The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

Plaintiff law firms continued to file lawsuits in connection with virtually every mergers and acquisitions transaction in 2012, according to an updated report from Cornerstone Research. The February 2013 report, which is entitled “Shareholder Litigation Involving Mergers and Acquistions” and which was authored by Robert M. Daines of Stanford Law School and Olga Koumrian of Cornerstone Research, shows that plaintiff law firms filed lawsuits on behalf of shareholders in 96 percent of M&A deals valued over $500 million and 93 percent of transactions valued over $100 million. Cornerstone Research’s February 28, 2013 press release regarding the report can be found here. The report itself can be found here.

According to the report, the litigation rate involving M&A deals in 2012 was essentially unchanged from 2011. In both 2011 and 2012, about 93% of all deals valued over $100 million attracted litigation, and 96% of all deals valued over $500 million attracted litigation. Deals valued over $100 million attracted an average of 4.8 lawsuits per deal in 2012 (down slightly from 5.3 per deal in 2011) and deals valued over $500 million attracted an average of 5.4 lawsuits in 2012 (down from 6.1 in 2011).

The report notes that after a contrary trend in recent years, in 2012 a larger percentage of cases were filed in Delaware. In 2012 39% of all M&A lawsuits were filed in Delaware compared to only 25% as recently as 2012. For Delaware Corporations, 16% of deals were challenged only in Delaware, compared with 9% in 2011 and only 2% in 2009.

Of the 58% of cases filed in 2012 that had been resolved, the majority (64%) settled. 33% of the resolved cases were dismissed and 3% were voluntarily withdrawn. (These case outcomes are roughly equal to prior years, although with a certain number of the 2012 cases yet unresolved the settlement rate is slightly higher than prior years.)

Of the 2012 cases that were settled, 81% of the settlements involved only additional disclosures (compared to 88% in 2011 and 76% in 2010). According to the report, “the parties in only one settlement acknowledged that litigation contributed to an increase in the merger price.” The deal termination fee was reduced in four cases and the parties reached agreement about appraisal rights in six cases. There were two large settlements in 2012, both relating to transactions announced in 2011: the $110 million settlement in the El Paso/Kinder Morgan case and the $49 million settlement in the Delphi Financial/Tokio Marine case.

The report includes a detailed table of the ten largest M&A lawsuit settlements during the period 2003-2012. As the report notes, most of the larger settlements in the table “included allegations of significant conflicts of interest.”

The average agreed-upon attorneys’ fee for the 2012 settlements was $725,000, The average fee in a disclosure only settlement was $540,000, down from $570,000 in 2011 and $710,000 in 2010. The report includes an analysis of the factors that influence the size of the fee request. The report notes that “plaintiff attorney fees appear to be influenced by the following factors: size of the settlement fund; other monetary benefit to shareholders; number of suits filed; time to settlement; and overall deal value.”

The report concludes with a review of the emerging litigation involving shareholder challenges relating to annual proxy votes and disclosures about executive compensation, which mounted quickly as 2012 progressed. The report notes that “as the 2013 proxy season approaches, this litigation may expand.”

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Litigation related to M&A activity continued at an “extremely high rate” in 2012, according to the latest research update from Ohio State law professor Steven Davidoff and Notre Dame business professor Matthew Cain. According to the professors’ analysis, presented in their February 1, 2013 paper entitled “Takeover Litigation in 2012” (here), 91.7% of all merger transactions that met the professors’ criteria attracted at least one lawsuit, compared to 91.4% in 2011.

The professors’ paper is the latest update on their research originally presented in their January 2012 article entitled “A Great Game: The Dynamics of State Competition and Litigation” (here), which I reviewed here. Following the original article’s publication, the professors updated their research with additional litigation data regarding M&A transactions that took place in 2011. Their latest paper updates their research with regard to 2012 transactions.

The professors have limited their analysis to merger transactions over $100 million involving publicly traded target companies with an offering price of at least $5 per share. The 2012 update includes only transactions there were completed as of January 2013. The professors intend to update their 2012 data in six months to incorporate information relating to the in process transactions.

