to 23.0x to Trulias
fiscal 2015 Adjusted EBITDA and arrived at an estimated range of equity
values per share for Trulia common stock of $17.25-$38.50.70

69

Proxy at 129-30.

70

Id. at 130.

34

Plaintiffs grievance is that the Proxy did not provide the relevant multiples for each
of the 32 individual transactions.

The individual multiples were added in the

Supplemental Disclosures for those transactions for which the information was publicly
available.71 The addition of this information made evident that multiples were not publicly
available for 15 of the 32 transactions. Plaintiffs argue that, without the Supplemental
Disclosures, stockholders would not have realized that J.P. Morgans analysis did not
consider multiples for half of the precedent transactions it listed and was therefore less
robust than the Proxy portrayed it to be.
The addition of the individual multiples and the revelation that some were not
publicly available could not reasonably have been expected to significantly alter the total
mix of information.

No argument is made, for example, that having 16 similar

transactions was not sufficient to perform the analysis that J.P. Morgan conducted. The
discussion in the Proxy, moreover, including the portion quoted above, fairly summarized
the methodology and assumptions J.P. Morgan used in conducting that analysis to
extrapolate a range of per share values for Trulia stock. A fair summary does not require
disclosure of sufficient data to allow stockholders to perform their own valuation.72

71

In one case, the publicly available multiple was not included because it exceeded 100x
and thus was not considered meaningful. Supplemental Disclosures at 5.
72

In re Gen. Motors (Hughes), 2005 WL 1089021, at *16.

35

This conclusion is supported by the Courts decision in In re MONY Group

Shareholder Litigation.73 There, the Court rejected a similar argument that the disclosure
of transaction multiples was important because it showed that 25% of the multiples in a
set of 71 transactions were unavailable. After noting that the plaintiffs had not argued
that the financial advisor did not have sufficient data to perform its analysis, the Court
held that the additional information was immaterial, as a matter of law, and a triviality
[that] could not reasonably be expected to affect the total mix of information.74 In my
view, the addition of similar trivialities was not helpful to Trulias stockholders here.
3.

Individual Company Multiples in the Selected Public Trading Analysis

The Proxy disclosed the names of sixteen publicly traded companies that J.P.
Morgan used to construct ranges of forward EBITDA and revenue multiples for Trulia
and Zillow.75 The Proxy provided these multiples for Trulia and Zillow based on their
last unaffected trading day before the announcement of the merger, and provided the
median multiples for the three groups into which J.P. Morgan categorized the sixteen
comparable companies: Real Estate, Software as a Service, and Other. The Proxy
did not include individual multiples for the peer companies.

73

852 A.2d 9 (Del. Ch. 2004).

74

Id. at 28.

75

Proxy at 125-26.

36

The Supplemental Disclosures added the revenue and EBITDA multiples for each
of the sixteen companies. Citing In re Celera Corporation Shareholder Litigation,76
plaintiffs argue, in essence, that individual company multiples are material per se. That is
not a fair reading of the case. In Celera, the Court commented that as a matter of best
practices, a fair summary of a comparable companies or transactions analysis probably
should disclose the market multiples derived for the comparable companies or
transactions.77 Although the decision reluctantly concluded that a multiples disclosure
was compensable, it found it questionable whether [the multiples] altered the total mix
of available information because that information already was publicly available.78
The individual company multiples in the Supplemental Disclosures here also were already
publicly available.79

76

2012 WL 1020471 (Del. Ch. Mar. 23, 2012), affd in part, revd in part on other
grounds, 59 A.3d 418 (Del. 2012).
77

Id. at *32.

78

Id.

79

Meinhart, plaintiffs expert, points out that not all stockholders can access all of this
information because some of the forward-looking data are available only from proprietary
fee-based services. It may be correct that not all of these data would be freely or easily
obtainable. A fair summary, however, does not require disclosure of sufficient data to
allow stockholders to perform their own valuation. And it certainly does not require
disclosure of underlying data that stockholders could obtain on their own, even if doing
so would involve some cost or investment of time. Meinhart also opines that the
multiples show a high level of dispersion, but he fails to explain how that information
undermines J.P. Morgans analysis or is otherwise informative considering that J.P.
Morgan explicitly stated that its analysis was not strictly quantitative in nature. See Proxy
at 126-27 (J.P. Morgan did not rely solely on the quantitative results . . . . Based on
various judgments concerning relative comparability of each of the selected companies to
37

More importantly, the original disclosures in Celera simply listed the comparable
companies with no summary multiple data at all.80 Although the supplemental disclosures
in that case added summary data for each of three categories of companies, they did not
provide any individual company multiples.81 In other words, the disclosures in Trulias
Proxy, which provided the median multiples for three different categories of companies
that J.P. Morgan considered in its judgment to be similar to Trulia, essentially started at
the point where Celera ended.82
Plaintiffs next argue that the individual multiples are important here because they
allow stockholders to compare the selected companies EBITDA growth rates and
EBITDA multiples to Trulias. This argument is unpersuasive for two reasons. First,
basic valuation principles already would suggest to stockholders that higher growth rates
Trulia, as well its experience with the industry . . . J.P. Morgan selected a range of
revenue and Adjusted EBITDA multiples that it believed reflected an appropriate range
of multiples applicable to Trulia.).
80

See In re Celera Corp., 2012 WL 1020471, at *32.

