Shareholder merger litigation is everywhere these days. And recent developments, including a decision in Delaware over the now completed acquisition of Transatlantic Holdings, show not only that merger litigation is here to stay, but also that courts still don’t know what to do about the proliferation of suits.
Merger litigation is when plaintiffs’ lawyers bring class-action lawsuits challenging an acquisition transaction. It’s a big issue these days because once you’ve announced a deal, you are likely to get sued. Really.
A yearly merger litigation report that I prepare with Matt Cain, an assistant professor at Notre Dame, shows that last year, 92 percent of all transactions with a value greater than $100 million experienced litigation. The average deal brought five different lawsuits. In addition, half of all transactions experienced multi-jurisdictional litigation, typically litigation in Delaware and anothe state.
Take the recently announced buyout of Dell. There are already 21 lawsuits pending in Delaware Court of Chancery, and three more pending in Texas state court.
The rise in merger lawsuits has judges pushing back. In the Transatlantic case, Chancellor Leo E. Strine Jr. of Delaware’s Court of Chancery did something last week that a judge in the state has rarely done: he rejected a settlement reached between the plaintiffs’ attorneys and the target company.
In that case, the merger litigation had been settled with Transatlantic agreeing to make additional disclosures. Plaintiffs had petitioned for a fee of $500,000. In considering a motion to approve a settlement and certify a class, Chancellor Strine denied the motion. He found instead that the settlement was essentially worthless and did not disclose any new material information.
Not only that, but the plaintiffs, one who held only two shares and the other who did not vote on the merger, were not proper represent! atives of the shareholders. Approval of settlements is something courts are supposed to do in honor of looking out for the plaintiffs. But given that the settlement is something the buyer and seller agree upon, a rejection like this is very rare.
All this merger litigation is a feeding frenzy, and with any frenzy, it is stirring confrontation, not just between lawyers but between judges.
In recent weeks, Delaware and New York were battling over the litigation filed related to NYSE Euronext’s acquisition by IntercontinentalExchange. There are five cases pending in New York, but also eight filed in Delaware, creating a tug of war over jurisdiction.
According to Reuters, Justice Shirley Kornreich of the New York State Supreme Court remarked of the Delaware litigation: “Who - please tell me it’s not Chancellor Strine who has the Delaware case†She subsequently refused to defer to the Delaware litigation, meaning two dueling courts are hearing virtually identical litigation claims from this sale.
Given all the bickering and conflicts, it is understandable that the knee-jerk reaction is that this litigation is bad and needs to stop. However, merger litigation can have real value.
Those in favor of such cases argue that though many of these suits may be unsuccessful or minor, they finance litigation against larger deals that need to be challenged and are successful. For example, the litigation over the Del Monte buyout yielded an $89 million settlement, while the litigation over the sale of El Paso yielded a $110 million settlement. For lawyers to bring good cases like these, they need to bring bad ones to pay for them (and because frankly at the start they can’t tell the difference).
And in any event, the bad ones are not that costly. In our repor! t, Pr! ofessor Cain and I found that 88.5 percent of settlements in 2012 were for disclosure only. The median amount that the plaintiffs’ lawyers earned per settlement was about $595,000. That excludes what defendants had to pay their own lawyers, but some would argue that these costs are reasonable to defray the costs of larger cases and to keep the market on its toes.
The second argument is not so much in favor of merger litigation, but an argument that all this litigation is actually for the benefit of targets and buyers as much as it is for plaintiffs’ lawyers. Professor Sean Griffith and Professor Alexandra Lahav argue that merger litigation is merely a way for buyers to obtain releases that accompany any settlement. In exchange, they do not have to worry about new claims popping up from shareholders.
The value to corporations is real. Consider an extensive antitrust litigation going on in Boston, in which plaintiffs†law firms are asserting that private equity firms colluded in their bidding in several mergers. In that case, the plaintiffs are handicapped since many of the private equity firms obtained these releases in connection with their own buyouts. In other words, the private equity firms have benefited from merger litigation and are using the releases obtained from it against the same plaintiffs’ lawyers who are now suing them.
In this situation, by the way, everyone has an incentive to keep merger litigation going - the lawyers for their fees and the companies for the releases. Even the Delaware judges arguably gain by getting exciting cases to decide; without merger litigation, their dockets would be cut by more than half.
But the spate of merger litigation has more detractors than proponents. Many find it useless or distracting. The rise of litigation in every case has led to ! claims th! at frivolous suits are being brought and companies settle them merely to get rid of the claims, not because they have merit.
The rise in litigation has led to concerns that Delaware is losing its cases to other jurisdictions as plaintiffs’ lawyers flee to more favorable state courts. Although Chancellor Strine refused to approve the settlement in Transatlantic, if the Delaware courts do this too often, it will only drive these cases to another state.
This was examined in depth by two law professors, Robert Thompson and Randall Thomas, who argued that the rise in lawsuits is actually more a rise in litigation in multiple jurisdictions. Lawyers are filing in more than one jurisdiction in order to leverage a claim against competitor firms and gain a share of the fees.
In this case, the rise in litigation is actually about fee-shifting among plaintifs. The professors don’t see any significant harm here since this is merely a battle among lawyers.
The squabbling among judges also allows plaintiffs’ lawyers to file in multiple jurisdictions to split fees and to get courts to compete to secure this merger litigation. In another paper, Professor Cain and I found that there is evidence for both of these effects. Lawyers file in jurisdictions where they think they will get better outcomes, while Delaware responds to losing cases by changing its dismissal rates.
In fairness, many in Delaware would dispute our findings, arguing that Delaware is simply deciding cases on the merits and if there are good cases they will go forward and bad ones they will be dismissed.
So what does all this mean For one, Delaware may need to take a closer look at what the proliferation of such suits will mean for its status as the home for deciding corporate law. Delaware has a! great in! terest in keeping these cases, since most of corporate law is Delaware law. Without cases, Delaware’s law is not made, Delaware companies may look elsewhere for guidance and Delaware’s lawyers do not earn fees. And let’s face it, do we really want less experienced and familiar judges outside of Delaware deciding these cases
Delaware is responding. The energetic and brilliant Chancellor Strine recently released an article with two professors, Larry Hamermesh and Matthew Jennejohn, addressing the jurisdictional competition issue. He proposed that other states defer to the state with the most interest in the case in any merger litigation, which coincidentally would oftentimes be Delaware.
The markets have also responded, as more companies have adopted charter bylaws which select Delaware as the only place for litigation. And true to form, the validiy of these bylaws is currently pending issue being litigated in Delaware. However, even if Delaware finds these bylaws valid, other states do not have to honor such a ruling.
So where does that leave us The debate about whether merger litigation is good or bad will continue. But merger litigation seems here to stay. Get used to it.