It is probably worth noting that there were fewer deals that met the professors’ sorting criteria in 2012. There were only 84 deals with the defined characteristics in 2012, compared to 128 in 2011 (representing a year over year drop of 34%). But the percentage of deals attracting at least one lawsuit remained virtually unchanged, with 91.7% of deals attracting at least one suit, compared to 91.4%. The professors believe based on anecdotal evidence, that when they update their 2012 “the ultimate litigation rate will match or exceed the 91.7% figure.” Though the litigation rate is virtually unchanged from 2011, the 2012 rate is “almost 2.5% that of 2005,” when the litigation rate was only 39.3%.

The number of complaints brought per transaction remained at about 5.0 lawsuits per transaction, the same rate as in 2011 but more than double the mean number of lawsuits in 2005, when the figure was 2.2/ Multi-jurisdiction litigation “remained similar in 2012 with 50.6% of transactions with litigation experiencing litigation in multiple states,” compared to 53% in 2011.

87.5% of all 2012 cases that had settled involved “disclosure only” settlements, compared to 79.5% in 2011. The average attorneys’ fees were down substantially in 2012, but that may be driven by a few larger settlements in 2011. The median attorneys’ fee award was about the same both years -- $580,000 in 2011, $595,000 in 2012.

Delaware attracted a slightly reduced share of M&A litigation in 2012. The state attracted 46.7% of all litigation that could have been filed in there in 2012, compared with 52.8% in 2011. Delaware “also appears to be dismissing fewer cases, thus allowing more cases to be settled” – 76.9% of Delaware cases settled in 2012, compared with 61.5% in 2008. The authors note, referencing their original paper, that “when Delaware loses cases to other jurisdictions it historically has dismissed fewer cases and allowed more to settle, consistent with conduct designed to reattract litigation.”

Discussion

Because of the authors’ sorting criteria, their analysis and conclusion are most relevant to the larger transactions. However, based on my own observations, the authors’ conclusions are consistent even with respect to the smaller deals that do not meet their sorting criteria. The explosion of M&A-related litigation in recent years has not been limited just to the larger companies and transactions.

The surge in M&A related litigation in recent years has been one of the principal justifications the D&O insurance carriers have given as an explanation for their efforts to try to increase the insurance rates, particularly with respect to the rates for primary D&O insurance. In addition, the upsurge in M&A-related litigation has also affected the terms and conditions that the carriers are willing to offer. In particular, some carriers have been insisting on adding a separate, larger retention for M&A-related claims. The professors’ updated M&A-related litigation date seems to suggest that the carriers will try to continue to push rate and to try to include separate M&A-related claim retentions.

As I detailed in a prior post (here), the defense expenses and settlement amounts associated with M&A-related litigation represent a serious problem, for the companies involved and for their insurers. The prevalence of the multi-jurisdiction litigation is a particularly vexing problem, as the proliferating lawsuits are expensive to defend and difficult to resolve.  Unfortunately, based on the professor’s updated research, all signs are that these phenomena will remain a significant part of the corporate and securities litigation landscape for the foreseeable future.

Special thanks to Professor Davidoff for providing me with a copy of his latest paper.

Chinese Reverse Merger Cases: Is There a “China Discount”?: During 2010 and 2011, and to a lesser extent during 2012, the plaintiffs’ securities lawyers rushed to file securities class action lawsuits against Chinese companies that had obtained a U.S. listing through a reverse merger. But while these cases flooded the courts, they have not proven to be a huge bonanza for the plaintiffs’ lawyers or their clients. As I noted in a prior post, the settlement so far have been rather modest.

Michael Goldhaber’s February 12, 2012 Am Law Litigation Daily article entitle “Whither Chinese Reverse Merger Litigation?” (here) suggests that there may be a “China discount” in the Chinese reverse merger cases. The article quotes a defense attorney with the Sherman & Sterling law firm as saying that there is now a “critical mass of settlements between $2 million and $3 million” and that these lower settlements “may exert a gravitational pull on other settlements down the road.” The article notes that “the remarkable uniformity of the settlements suggests that $5 million D&O insurance policies are standard for this niche,” adding that a policy of that amount allows enough for defense fees and a settlement compromise with in the policy limit.

