HPQ HP Inc

By Liz Hoffman 

A Delaware judge rejected the settlement of a shareholder lawsuit against Hewlett-Packard Co., saying the welter of litigation challenging corporate mergers has become a systemic problem.

The lawsuit stemmed from H-P's $2.7 billion purchase of Aruba Networks. It was brought on behalf of Aruba shareholders, but Vice Chancellor J. Travis Laster said the proposed settlement offered them little of value. The agreement called for H-P to disclose additional information about the sale process and pay the plaintiffs' lawyers a fee of $387,500.

Such so-called disclosure-only settlements, in which the only money paid goes to lawyers who bring the suits, are now the norm in the litigation that follows nearly every corporate merger.

Mr. Laster and others on the Delaware Court of Chancery, the most influential venue for corporate disputes, have become increasingly critical of these pacts.

"We've reached a point where we have to acknowledge that settling for disclosures only has created a real, systemic problem," Mr. Laster said. "We've all talked about it for a couple years. When you get the sue-on-every-deal phenomenon, it is a problem."

He said the formulaic arc that most M&A lawsuits take has created a "misshapen legal regime" that doesn't benefit investors.

Mr. Laster sharply criticized the plaintiffs' case in Aruba as thin and said they didn't investigate deeply enough to determine whether there were actual problems with the transaction. He dismissed the case on the grounds that the lawyers didn't adequately represent shareholders' interests.

Gregory Nespole of Wolf Haldenstein Adler Freeman & Herz LLP, a lawyer for the plaintiffs, said his firm disagrees with the ruling. "The firm prosecuted this case vigorously from start to finish," Mr. Nespole said in an emailed statement. "Disclosure settlements (some not nearly as robust as this) have been approved many times in Delaware and elsewhere around the country."

H-P agreed to buy Aruba, a provider of network software, in March for $24.67 a share, a 34% premium to the stock's closing price the day before the deal was announced. Seven lawsuits were ultimately filed, alleging the price was unfair and that process wasn't robust enough. The parties reached a settlement in April.

As is typical in such settlements, H-P agreed to release additional details about the deal and pay a fee in exchange for immunity from future lawsuits over the deal. Mr. Laster and others have criticized such releases as "intergalactic," saying they are too broad and can paper over real misconduct that might have been unearthed with a more vigorous investigation.

The proposed disclosures showed H-P offered Aruba Chief Executive Dominic Orr a new employment contract earlier than H-P had said in regulatory filings, a fact Mr. Laster said could have been grounds for a full-fledged lawsuit seeking damages.

Friday's decision doesn't affect a separate lawsuit brought by Aruba shareholders seeking a higher price. That so-called appraisal case, filed under a different set of legal rules, is pending and covers 2.3 million shares, worth about $56 million at the buyout price.

Most M&A-related lawsuits ultimately settle. Last year, 80% of the settlements were for disclosures only, according to Cornerstone Research. Critics of these cases say the fees paid amount to a what one could call a merger tax, while proponents say the cases act as incentives to directors to push for better deal terms, knowing actions would be scrutinized.

Mr. Laster rejected a similar settlement in July stemming from Cobham PLC's purchase of Aeroflex Holding Corp. The same week, another judge in the same court withheld approval of a settlement in litigation over Roche Holding AG's $8.3 billion acquisition of InterMune. In September, a third judge approved a settlement stemming from the private-equity buyout of Riverbed Technology Inc. but put plaintiffs' lawyers and companies on notice that they shouldn't expect him to do so in the future.

A tougher stance on settlements isn't necessarily a win for companies. Though they often complain about such lawsuits, companies benefit from easy, relatively inexpensive settlements.

"The historical basis for this has been the defendants' desire for complete peace," Mr. Laster said on Friday. "Just because you want it doesn't mean you get it."

Write to Liz Hoffman at liz.hoffman@wsj.com

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(END) Dow Jones Newswires

October 09, 2015 17:01 ET (21:01 GMT)

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