The Changing Odds of the Chancery Lottery
By Marianna Wonder
Delaware is home to the majority of shareholder class action litigations related to mergers and acquisitions (M&A). These cases usually result in settlements that provide shareholders with only disclosure in exchange for a broad release of future claims, which encompasses unknown and federal security claims. The Delaware Court of Chancery must review and approve these settlements under Delaware Rule 23(e), which has been interpreted as creating a fiduciary duty for the court to protect the interests of absent shareholders. Nevertheless, Delaware has a history of routinely approving disclosure-only settlements with laxity. Recently, members of the court have begun discussing the issues with this process and, in some cases, have begun rejecting settlements that were previously likely to be approved. This active discussion, combined with the discretion given to the individual members of the court to make their own business judgment, has resulted in each developing their own method of reviewing disclosure-only settlements and applying their fiduciary duty.
After developing a backdrop of the prototypical M&A case and the rules that define the court’s role, this Note reviews recent decisions of each member of the court in order to understand their individual method of reviewing settlements and how they apply their duty to shareholders in this process. This Note then identifies the interest group theory as a potential explanation for the external factors that may influence the court’s diverging methodologies. This Note concludes that in order to create a more consistent standard that fully applies the court’s fiduciary duty to shareholders, the Court of Chancery should (1) adopt a new materiality standard based on the merits of the case at filing, and (2) limit approval to settlements that have releases that are proportional to the relief provided to shareholders.