The two arguable exceptions to these generalizations both involve proceedings outside the U.S. The first is the $77.5 million Hong Kong arbitration award that C.V. Starr obtained against the founding shareholders of China MediaExpress Holdings (about which refer here) and E&Y’s $118 million December 2012 settlement of a Canadian class action arising out of its audit of Sino-Forest Corporation (refer here). Though these two exceptions each have their own distinct characteristics, these developments may hearten the claimants in the other cases and give them the incentive to continue to try to press on. The evidence so far, however, suggests the greater likelihood of the more modest settlements that have tended to become the norm.

A particularly interesting feature of the Am Law Litigation Daily article is a link to Sherman & Sterling document provided a comprehensive status summary of more than 75 disputes in U.S. forums relating to allegations of securities violations by Chinese parties, including more than 50 reverse merger companies. The summary document can be found here.

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As I have frequently noted on this blog (most recently here), one of the most distinctive litigation phenomenon has been the rise in litigation involving M&A activity. It has gotten to the point that virtually every merger now also involves a lawsuit (or, more often, multiple suits). These cases have proven attractive to plaintiffs’ lawyers because the pressure to close the deal has allowed the claimants to attract a quick settlement, often involving an agreement to publish additional disclosures or adopt corporate therapeutics and the payment of plaintiffs’ attorneys’ fees.

However, as noted in a November 9, 2012 post on the Harvard Law School Forum on Corporate Governance and Financial Reform by Boris Feldman of the Wilson Sonsini law firm, there recently has been a new twist to the M&A litigation phenomenon; increasingly, plaintiffs’ lawyers have “refined their business model” and now they aim to “keep the litigation alive post-close.” Moreover, Feldman notes, the plaintiffs are pursing these post-close M&A cases “even in situations where objective factors suggest a lack of merit to the claims: e.g., high premium; no contesting bidders; overwhelming shareholder approval; customary deal terms.”

Feldman posits three reasons that plaintiffs’ attorneys are pursuing these post-close merger claims. First, due to changes in the plaintiffs’ bar, some lawyers are struggling to modify their business model, as a result of which some lawyers have “decided to pursue cases that they would have let run dry in the past.”

Second, Feldman acknowledges that the post-close cases have their own in terrorem value, even if it is only a form of “nuisance value.” The continuing case subjects corporate executives to time-consuming and burdensome discovery, sometimes in the context of a deal that may or may not have worked out all that well. The case also threatens a trial on processes and analysis that led to the acquisition, a form of exposure the company may prefer to avoid. Therefore, Feldman notes, “even post-close suits have some ‘go away’ value to the surviving company.”

Third, Feldman speculates that at least some of the plaintiffs’ attorneys may be pursuing a longer term strategy, by showing that they are willing to persevere for years, even in a weak case, in the hope that the defendants “may just say ‘pay them and get rid of it’ before the deal closes.” By these lights, “a plaintiffs’ lawyer rationally could pursue a frivolous case, at great expense, post-close, even with low odds of getting a recovery, “simply as a way to improve the profitability of the rest of his inventory.”

Feldman notes that the post-close merger cases have their own peculiar dynamic, different than the dynamic of cases pre-close. Among other things, post-close, the plaintiffs’ lawyers have an incentive to try to drag things out. Pre-close, the plaintiffs’ lawyers want to accelerate procedures and discovery, to keep the pressure on the parties to the underlying transaction to settle the case. Post-close, the plaintiffs want to keep the case as long as they can, in part on the hope that as time goes by they might manage to find documents or other materials or information that will support their case, and in part on the hope that as time goes by, the defendants will get weary of the case and pay to make it go away.

According to Feldman, defendants in these post-close cases may want to take a more active role, and in particular actively push toward summary judgment. He suggests that though courts have been reluctant to grant summary judgment in the past, judges will “eventually decide that most merger claims are strikesuits and will extirpate them before trial.”

As support for this contention that more courts may be willing to grant summary judgment in post-close cases, Feldman cites the recent grant of summary judgment in favor of Intel in the case arising out of Intel’s acquisition of McAfee. (In a November 2, 2012 order (here), California Superior Court Judge James P. Kleinberg granted the defendants’ motion to dismiss in the case, just two weeks prior to the scheduled trial date.)

With reference to the grant of summary judgment in the Intel case, Feldman argues that the plaintiffs’ Achilles Heel in the cases may be the exculpatory provisions in the Delaware Corporations Code, which preclude damage claims against directors for breaches of fiduciary duty unless plaintiffs can establish serious conflicts of interest or bad faith. Feldman contends that “it will be the rare case indeed where plaintiffs have such evidence against a director, much less a majority of the Board.” Feldman predicts that many more courts will be willing to jettison cases at the summary judgment stage on this basis.