81

See id. The supplemental disclosure in Celera added more categories of summary data,
namely the high, low, median, and mean multiples. This distinction is immaterial. The
point of a fair summary is to summarize the methodologies and assumptions the financial
advisor used in its analysis. Here, the Proxy fairly summarizes J.P. Morgans use of
multiples in its trading multiples analysis.
82

Plaintiffs also rely on a transcript ruling in Turberg v. ArcSight, C.A. No. 5821-VCL
(Del. Ch. Sept. 20, 2011) (TRANSCRIPT). As in Celera, the initial description in
ArcSight did not have any multiples at all. The plaintiff obtained a full description of the
analysis comparable to the depiction that would appear in a board book. The Court
praised that disclosure in the context of a non-adversarial presentation regarding
settlement approval. The case is distinguishable because, unlike here, no summary
multiples were initially provided to stockholders.

38

should correspond to higher multiples.83 Second, the Supplemental Disclosures do not

contain EBITDA growth rates, so the figures necessary to make that comparison are not
present in any event. Thus, plaintiffs have not persuaded me that individual company
multiples are material or were even helpful in this case.
4.

Implied Terminal EBITDA Multiples in the DCF Analysis

J.P. Morgan performed a relative discounted cash flow analysis to determine the
per-share equity values of Trulia and Zillow, using expected cash flows from 2014
through 2028 based on managements projections for each company and the perpetuity
growth method to calculate the companies respective terminal values.84 The Proxy
explained this methodology and provided the assumptions J.P. Morgan used in its
analysis. Specifically, the Proxy disclosed managements projections of unlevered free
cash flows, the ranges of discount rates (11.0% to 15.0%) and perpetuity growth rates
(2.5% to 3.5%) that were used, the terminal period projected cash flows, and other
details.85 In my view, these disclosures already provided a more-than-fair summary of the
relative discounted cash flow analysis that J.P. Morgan performed.

83

Joshua Rosenbaum & Joshua Pearl, Investment Banking: Valuation, Leveraged

Buyouts, and Mergers & Acquisitions 19 (2009) (A companys growth profile, as
determined by its historical and estimated future financial performance, is an important
driver of valuation. Equity investors reward high growth companies with higher trading
multiples than slower growing peers.).
84

See Proxy at 127.

85

See id. at 108, 122, 127.

39

The Supplemental Disclosures added to this summary the EBITDA exit multiple
ranges for Trulia and Zillow that were implied by the range of terminal values calculated
based on J.P. Morgans chosen inputs. Plaintiffs argue that, although J.P. Morgan used
the perpetuity growth method and only derived the implied EBITDA exit multiples to
check the strength of its methodology, the implied multiples were important to
stockholders, who would be concerned that the exit multiples for Trulia and Zillow are
nearly identical despite differences in their current EBITDA growth rates, and that the
exit multiples are much lower than the current EBITDA multiples of Trulia and its
peers.86
The logic of plaintiffs argument is flawed in two respects. First, because the same
range of perpetuity growth rates (2.5% to 3.5%) was used to calculate the terminal values
for both companies, it should not have been surprising that the implied exit EBITDA
multiples would be similar for both companies: 4.0x to 6.7x for Trulia and 4.1x to 6.8x
for Zillow. Second, although Trulias then-current EBITDA growth rate was high, the
exit EBITDA multiples are based on growth assumptions as of 2028, not 2015, and the
2015 growth rate cannot realistically continue through the projection period.87 Basic
principles of valuation suggest that it would be more reasonable to forecast that the
86

Pls. Br. Supp. Proposed Settlement at 30-31.

87

Id. at 26 (noting Trulias expected EBITDA growth rate of 148% and the decided
correlation between higher growth rates and higher valuation multiples). Were Trulia
able to retain this impressive EBITDA growth rate for the entire forecast period, its 2028
EBITDA would amount to nearly $10 trillion, more than half the current GDP of the
United States.

40

growth of both Trulia and Zillow eventually would fall to a market-based rate, making
plaintiffs comparison to the current growth rates of Trulia and its peers inappropriate.88
Thus, not only is the supplemental disclosure immaterial, it also serves none of the
purposes that plaintiffs allege.
*****
For the reasons explained above, none of plaintiffs Supplemental Disclosures
were material or even helpful to Trulias stockholders. The Proxy already provided a
more-than-fair summary of J.P. Morgans financial analysis in each of the four respects
criticized by the plaintiffs. As such, from the perspective of Trulias stockholders, the
get in the form of the Supplemental Disclosures does not provide adequate
consideration to warrant the give of providing a release of claims to defendants and
their affiliates, in the form submitted89 or otherwise.

Accordingly, I find that the

proposed settlement is not fair or reasonable to Trulias stockholders.90

88

See Rosenbaum & Pearl, supra note 83, at 132 (The perpetuity growth rate is typically
chosen on the basis of the companys expected long-term industry growth rate, which
generally tends to be within a range of 2% to 4% (i.e., nominal GDP growth).).
89

As noted above, after the settlement hearing, the parties commendably agreed to narrow
the release to exclude Unknown Claims, foreign claims, and claims arising under state
or federal antitrust law. Nevertheless, even if the Supplemental Disclosures had provided
sufficient consideration to warrant the give of a release of claims, which they did not,
the scope of the revised release still would have been too broad to support a fair and
reasonable settlement because the revised release was not limited to disclosure claims and
fiduciary duty claims concerning the decision to enter the merger.
90

Because I reject the proposed settlement, I do not address the issue of class
certification, although stockholder classes in cases such as this are typically certified.
41

III.

CONCLUSION
For the foregoing reasons, approval of the proposed settlement is DENIED.

IT IS SO ORDERED.

42