The rate of merger litigation has more than doubled over the past decade, yet the vast majority of these cases end in ‘disclosure only’ settlements, which exhibit all of the indicia of litigation agency costs. This chapter offers a review of settlement practices in the Delaware Court of Chancery, America’s leading corporate law court, focusing on the role of the judiciary in approving settlements and awarding fees, demonstrating that the occasional reduction of attorneys’ fees has not been sufficient to stem the flood of merger-related litigation. The chapter then argues that in order for the Court of Chancery to solve the problem of merger litigation, it must consider more drastic measures. Specifically, the Court should either: (i) reject low value settlements as a matter of course; (ii) establish a presumptive no-benefit rule for disclosure settlements; or (iii) require proportionality of the settlement and release. Fortunately, there is substantial evidence, reviewed in the chapter, that the Court is now considering changes along precisely these lines.
Sean J. Griffith and Anthony Rickey
This chapter focuses on Delaware’s efforts to crack down on disclosure-only settlements. The authors test one theory of plaintiff law firms: that there are “white hat” and “black hat” firms, that is, firms that bring meritorious cases and firms that bring weak ones. They find evidence consistent with the existence of “black hat” firms, but also evidence that “white hat” firms may in fact be “gray,” filing strong cases in Delaware and weaker cases outside it. To deal with the problem of “gray hat” behavior, the authors suggest that Delaware probe lead counsel applicants’ conduct outside of Delaware in making lead counsel appointments. Delaware can use its unique position as the center of corporate law to assure that meritorious cases continue to be brought there.