Finally, Feldman notes that even if these cases survive summary judgment, they could prove difficult for the plaintiffs. The cases are challenging to try to settle, as there are no opportunities for non-monetary settlements and as the justification for additional deal consideration will be lacking after shareholder approval. At the same time, the cases will prove difficult for plaintiffs to try, as, Feldman suggests, “very few judges will be willing to second-guess the decisions of independent, well-advised boards of directors as to what their company was worth.” In the final analysis, Feldman suggests, the “ultimate irony” may be that even if plaintiffs’ keep their cases alive post-merger, they will have difficulty figuring out “a way to monetize them that survives judicial scrutiny.”

I think Feldman’s analysis is interesting, particularly his estimation of the strong likelihood that defendants will prevail if they push the post-close merger cases to summary judgment or trial. At the same time, however, I think it is important to note that Intel’s summary judgment victory was considered noteworthy precisely because it was so unusual for the defendant company to continue to fight the continuing litigation. (See for example, Nate Raymond’s commentary about the summary judgment ruling on the On the Case blog, here.)

Even if Feldman is right about the defendants’ prospects if they continue to fight these cases, the far likelier outcome is that the defendant companies will, as the plaintiffs’ undoubtedly hope, tire of the cases rather than fighting them and seek some type of a compromise. Unfortunately, the plaintiffs’ may continue to pursue post-close merger cases as a way to try to extract something from the merger, even if they are unable to secure a pre-close settlement, simply because the likeliest outcome is that they will eventually get rewarded for doing so. Whether more companies will, like Intel, prove willing to fight the cases remains to be seen.

Rating Agencies Take Another Hit: In a post last week, I noted the decision of an Australian Court holding S&P liable for ratings of certain complex financial instruments. The rating agencies took another hit later in the week, in a decision by an Illinois state court judge denying the motion of McGraw-Hill, S&P’s parent, to dismiss an action brought against the rating agency by the Illinois attorney general. The court’s ruling that the alleged misrepresentations are not protected opinion is particularly noteworthy.

Illinois Attorney General Lisa Madigan had commenced the action, alleging that during the period 2001 through 2008, S&P had misled the investing public by claiming that its ratings of certain structured financial products were independent, objective and unbiased. The AG alleged that the rating agency’s repeated representations regarding its independence and objectivity were demonstrably false. The Illinois AG asserted claims under the Illinois Consumer Fraud and Deceptive Business Practices Act and under the Uniform Deceptive Trade Practices Act. The defendants moved to dismiss.

In her November 7, 2012 opinion (here), Illinois (Cook County) Circuit Court Judge Mary Ann Mason denied the defendants’ motion to dismiss. Her opinion emphasized certain alleged attributes of the ratings themselves. That is, first, that because of the alleged “opaque” nature of the securities (meaning that there was no ready source of information by which investors could otherwise gauge the investments), the rating agency’s assertion that its ratings were independent, objective and unbiased were “of enhanced importance to investors.” Second, because the opinions allegedly were issued pursuant to an “issuer pays” business model, as a part of which the rating agency’s had an incentive to provide the rating the issuer desired in order to secure future business, “allowed the profit motive to override its objectivity and independence.”

The defendants moved to dismiss on the ground that its ratings represent protected opinion. However, as Judge Mason noted, the AG’s claims are not based on the rating agency’s opinions but rather its “repeated statements of fact regarding S&P’s independence and objectivity.” Judge Mason expressly rejected the defendants’ arguments that the ratings were protected by the first amendment, because the statements about the agency’s objectivity and independence and not simply opinions; that are, Judge Mason said, “verifiable representations regarding the manner in which S&P assures the integrity and independence central to the credibility of its ratings.”

Judge Mason went on to note that “the logical extension “ of the defendants’ arguments “would be to immunize rating agencies from investor claims based on investor claims clearly intended to influence those same investors.” She noted that the entire value of the system from which the rating agencies hope to profit “depends on the investing public’s confidence in the credibility and independence of its ratings.” If the investors lack that confidence, the “ratings lose their value to issuers and issuers lack motivation to seek out the agency’s ratings in the future.”

