In a bench ruling on October 9, 2015, Vice Chancellor Laster declined to approve a proposed disclosure-only settlement in connection with a typical stockholder suit brought over a public merger, and dismissed the case as to the named plaintiffs on the basis of inadequacy of representation (In re Aruba Networks, Inc. S'holder Litig., C.A. No. 10765-VCL (Del. Ch. Oct. 9, 2015) (TRANSCRIPT)). The ruling represents a culmination of several recent decisions from the Delaware Court of Chancery in which the court has warned that it will no longer grant what it has called "intergalactic releases" in return for disclosure-only settlements and an attorney fee. In Aruba Networks, the court for the first time not only rejected the proposed settlement, but dismissed the case in its entirety on grounds of inadequate representation by counsel.

The case arose out of the acquisition of Aruba Networks by Hewlett-Packard Company (see the What's Market merger agreement summary). In the scheduling order for the case's settlement hearing, Vice Chancellor Laster had notified plaintiffs' counsel that they should be prepared to "explain at oral argument why this matter should not be approached in the same manner as the Aeroflex case." This was a reference to Vice Chancellor Laster's bench ruling in Acevedo v. Aeroflex Holding Corp., C.A. No. 7930-VCL (Del. Ch. Jul. 8, 2015) (TRANSCRIPT), described in detail in Legal Update, Delaware Court of Chancery Signals Stricter Approach to Approving Settlements in M&A Deals. In Aeroflex, Vice Chancellor Laster rejected a proposed settlement and announced that he no longer intended to approve "intergalactic releases" in return for minimally useful disclosures, owing to the rise of the Delaware industry of bringing rote claims over nearly every public merger.

Counsel for the Aruba Networks plaintiffs initially filed suit with a challenge against the price of the acquisition, but soon abandoned that claim. During discovery, however, counsel found missing or misstated disclosures regarding the timing of employment negotiations between HP and Aruba's CEO that warranted correction and were ultimately fixed. On the basis of that and some other disclosures, counsel came before the court to argue for approval of the settlement and release of all merger-related claims on the grounds that it had extracted value in the form of the disclosure correctives.

From the outset and throughout the hearing for the Aruba Networks settlement, Vice Chancellor Laster sharply questioned whether plaintiffs' counsel's work warranted certification of the class, approval of the settlement and award of an attorney fee. In particular, Vice Chancellor Laster took issue on the following grounds:

As to the scope of the release, Vice Chancellor Laster held that the proposed language suffered from the same defects as the release that he rejected in Aeroflex. The Vice Chancellor highlighted that:

Plaintiffs' counsel attempted to argue that the court should not be concerned with the scope of the release, because it only releases direct claims. Vice Chancellor Laster did not accept that argument, however, in light of the "systemic problem" of disclosure claims that are traded for global releases and that attach to virtually every public merger. Vice Chancellor Laster suggested that he might have approved the settlement had the release been limited only to disclosure claims, as that would have reflected a give-and-take for what counsel had managed to extract from the target company. At the same time, Vice Chancellor Laster did not see those corrective disclosures as a reflection of counsel's efforts in the case, and instead characterized those findings as something that fell into counsel's lap.

Having determined that the proposed release was overly broad and that a fee award was not justified for the work put in by counsel, the Vice Chancellor held for the first time that he would dismiss the case on grounds of inadequacy of representation. In so doing, the Vice Chancellor characterized the case as a "harvesting-of-a-fee opportunity," because there was no meritorious claim when initially filed.

Vice Chancellor Laster's bench ruling reaffirms and in fact extends the Court of Chancery's increasingly strict approach to approving disclosure-only settlements. In its effort to stem the practice of trading releases for settlements, the court has now signaled that it will look for a colorable claim at the outset that justified the filing of the claim, instead of allowing current practice to continue in which counsel files a claim first and hopes to discover a claim during discovery later. In addition, the Aruba Networks ruling indicates a new willingness to not only reject a settlement, but to dismiss the case altogether.

By raising the standard demanded of Revlon claims, the decision represents something of a companion piece to the Delaware Supreme Court's recent decision in KKR (see Legal Update, Delaware Supreme Court Affirms "KKR," Lowers Standard of Review from Enhanced Scrutiny to Business Judgment when Merger Approved by Fully Informed Stockholder Vote). In KKR, the Supreme Court held that even claims that are ordinarily subject to enhanced scrutiny under Revlon can be reviewed for ordinary business judgment if the underlying transaction is approved by a fully informed vote of the disinterested stockholders. The effect of that ruling is to set up an early, important decision for plaintiffs' counsel: either bring a Revlon claim that is strong enough to win an injunction before the stockholder vote takes place, or do not bother bringing the claim at all (because it is a virtual certainty that counsel will lose a claim against a board that is entitled to the presumptions of the business judgment rule). Between KKR and Aruba Networks, plaintiffs' counsel now must consider the possibility that they will win nothing in return for bringing insubstantial Revlon claims.