In response to concerns that virtually every merger transaction was attracting at least one lawsuit, Delaware’s legislature and judiciary acted to try to cut down on the merger objection litigation in the state’s courts. In 2015, Delaware’s legislature adopted a provision expressly allowing corporations organized under the state’s law to adopt bylaw provisions designating Delaware’s courts as the exclusive forum for shareholder disputes. Delaware’s courts, in a series of decisions culminating in Chancellor Bouchard’s January 2016 decision in Trulia, made it clear that in most cases the courts will no longer support the kind of disclosure-only settlements by which these cases frequently were resolved.
But what has the impact of these changes been? That is the subject of a February 23, 2017 paper entitled “The Shifting Tides of Merger Litigation” (here) written by Matthew Cain of the SEC; U. Penn. Law Professor Jill Fisch; U.Cal. Berkeley Law Professor Steven Davidoff Solomon; and Vanderbilt Law Professor Randall Thomas. The authors conclude that there has been “a tidal wave of change in the merger objection litigation industry.”
The impact of the Delaware’s legislative and judicial actions has been to decrease the volume of merger litigation; to increase the number of cases that are dismissed; to shift the number of cases that are filed from Delaware’s courts to other states’ courts and to federal courts, and to reduce the size of attorneys’ fee awards.
This new paper, which is summarized in a March 1, 2017 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation (here), provides important statistical analysis of the changing dynamics of deal litigation and includes some predictions on what may lie ahead, as well as some words of caution about too quickly jumping to conclusions about what the early indications may mean.
In order to assess the impact of the changes in the Delaware legislation and Delaware case law on merger-related litigation, the authors examined merger transactions over $100 million involving publicly traded target companies with an offering price of at least $5 per share. (This research updated prior research by two of the four contribution authors, Solomon and Cain.)
The authors found that “the 2016 filing numbers show the immediate impact of Trulia and its cohort.” The authors found while merger objection transaction litigation peaked in 2013 with an “astounding” 96% of all transactions attracting at least one lawsuit, the number of deals attracting litigation has dropped since then. In 2016, the number of transactions attracting at least one lawsuit fell to 73% of all completed deals.
Perhaps even more significantly, the number of deals attracting a lawsuit in Delaware fell from 61% in 2015 to 32% in 2016.
At the same time that the Delaware merger objection lawsuit filings decreased, the filing of merger objection lawsuits in other states courts has increased. Other state filings increased from 51% in 2015 to 65% in 2016.
The “most significant increase” in 2016 filings is in federal court filings, which increased from 20% of filings in 2015 to 37% of filings in 2016. The number of cases attracting litigation in multiple jurisdictions has also decreased from earlier years; in 2013, for example, 61% of transactions involved litigation in multiple jurisdictions, whereas in 2016, 37% of transactions involved litigation in multiple jurisdictions.
The authors also analysis also shows that “the effects of Trulia and other decisions which have affected the ability to settle cases for a disclosure-only outcome are clear.” In 2016, 22% of settlements were rejected or otherwise withdrawn by counsel, compare to a largely 0% rate in years before 2014.
The attorneys’ fees available to plaintiffs’ counsel in disclosure only settlements has also declined. The median attorneys’ fees in disclosure-only settlements declined from a high of $575,000 in 2009 to $320,000 in 2016. The authors suggest that “the drop may be attributable to judges viewing disclosure-only settlements as providing lower value to shareholders in the wake of Trulia and its progeny.”
The authors also examine the numbers of cases settled in Delaware as a percentage of deals involving Delaware-incorporated target companies for which litigation is brought. The analysis shows that these Delaware settlements represented only 5% of all settlements in 2016, compared to 55% in 2014 and 40% in 2015. This drop, the authors suggest, shows that “plaintiffs’ attorneys are avoiding Delaware for their settlements and dispositive litigation.” However, the analysis also shows that Delaware awards higher attorneys’ fees, while at the same time dismissing more cases. The authors suggest that the higher fee rate may be intended to “compensate for this dismissal rate.”
At the same time that Delaware-court settlements declined, the number of federal court settlements has increased. Federal court cases represented 0% of merger objection lawsuit settlements in 2009, whereas in 2016, federal court settlements represented 31% of all settlements in 2016.
The authors also found that the overall average number of suits per transaction with litigation in any jurisdiction dropped from 4.5 in 2015 to 2.9 in 2016. Delaware-only suits dropped from an average of 3.7 suits to 2.3 suits per completed deal.