Judge Mason’s ruling is interesting and her reasoning could be persuasive to other courts, at least in other cases in which the misrepresentation that rating agency defendants are alleged to have made relate to the agencies’ supposed independence and objectivity. However, as Alison Frankel notes in an interesting November 9, 2012 post on her On the Case blog (here), Judge Mason’s ruling may not open the floodgates; in particular, as Frankel notes, federal laws may preempt claims against rating agencies involving post-2007 conduct. It could be that Judge Mason’s reasoning is less useful in cases involving alleged misrepresentations after 2007, and the pre-2007 alleged misrepresentations may be untimely.

Libor Investigations in Asia: In earlier posts (refer, for example, here), I have examined the regulatory investigations into possible manipulation of the Libor benchmark interest rates. A number of countries are also investigating possible Libor manipulation, including countries in Asia. As detailed in an interesting November 2012 memorandum from the Ince & Co. law firm entitled “LIBOR – The Asia Story” (here), the Asian countries investigating possible Libor or other benchmark interest rate manipulation include Singapore, Korea, and Japan. Interestingly, the related developments in Singapore include a lawsuit brought by an RBS trader who claims he was wrongfully terminated for his involvement in benchmark rate manipulation in order to deflect attention from the bank for its involvement in the Libor scandal.

The authors of the Ince law firm memo include my good friends Nilam Sharma and Aruno Rajaratnam, and their colleague Victoria Gregory.

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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.

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During last week’s PLUS D&O Symposium, several of the panels discussed the problems surrounding the current onslaught of M&A-related litigation – and appropriately so, as the surging levels of M&A litigation is one of the most distinct and troubling current litigation trends. During the course of the discussion at the conference, several of the speakers referenced developments, materials and statistics. I thought it might be useful to assemble these various references in one site. (I have linked to some of these resources in prior posts on this site.)

First, though, by way of background about M&A-related litigation developments, I thought it might be useful to reference and to link to a recent paper that provides a good introductory explanation of what the M&A-related litigation is all about. In a February 6, 2012 paper entitled “Anatomy of a Merger Litigation” (here), Douglas Clark of the Wilson Sonsini law firm and Marcia Kramer Mayer of NERA Economic Consulting walk through the litigation developments surrounding a single merger transaction, by way of illustration and as a vehicle to discuss and consider a variety of aggregate statistics regarding merger litigation. The paper provides a useful starting point for understanding the current M&A-related litigation phenomenon. NERA's related statistical analysis of M&A litigation can be found here.

With respect to the conference panels, I am sure that many attendees were as struck as I was by the statement of Stanford Law School Professor Michael Klausner that if you take state court M&A-related litigation into account, then corporate and securities litigation filings are at “an all-time high.” I have in fact made the same point myself, but it just has so much more credibility coming from Professor Klausner. In making these statements, Professor Klausner was referring (with respect to the state court M&A litigation) to the recent Cornerstone Research paper entitled “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions” (here).

In connection with the initial panel discussion of these litigation statistics, John Spiegel of the Munger Tolles law firm referred to a recent paper by Ohio State University Professor Steven Davidoff and Notre Dame University Finance Professor Matthew Cain. The January 1, 2012 paper, entitled “A Great Game: The Dynamics of State Competition and Litigation” can be found here. (I discussed Professors Davidoff and Cain’s paper in a prior post, here.)

Among the many issues discussed relating to the M&A-related litigation were the problems associated with multiple suits pending in separate jurisdictions relating to the same transaction. Among the suggestions that have been proposed as a way to avert the problems associated with multi-jurisdiction litigation and to discourage plaintiffs from forum shopping is the adoption by companies of a by-law amendment designating Delaware as the sole forum for all corporate and securities litigation. This suggestion has attracted a great deal of interest and a number of companies have adopted by-law amendments designating Delaware as the sole forum for corporate and securities litigation.

As several of the panelists mentioned during the conference, certain plaintiffs’ lawyers have now launched a litigation assault on these by-law amendments. On Monday and Tuesday this past week, the lawyers filed at least nine complaints against companies that had adopted these types of by-law amendments. Nate Raymond’s February 8, 2012 Am Law Litigation Daily article discussing the suits can be found here. Alison Frankel’s February 8, 2012 article on Thomson Reuters News & Insight about the cases can be found here. Francis Pileggi’s February 7, 2012 post about the cases on his Delaware Corporate and Commercial Litigation blog can be found here.

