One of the most distinctive corporate and securities litigation trend in recent years has been the surge in M&A-related litigation, with virtually every deal attracting at least one lawsuit. This trend continued again in 2013, according to a recently updated study from Notre Dame business professor Matthew Cain and Ohio State law professor Steven Davidoff. As reflected their January 9, 2014 paper entitled “Takeover Litigation in 2013” (here), 97.3% of all takeovers in 2013 with a value of over $100 million experienced a shareholder lawsuit, which represents the highest litigation rate recorded.
Professor Davidoff’s January 10, 2013 column on the New York Times Dealbook blog about the authors’ paper and entitled “Corporate Takeover? In 2013, a Lawsuit Almost Always Followed” can be found here.
The professors’ paper is the latest update on the research originally presented in their January 2012 paper 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 and they updated their research again with respect to the transactions that took place in 2012.
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 2013 update includes only transactions there were completed as of January 2014. The professors intend to update their 2013 data in six months to incorporate information relating to the in-process transactions
According to the authors’ research, only about 40% of deals meeting the research criteria in 2005 attracted litigation, whereas in 2013 almost every deal attracted at least one suit. In 2013, 78 of the 80 transactions meeting the criteria attracted litigation, representing 97.5% of all of the deals (up from 91.7% in 2012). The authors note in their paper that the 2013 figure “continues the increasing trend in takeover litigation which is now brought at a rate almost 2.5 times that of 2005.”
As the authors observe, “in plain English, if a target announces a takeover it should assume that it and its directors will be sued.”
Not only that, many of the deals attracted multiple lawsuits. The mean number of lawsuits per transaction also reached an all-time high in 2013, with an average of 6.9 lawsuits per transaction, up from 5.2 in 2012 – and only 2.2 per deal in 2005. Obviously, the plaintiffs’ lawyers view this type of litigation as good business, and more of them are trying to get into the act.
If there is one (slightly) positive note, it is that the authors found that the number of deals involving multistate claims has declined. In 2013, 41.6% of deals involved lawsuits in more than one state. This is down from 2012, when 51.8% of deals attracted multistate litigation. Though the 2013 figure represents a decline, it is still well above the equivalent figure for 2005, when only 8.3% of deals involved multistate litigation.
Much of the 2013 litigation is still in process, but the authors do include some settlement information in their paper. Their analysis shows that the 2013 cases that have settled, 84.8%of the settlements were “disclosure only” settlements, compared to approximately 85.7% in 2012.
In his Dealbook column about the paper, Professor Davidoff comments on courts’ increasing skepticism about the value of the “disclosure only” settlements, noting particularly in Delaware that “the judges are clearing tiring of disclosure-only settlements. As noted in a Decemvber 30, 2013 post on the MoneyBeat blog (here), Delaware Chancellor (and Delaware Supreme Court nominee) Leo E. Strine, Jr., commenting on the $237,500 plaintiffs’ attorney fee in the disclosure only settlement of the litigation challenging the takeover of Talbot’s Inc., said that “The social utility of cases like this continuing to be resolved in this way is dubious.”
The mean plaintiffs’ attorneys’ fees awarded per case in 2013 (at least for the cases that have settled so far was $696,000, compared to $600,000 in 2012. The median plaintiffs’ attorneys’ fees in 2013 was $485,000, down from $500,000 in 1012.
The authors caution that the because so many of the 2013 cases are still in process, the settlement and attorneys’ fee data are preliminary only.
One of the important background issues in the context of the surging M&A litigation is whether or not there is a jurisdictional competition, in which the various states (particularly Delaware) are or are not in competition with one another for this type of litigation. In that regard, the authors found that in 2013, Delaware attracted a slightly smaller share of the litigation. The authors found that Delaware attracted 45.2% of all litigation that could conceivably go to Delaware because the company was incorporated or headquartered there, compared to 46.3 percent in 2013.
As I have noted in the past with respect to the authors’ research, the criteria the authors use for their analysis means that their statistical conclusions are most relevant to larger transactions involving publicly traded companies. In my experience even smaller transactions also frequently attract the unwanted attention of the plaintiffs’ lawyers. Just the same, because the authors’ research most particularly pertains to larger transactions involving publicly traded companies, the authors’ statistical conclusions must be used advisedly outside of that context.
This continuing onslaught of M&A-related litigation continues to be a problem for the companies involved in these transactions and for their insurers. Although as noted above these cases often are resolved with disclosure only settlements, there have also been a number of significant cash settlements as well – for example, the $110 million settlement in the El Paso/Kinder Morgan case. The growth in this kind of litigation first and foremost represents a frequency problem for D&O insurers. But as the incidence of large cash settlements in these kinds of cases increases, the upsurge of this type of litigation represents a severity problem as well. (These issues about the possible impacts on the D&O Insurance industry are discussed in greater detail here.)
The dramatic increase in this type of litigation in recent years has been one of the justifications that the D&O insurers have given to justify rate increases, at least at the primary layer. In addition, some primary D&O carriers are requiring the addition of a separate M&A-related litigation retention, with the level of the retention set at a level to try to avoid loss costs associated with the disclosure only type settlement. As long as the elevated levels of M&A-related litigation persist, the carriers are likely to continue to try to find defensive measures to try to limit their loss costs. As far as the companies themselves, there are also steps they can take to try to enable them to better defend themselves, as discussed here.
The decrease noted in the 2013 study of multistate litigation, though slight, is a positive development, and provides some hope that defendants will not be forced to have to try to fight a multi-front war. The Delaware court’s acceptance and enforcement of forum selection clauses in corporate by-laws may also help reduce the prevalence of multi-jurisdiction litigation.
Although the disclosure-only settlements represent their own peculiar kind of problem, as merger objection suit that fails to settle and that lingers on after the transaction closes may represent an even worse problem, as discussed here.
London 1927: In 1927, Claude Friese-Greene shot some of the first color film footage ever taken of London, using a technique known as Biocolour. The film images he captured are beautiful, and evoke the time 87 years ago. The images are both hauntingly familiar yet somehow eerily different. The streets were already busy with motor traffic; all the men wore hats. And in that simpler, bygone time, England emerged victorious over the Aussies in the Test Match at the Oval –yes, a long time ago…