In a prior post (here), I examined the mounting problems associated with the increasing levels of M&A-related litigation. A recent academic paper takes a closer look at these issues and concluded, among other things, that M&A-related lawsuit filings now outnumber federal securities class action lawsuit filings, and M&A-related litigation has “replaced traditional stock drop cases as the lawsuit of choice for plaintiffs’ securities lawyers.”
In her article entitled “Securities Class Action Lawsuits in State Court” (here), Lewis & Clark Law School Professor Jennifer Johnson examines a database of class actions filed in state court between 1996 and 2010. Her analysis shows that as a result of several Congressional enactments in recent years – particularly SLUSA and CAFA – the prevalence of many types of state court securities class action filings has declined. However, the number of state court class action lawsuit filings involving M&A transactions has been “skyrocketing” and now even outnumber federal securities class action lawsuit filings.
Indeed given that the database of state court filings on which Professor Johnson relied almost certainly understates the number of state court filings, it is probable that the number by which the state court M&A-filings exceeds the number of federal court filings is even greater than her analysis shows.
According to Professor Johnson, the growth of M&A-related litigation is a consequence of the various Congressional enactments intended to restrict traditional securities class action lawsuits to federal court. As legislative enactments like SLUSA and CAFA drove plaintiffs’ lawyers away from federal court, “dispossessed plaintiffs’ lawyers increasingly have turned to filing alternative class actions in state court” – particularly M&A-related class actions. As a result, M&A-related class action lawsuits “have replaced traditional stock drop cases as the lawsuit of choice for plaintiffs securities lawyers,” particularly because the cases are filed and resolved quickly, owing to the pressure on the defense attorneys’ to complete the underlying transaction.
While the increased numbers of M&A-related lawsuits has led to an increase in the numbers of filings in Delaware state court, “the relative percentage of Delaware cases compared to those in other jurisdictions has fallen.” Increasingly, plaintiffs’ lawyers are choosing to file cases outside the defendants’ state of incorporation. At the same time, while the growth in M&A-related litigation has primarily been a state-court phenomenon, there have also been growing numbers of federal court M&A related lawsuit filings as well.
The proliferation of M&A-related litigation outside of Delaware is in part due to the fact that increasingly any one M&A event is likely to “induce multiple filings.” During 2010, for example, each M&A event spurred an average of 1.8 filings, but this statistic is “slightly misleading” as larger entities often faced suits in 4 or 5 different jurisdictions.
The reasons for increase in M&A-related filings outside of Delaware may include concerns among plaintiffs’ attorneys that Delaware’s courts are “increasingly diligent in policing the conduct of lead counsel and the award of attorneys’ fees.” There may also be a perception that Delaware is a “manager-friendly state” and that “settlement values may be higher outside of Delaware state court.”
The growing levels of multi-jurisdiction litigation “makes it difficult for courts to manage cases, as there is no prescribed orderly procedure for consolidation as would exist in the federal courts.” There are also no mechanisms for coordination between states or between state and federal courts. The phenomenon of multi-jurisdiction M&A litigation “wastes judicial resources,” leads to “obvious inefficiencies and increased costs” for defendants, and even leads to problems among plaintiffs’ counsel “as they jockey for position and ultimately for fees.”
Johnson observes that “effective coordination” between the courts could help ameliorate these difficulties. She also reviews various proposals that have been offered for corporations to amend their charters to include clauses specifying the forum for specifying intra-corporate disputes. But, she also speculates, “absent a major change,” the concerns associated with the proliferation of multi-jurisdiction M&A related litigation “is likely to come to the attention of Congress.”
Johnson suggests that Congress might attempt to address these concerns through an outright repeal of the so-called “Delaware Carve-Out” from SLUSA, which preserves state court jurisdiction for state law claims involving shareholder communications involving voting rights, such as in M&A transactions, forcing the class actions into federal court. Alternatively, Congress might revisit SLUSA and restrict the carve-out to preserve state court jurisdiction for the courts of an entity’s state of jurisdiction (which, Johnson speculates, would have the effect of making Delaware the sole forum for the majority of cases).
Johnson’s article further substantiates the alarms being sounded in connection with the exploding levels of M&A-related litigation. The growth of M&A-related litigation is a vexing and costly problem, and her article helps to substantiate the growth and seriousness of the problem. However, her speculation about possible solutions may be optimistic. The inability of the current Congress to confront even matters of the greatest urgency is hardly reassuring about its ability to deal with issues of the type involved here.
But even Congress were to address these issues, I am skeptical that Congress would outright eliminate the Delaware Carve Out from SLUSA and make all corporate litigation into federal litigation. It is relatively likelier that Congress might be willing to revise the carve-out to restrict the preserved jurisdiction to the court of the state of an entity’s incorporation, but even there I have my doubts that Congress would be willing to act in a way that would so clearly favor the courts of a single jurisdiction.
Even if we assume for the sake of discussion that Congress will eventually be able to address these issues, that action could well be a long time coming. In the meantime, courts and litigants face a growing and costly problem. Courts and litigants alike will have to continue to grapple with these problems. Absent a congressional directive, informal cooperation between and among the courts and parties involved will be the only practicable solution available – a solution that admittedly could be frustrated in any specific case by a recalcitrant party or court.
Setting aside the questions of what to do about it, it is important simply to recognize that the problems associated with the growing levels of M&A-related litigation activity exist. As Johnson’s article documents, corporate and securities litigation overall is changing. It is no longer sufficient to focus just on federal securities class action litigation. M&A related litigation is an increasingly important part of the overall mix of corporate and securities litigation. For anyone whose tasks include understanding the risks and exposures associated with corporate and securities litigation, this is an important development with significant implications.
Special thanks to a loyal reader for forwarding a copy of this article.