To summarize their analysis of their empirical data, the authors note that there has been a “significant shift in merger litigation practice post-Trulia.” Fewer merger objection lawsuits are being filed, particularly in Delaware. At the same time, there has been a shift from Delaware towards federal court, to avoid forum-selection clauses and Trulia. There has been an overall reduction in the size of attorneys’ fee awards. There also appear to be higher rates for cases generally.
However, the authors also emphasize that “our findings are necessarily preliminary,” based on the relatively limited data that has accumulated in the short time since the various changes came about. They also note that because of the study’s short time frame, “we cannot evaluate the long-term consequence for Delaware law.”
What all this may mean in the longer run depends how other jurisdictions’ courts may react. The authors note that at least one federal circuit court – the Seventh Circuit in its 2016 decision in the Walgreen case (discussed here) – has express adopted Trulia’s skepticism of disclosure-only settlements. By contrast, the New York Court of Appeals in its recent decision in the Verizon case (discussed here) refused to apply Trulia to a merger objection lawsuit settlement involving a Delaware corporation, instead imposing “an easier to meet standard for its approval of a disclosure-only settlement.” The situation is clearly a “work in progress” as judges and litigants “work through the implications of the new legal climate.”
The authors note that plaintiffs’ lawyers are highly adaptive and respond to incentives, which raises the question of what alternatives the lawyers may pursue as merger objection litigation becomes more challenging. One possibility the authors suggest is that the plaintiffs’ lawyers may seek to pursue appraisal litigation. The authors note that there was an increase in appraisal litigation in Delaware. However, the authors also caution that Delaware’s courts have also recently adopted a presumption in appraisal proceedings that in a well-shopped deal, the merger price represents fair value of the target company’s stock. This development, along with 2016 legislation narrowing the circumstances in which plaintiffs’ may bring appraisal claims, “dramatically reduc[es] the potential upside of bringing an appraisal claim.”
The authors conclude with a meditation on the problems associated with cutting too wide of a swath in the ability of plaintiffs to be able to bring shareholder claims in Delaware. The authors note that overly extensive efforts to restrict the availability of shareholder remedies could wind up eliminating the availability of remedies for meritorious claims. From Delaware’s own perspective, if it becomes too unfriendly to shareholder claims, litigants could seek be driven to other jurisdictions, which in turn could undermine the interests of the Delaware bar and could also affect the ongoing competition between states for the lucrative business of incorporating companies.
For that reason, the authors suggest that Delaware’s courts should “hold off on further litigation reforms,” noting that “caution is warranted” until the “full impact” of recent changes has been “incorporated into the merger ecosystem.” When sufficient data has accumulated and enough time has passed, “Delaware can determine whether its litigation system provides an appropriate balance between protecting shareholder value and limiting litigation abuse.”
Interestingly, the authors found little evidence of “collusion,” that is, of cases in which defendants appear to be ignoring forum selection clauses in order to try to reach a disclosure-only settlement in a jurisdiction other than Delaware. This analysis stands in interesting contrast to the analysis of Fordham Law School Professor Sean Griffith, discussed here, in which Professor Griffith suggested the defense counsel are “complicit” in circumventing forum selection clauses, and arguing based on that analysis that companies should adopt “no pay” bylaw, barring corporations from reimbursing stockholders for attorneys’ fees and expenses incurred in merger litigation. The authors of the paper discussed above, who specifically refer to Professor Griffith’s paper in a footnote, seem to suggest that the adoption of these kinds of solutions at this point may be premature, and that they are wary of proposed solutions that could sweep overly broadly and burden the ability of shareholders to bring meritorious claims.
A New Feature: Readers’ Travel Pix!: Regular readers know that for several years, I have been publishing travel blog posts that include pictures of the various places I have visited. I have had lots of fun doing this. It recently occurred to me that there is no reason for me to keep all of the fun to myself. So today I am instituting a new feature – periodically, I will publish on this site travel pictures that readers have submitted. If you would like to have one of your travel pics published on this blog, please send it along to me in .jpeg format, with a brief description of where and when it was taken and what you were doing when you took the picture. I should caution in advance that in all likelihood I will only be able to publish a few of the pictures that readers submit, so please understand if you submit a picture and it doesn’t get published.
To get thing started, I have published below a travel picture submitted by loyal reader James Roskopf of INSURICA in Plano, Texas. He took this picture while in Death Valley, California, hiking with his brothers.
Thanks James for submitting this great picture! (I liked it so much that when I saw it, that’s when I came up with the idea for instituting this new feature.) Sorry I had to shrink the picture but the full-sized version involved more data than this site can support.
So, readers, please let me know if you have a travel pic that you would like to have published on this site. Again, I can’t promise that if you submit a picture that it will get published, but I will try to publish as many of them as I can. I look forward to seeing everyone’s pictures!