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 2014, according to a recently updated study from Matthew Cain, an economic fellow at the SEC, and University of California Berkeley law professor Steven Davidoff Solomon. As reflected their February 20, 2015 paper entitled “Takeover Litigation in 2014” (here), takeover litigation continued at a “steady state” and at an extremely high rate during 2014. Lawsuits were brought in 94.9% of takeovers in 2014 versus 39% in 2005. The 2014 figures are consistent with but slightly down from the filings in 97.3% of all takeovers in 2013.
The authors’ 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 authors 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 and again in 2013.
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 2014 update includes only transactions there were completed as of January 2015. The professors intend to update their 2014 data in six months to incorporate information relating to the in-process transactions.
Based on this transaction dataset, the authors identified 79 transactions during 2014 that met these criteria, 75 of which resulted in at least one merger objection lawsuit. The lawsuit filing in connection with 94.9% of transactions means that 2014 is the fourth year in a row over 90% of transactions experienced a lawsuit. The authors note that “The higher figure continues the increasing trend of takeover litigation which is now brought at a rate almost 2.5 times that of 2005.” The authors conclude that “In plain English, if a target announces a takeover it should assume that it and its directors will be sued.”
The mean number of cases per transaction during 2014 was 4.3, down slightly from the 4.8 suits filed per transaction in 2013 and down from the 2011 high of 5.0 lawsuits per transaction.
The authors noted that the incidence of multi-jurisdiction litigation declined during 2014 relative to recent years. In 2014, 33.8% of transactions with litigation involved litigation in multiple states. This compares to 52.7% of transactions with multi-state litigation in 2012 and 41.8% in 2013. The authors speculate that the sharp decline in multi-jurisdiction litigation the “decrease may be due to the effectiveness and increasing use of forum selection by-laws,” but they add that this topic remains to be explored further.
During 2014, 82.6 percent of settlements were “disclosure only” in 2014 compared to approximately 78.9 percent in 2013.
Attorneys’ fees remained consistent with the amounts awarded in prior years. The average attorneys’ fee award in 2014 was $865 thousand versus $918 thousand in 2013. The mean attorneys fees awarded in a disclosure only settlement during 2014 was $531,000 and the median was $550,000, compared to $489,000 mean and $450,000 median in 2013. The authors suggest that the increase in mean and median fees in non-disclosure cases is “may represent an increased focus by courts on value-producing cases, and attorneys’ responding by holding out for these types of settlements.” The authors note that there were several instances during the year in which Delaware judges refused to accept disclosure only settlements. The authors add a note of caution about the 2014 data; since the award of attorneys’ fees lags the settlement of a case, there are many cases that settled during 2014 for which the attorneys’ fee data is not available.
Delaware drew a lower share of merger objection litigation in 2014. The state attracted 26.7% of all litigation which could have been filed in Delaware, down from 47.7% 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.
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, just during the last few months there have been massive settlements of merger objection cases involved Activision Blizzard, which settled for $275 in the largest shareholder derivative lawsuit settlement over, and in the merger objection case involving Freeport McMoRan, which settled for $137.5 million. (For further detail about these settlements, refer here and here.) 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 fact that lawsuits emerge in connection with virtually every merger transaction does raise certain questions about the meritoriosness of at least some of this litigation. These kinds of questions about much of this litigation were reinforced but the recent publicity surrounding the one law firm’s use of a repeat plaintiff in these cases.
Break in the Action: I am going to be on the road this upcoming week (week of February 23, 2015) and s there will be a break in The D&O Diary’s publication schedule. Regular publication will resume next week.