The nine companies targeted in the suits are: Chevron; Priceline.com; AutoNation; Curtiss-Wright; Danaher Corporation; Franklin Resources; Navistar International; SPX Corporation: and Superior Energy Services. An example of one of the complaints, which are substantially the same, can be found here.

The plaintiffs complain that the by-law applies to broad categories of kinds of litigation, is not limited just to derivative or class litigation, and applies to individual claims. But while the shareholders are required by the by-laws to bring their claims in Delaware, the bylaws provide no forum restrictions on the corporations themselves. The plaintiffs also complain that the bylaws seemingly require claim to be brought in Delaware even where there may not be personal jurisdiction over prospective defendants (for example, in connection with claims against individual directors and officers).

The plaintiffs in these suits seek a judicial declaration that the by-laws are invalid. The interesting attribute of the by-laws in dispute is that in each case, the by-laws were adopted by board action and not put to shareholder vote. So even if these particular board adopted by-laws are struck down, the cases may not address the question of whether a forum selection by-law that has been adopted by shareholder vote can be enforced (for example, on former shareholders, or even where there is no personal jurisdiction over prospective defendants).

It is worth noting that in the only judicial decision to date to consider a forum selection by-law, the by-law was found to be unenforceable. As discussed here (scroll down), in January 2011, Northern District of California Judge Richard Seeborg found Oracle’s forum selection by-law to be unenforceable, in part because it had not been put to shareholder vote. Because Seeborg was applying federal common law rather than Delaware law, his ruling may have only limited impact on the Delaware proceedings.

At least one member of the Delaware Chancery Court has voiced his approval at least of the concept of a forum selection by law; in the Revlon Shareholders’ Litigation, the Delaware Court of Chancery suggested that corporations organized under Delaware law are "free" to adopt "charter provisions selecting an exclusive forum or inter-entity disputes." In the wake of this suggestion, many lawyers began to recommend that their client companies adopt charter provisions designating the Delaware Court of Chancery as the preferred forum. The newly filed litigation may provide guidance on this important issue.

Finally, if you have not yet checked it out, the PLUS Blog has a number of video highlights from the PLUS D&O Symposium, including among other things an interview with yours truly.

Another FDIC Failed Bank Lawsuit: Another topic of discussion at the PLUS D&O Symposium was the growing wave of FDIC litigation against former directors and officers of failed banks. On Thursday, February 9, 2012, the FDIC filed its latest lawsuit in the District of Nevada, against four former officers of the failed Silver State Bank of Henderson, Nevada. The FDIC’s complaint can be found here.

The lawsuit is the 22^nd that the FDIC has brought as part of the current bank wave. Interestingly, this complaint was brought well over three years after the September 2008 failure of Silver State Bank. Informed sources advise that the parties had entered a tolling agreement. A February 10, 2012 Las Vegas Review-Journal article discussing the new suit can be found here.

A Preview of Warren Buffett’s Annual Letter to Shareholders: Berkshire Hathaway’s 2011 annual report will not be published for a few more weeks yet. But readers interested in a preview of Warren Buffet’s annual letter to Berkshire shareholders, which is the highlight of the company’s annual report, may want to take a few minutes to review an excerpt of the forthcoming letter that was published on February 9, 2012 in a blog on the CNN Money website (refer here). The basic thrust of the excerpt is that due to the impact of inflation and taxation, stocks outperform bonds and gold. The interesting excerpt is vintage Buffett.

“Investing,” Buffett writes, “is forgoing consumption now in order to have the ability to consume more at a later date.” Real risk then is not volatility, but the possibility that your investment will lose purchasing power -- that is, that you will actually only be able to consume less later. Investments denominated in currentcy, such as bonds or money market funds, though often charactized as "safe"  lose value due to the "inflation tax," not to mention actual taxes. Buffet says, "right now, bonds should come with a warning label." .

A Piano Duet: For today’s musical interlude, I feature a video of a 90-year old couple, playing an entertaining piano duet in the atrium of the Mayo Clinic. They have been married 62 years and they can still play a mean piano.

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