Proposals to Address the M&A-Related Litigation Problem
The growing problem of M&A-related litigation has been well-documented on this site (refer for example here). The prevalence of M&A litigation has grown to the point that virtually every M&A transaction involves litigation, and often involving multiple lawsuits in multiple jurisdictions. These growing problems have been well-documented (refer for example here and here), but coming up with solutions has proven challenging.
An October 2012 paper by the U.S. Chamber Institute for Legal Reform entitled “The Trial Lawyers’ New Merger Tax” (here) takes a comprehensive look at M&A litigation and proposes a number of possible legislative solutions to the problems associated with multi-jurisdiction litigation. The paper is being released in conjunction with the U.S. Chamber Institute for Legal Reform’s annual Legal Reform Summit, being held on October 24, 2012 at the U.S. Chamber of Commerce in Washington. D.C.
The paper opens with a description of the current state of M&A-related litigation. The paper certainly does not hold back in characterizing the state of M&A litigation. Among other things, the paper describes M&A litigation as “extortion through litigation” that permits trial lawyers to “hold transactions hostage until they collect a ‘litigation tax’ draining a share of the merger’s economic benefit away from shareholders and into the lawyers’ own pockets.”
The paper includes a detailed review of recent statistical studies documenting the M&A related litigation trends, noting in particular (and citing the Cornerstone Research’s analysis of M&A litigation, about which refer here) that on average each transaction is subject to five lawsuits, and that many deals attract more than 15 suits. In some cases, merger deals have attracted as many as 25 lawsuits.
The paper also notes that increasingly these multiple lawsuits are filed in multiple jurisdictions, which forces defendants “to litigate in numerous jurisdictions that are incapable of coordinating with each other, particularly state courts in different states,” which “dramatically increases the cost of defense and increases the settlement pressure regardless of the merits of the underlying claims.” Because “no procedure exists to consolidate identical cases filed in the courts of different states and in federal court,” judges today “cannot stop the abuse.”
Although there are many aspects of the M&A litigation problem, the paper focuses its proposed solutions on the multiple jurisdiction litigation issue, in part because it is “a principal source of the trial lawyers’ settlement leverage.” The paper suggests several possible legislative reforms to “prevent plaintiffs’ lawyers from exploiting” the burdens imposed by multiple jurisdiction litigation by “eliminating forum shopping and forum multiplication.”
In order to address these issues, the paper suggests three possible legislative reforms (not necessarily mutually exclusive) at the federal level. First, the paper suggests that Congress could “enact a statute requiring all merger-related litigation to be brought in the state of incorporation of the defendant company.” (The paper notes that this proposal has also been advanced by committee of the Association of the Bar of the City of New York.) Second, the paper suggests that Congress could amend the “carve outs” in SLUSA and CAPA to required that class actions brought under the carve-outs “may be filed only in the courts of the defendant company’s state of incorporation.”
Third, to address the fact that many of these merger related lawsuits are brought in federal court, the paper suggests that Congress could enact legislation providing that any lawsuits relating to mergers or acquisitions that are brought in federal court should be transferred immediately to a federal court for the district containing the state capital.
The paper also notes that there is also possibility for legislative reform at the state level, but state legislative reform could be cumbersome and could take time because to be effective it would require enactment by a significant number of states. The paper does note that the M&A litigation problem could be addressed if states enacted legislation specifying the merger objection litigation must be brought in the state of incorporation.
The paper contains a number of possible solutions to the multiple jurisdiction litigation problem which are worthy of further discussion and consideration. There is no doubt that the multiple jurisdiction litigation does nothing to benefit shareholders and in fact accomplishes only the multiplication of legal costs and burdens, and therefore there is no doubt that active steps should be taken in order to try to eliminate this problem.
As important as it is to address the multiple jurisdiction litigation problem, however, it is worth noting that even if the multiple jurisdiction litigation problem is addressed that will not address all of the concerns with M&A litigation. As the paper itself notes about the legislative reforms proposed, “although these reforms will not entirely eliminate the problem of abuse, they will stop the multiplication of litigation and forum shopping and … and enable companies to fight back against unjustified claims” which, the paper concludes, would make it “more difficult for trial lawyers to collect the litigation tax.”
It is probably also worth noting that though the paper’s proposal regarding M&A litigation filed in federal court could reduce the problems when separate M&A-related suits are filed not just in state court but also in federal court, the proposal would not eliminate the problem. Even the transfer scheme that the paper contemplates for the suits filed in federal court would still allow for the possibility of parallel suits proceeding simultaneously in state and federal court. While it would be hoped that the courts would coordinate their actions in order to try to eliminate duplicative litigation burdens and expense, there is nothing about the federal court transfer proposal that would assure that the duplicative litigation would not go forward.
