Just weeks before the shareholder vote on Walgreens’ $4.8 billion merger with a European pharmacy, Walgreens got slapped with a class action lawsuit claiming that the legally-required information given to shareholders regarding the merger (the Proxy Statement) omitted important and relevant information.
What a surprise.
Actually, these types of suits are filed in 95 percent of mergers over $100 million. And like most companies faced with these “strike suits”, Walgreens had no choice but to settle. In merger litigation, a “strike suit” is a challenge to a proposed merger, with the aim of quickly getting fees for plaintiffs’ lawyers, instead of producing any benefit for shareholders. The class action attorneys were essentially holding the shareholder vote for ransom. Rather than derail the merger, Walgreens settled the lawsuit – one week before the shareholder vote.
Under the settlement, stockholders received nothing, the class action attorneys would get $370,000, and Walgreens would file “Supplemental Disclosures” to the Proxy. The Supplemental Disclosures were supposed to give shareholders the material information that had been “missing” from the Proxy. In reality, the Supplemental Disclosures were meaningless fluff. The Center for Class Action Fairness filed an objection to the settlement on behalf of shareholder John Berlau.
This time, the good guys finished first. On August 10, the Seventh Circuit issued its opinion in In Re: Walgreen Co. Stockholder Litigation, No. 15-3799. One by one, Judge Posner dissected each of the six Supplemental Disclosures and held that they offered nothing to the shareholders. Nil. He found that the class action attorneys were inadequate representatives because they were only interested in fees and recommended that the whole case be dismissed.
But the beauty of the Seventh Circuit opinion is that it goes beyond the worthless disclosures in this case. Judge Posner called for an “end” to this type of case, which he described as “no better than a racket.” He endorsed the Delaware standard from In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884, 894 (Del. Ch. 2016), which requires that the misrepresentation or omission the supplemental disclosures is correcting be “plainly material.” When Trulia came down earlier this year, the big question was whether these disclosure-only settlements would shift outside of Delaware to other state and federal courts. Wherever they land, Walgreens is powerful precedent that may well be the beginning of the end for disclosure-only settlements.
This blog post was previously published on the Competitive Enterprise Institute’s Open Market Blog.