As I have noted in recent posts, several members of the Delaware Court of Chancery have made it clear that they are increasingly skeptical of disclosure-only settlements in merger objection lawsuits. It now appears that the Chancery Court rulings are starting to have an impact at the supply end of the food chain; according to a recent analysis by The Chancery Daily, the number of new merger objection lawsuit filings in the Delaware Chancery Court has begun to drop in response the Chancery Court’s rulings. The publication reported what it observed to be during October and November 2015 a “pronounced decline in the number of class action complaints filed compared to prior months in the year 2015.” The Chancery Daily’s November 13, 2015 blog post discussing its analysis can be found here. Alison Frankel’s November 16, 2015 post on her On the Case blog discussing the recent filing trends can be found here.
Readers will recall that in October, Vice Chancellor Travis Laster refused to approve the proposed disclosure-only settlement in the lawsuit that had been filed objecting to the Hewlett-Packard’s $2.7 billion acquisition of Aruba Networks, as discussed here. Laster’s ruling was just the latest in a series of ruling by judges on the Delaware Chancery Court in which they clear evidenced their distaste for these kinds of lawsuits and for the settlements these cases produced.
At least based on the evidence that The Chancery Daily compiled, the plaintiffs’ lawyers have been paying attention. At least according to The Chancery Daily, fewer merger objection lawsuits are now being filed.
In order to track these trends, The Chancery Daily compiled a list of all merger objection suits filed in the Delaware Chancery Court between January 1 and November 15, 2015. The fewest number of merger objection suits filed in any month took place in October, when there were only 16 suits filed. Tellingly, there were 14 filed in the first half of October and only two in the second half. During the first half of November, there were only five. The significance of these lower numbers can be seen by considering the number of merger objection lawsuit filings as a percentage of all corporate and commercial lawsuit filings; the Chancery Daily found that year-to-date lows of 23% and 18% in October and the first half of November, respectively.
The Chancery Daily also took into account the possible effect of difference in merger transaction activity. Between January and September 2015, the ratio of the number of merger objection lawsuits to the number of merger transactions with a value of over $100 million was over 1.0 (meaning there were more merger objection lawsuits than mergers). However, in October, there were 16 merger objection lawsuits and 24 merger announcements, for a ratio of .69 (a figure that may not fully reflect the sharp drop off in the second half of October, after Vice Chancellor Laster’s opinion in the Aruba case).
The Chancery Daily summarized its findings by saying that “While not conclusive, the decline in class action filings in October and the first half of November in the absence of corresponding declines in total filings or deal volume is consistent with plaintiffs’ reluctance to file in Delaware following the Aruba holding.”
As Frankel noted in her blog post about The Chancery Daily’s analysis, we could be in the “death throes of reflexive M&A litigation.” While this is of course good news for any company considering becoming involved in a merger transaction, it could be a serious problem for the many smaller plaintiffs’ law firms that were making a pretty good living off of this kind of litigation. I suspect that many of these firms are going to have to try to diversify their product lines.