I do think it is interesting that all of the proposals suggested are focused on reforming litigation procedures. The paper does not mention another reform M&A litigation reform proposal that at least for a time had a certain amount of cachet – that was the notion of incorporating a forum selection clause in the company’s charter documents in order to require certain types of shareholder suits to be brought in the courts of the company’s state of incorporation. This idea certainly has its advocates; however, as discussed here, companies that adopted these forum selection by laws found themselves targeted in a wave of shareholder suits challenging the by-laws. It appears that with the litigation and controversy, the forum selection by-law idea may not enjoy the same currency that perhaps it once did.
I will say that by addressing the multiple jurisdiction problem rather than trying to come up with a broader proposal attempting to eliminate abusive M&A-related litigation altogether, the paper has chosen a target about which it will easier to reach a consensus on the need for reform and that can be addressed at least in part with some identifiable legislative actions. The reform proposed in the paper is achievable and could help to reduce a serious problem facing corporate America. It is not necessary to agree with all of the paper’s rhetoric in order to agree with the proposed legislative reforms. The proposals suggested in the paper are serious and merit further discussion and consideration and I hope that Congress will take up these issues – at least once they have addressed the looming “fiscal cliff.”
Towers Watson Launches 2012 D&O Liability Insurance Survey: Towers Watson is once again taking up its annual D&O Liability Insurance Survey. This survey has a long and venerable tradition in the D&O insurance industry. The Survey went off-line briefly for a few years, but now it is back. The annual survey report, which Towers Watson makes freely available, is a valuable resource for everyone in the D&O insurance industry.
Because the survey results are so valuable for everyone in the industry, everyone participant has a stake in seeing that the survey is as representative as possible of the overall D&O industry. The survey is only as good as the data that results from the survey participants, and the more participants there are the better will be the survey results. So everyone has a stake in seeing that as many D&O insurance buyers as possible complete the survey.
The 2012 Towers Watson D&O Liability Insurance Survey can be found here. I hope that every D&O Diary reader will forward the survey link to their clients and encourage them to complete the survey. Again, the more companies the complete the survey the better the form will be. So please take the time to forward the survey to your client companies and encourage them to complete the survey form. Please note that the survey must be completed by November 30, 2012.
A summary regarding the 2011 Towers Watson D&O Liability Survey can be found here.
It is interesting that the Chamber, usually opposed to government "interference" with business (meaning any kind of regulation) advocates curtailment of plaintiffs rights as the only solution for this "tax" on mergers.
It is especially interesting that the Chamber sees legislative action at the federal level as appropriate. As you point out ( and the paper does touch on, obliquely, on the second to last page), many of the legitimate issues raised by this paper can be resolved by better drafting of corporate documents. If forum shopping or multi-state litigation is an issue, the corporation can prevent those problems by using choice of forum provisions.
There are nuisance cases out there and lawyers ("rapacious jackals" to borrow a phrase from earlier times) who are more interested in fees than their clients. To tar all M&A plaintiffs with that brush, however, is short sighted.
The paper, which I only skimmed, does not seem to address several questions: if the legal climate for M&A activity is so bad, why doesn't it discourage mergers and acquisitions?
If it is an issue that none of these cases go to trial, as the paper emphasizes, whose decision was that? Defendants are not forced to settle cases- they choose to do so. If the deals are so good that the litigation is unwarranted, then why settle?
In reality, this kind of litigation is decided largely on the papers. The litigants have often gone through dismissal motions and summary judgment, which crystallize the issues. Trials are rarely necessary because the key issues have been decided.
Yes, litigation is expensive, but if a "feeding frenzy" has been unleashed, is it because merger partners are eager to settle?
Further, while the plaintiffs' attorneys fees are often apparent, aren't defense costs just as high, or higher? Having worked at two very large firms, I have seen cases in which the legal fees far exceeded any amount at issue.
The underlying notion of this paper is that businesses should be able to do as they please, when they please, without interference, but that shareholders (who are the plaintiffs in these cases) do not deserve the same right.
Many of the plaintiffs in these cases are substantial shareholders, using the same kind of white shoe law firms that the corporations themselves use. Is it possible that the cases may, sometimes, even have merit? The paper proposes legislation which will deter all litigation, regardless of merit.
Lastly, the report - and all reports on this subject - use the same statistics about large deals and large public companies. There is no indication that these deals were deterred or even slowed by litigation, only that the parties spent money in litigation. There is no information on smaller deals, or private deals.
Large transactions affect large numbers of people, shareholders especially. Those affected may want a voice in the process, which is often simply presented to shareholders as a done deal.
Some of the litigation involves transactions in which senior management - the ones negotiating the deal - receives outsized compensation or special advantages to the detriment of shareholders. Is it appropriate to suggest that shareholders have no right to try to derail these deals?
My personal belief is that participants in mergers often want to rush deals through, almost assuring a "marry in haste, repent in leisure" scenario. How many transactions have been deemed failures because of issues that might have been uncovered had the transactions been conducted in a more deliberate fashion?