gavelnewSince merger objection litigation became one of the most distinctive phenomena on the corporate and securities landscape, it has been both chronicled and measured in a series of annual papers by Matthew Cain, now an SEC economist, and Steven Davidoff Solomon, a law professor at the U.C. Berkeley. In their latest update, “Takeover Litigation in 2015” (here), published last week, the authors confirm that while merger objection litigation continued to be filed at significant levels last year, the litigation levels declined compared to recent years. Of particular note, starting in the Fall 2015, after Delaware Vice Chancellor Laster rejected the disclosure only settlement in the Aruba/H-P merger lawsuit, the filings of the merger objection lawsuits showed a decline that was “sharp and significant” and that the authors expect will continue in the new year.


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.


The authors’ analysis is based on their review of merger transactions involving companies listed on a U.S. securities exchange, with a deal value greater than $100 million, and that was completed before January 2, 2016. There were 73 deals that met these criteria in 2015. Of these 73 deals, 64 drew at least one merger objection lawsuit, representing 87.7% of all transactions.  The 2015 litigation rate of 87.7% is down slightly from the 2014 rate, when 94.9% of all merger deals drew at least one lawsuit. While this year over year comparison shows a modest decline in the litigation rate in 2015 compared to 2014, the authors also note that beginning in Fall 2015, the “rate of filings for completed and uncompleted transactions fell to 21.4% and a number of settlements were withdrawn” (as I also discussed in a recent post, here). The authors observe that “there is no doubt that the decline is sharp and significant,” adding that “it is expected that in the New Year this trend will continue.”


Of the deals that drew litigation in 2015, the number of lawsuits that each of these deals attracted, on average, also declined. In 2015, the average number of suits that deals involved in litigation drew was 3.6, and only 23.4% of the deals were involved in multi-jurisdiction litigation, down from 4.4 and 36.2% in 2014 and down even further from 5.0 and 53.0% in 2011. The authors attribute the decrease in multi-jurisdiction litigation to the “effectiveness and increasing use of forum selection by-laws.”  The authors do note that “to the extent that Delaware remains unwilling to approve disclosure settlements, there may be a trend out of Delaware by plaintiffs.” The authors also suggest that in the interest of remaining in the courts of a jurisdiction that is not as hostile to the disclosure only settlements (which for all of their ills at least offer defendants with a quick an effective way to resolve many of the merger objection lawsuits), some companies, like one specifically mentioned in the report, may choose not to enforce a forum selection bylaw.


The authors also found that because of the new hostility in Delaware court to disclosure only settlements, plaintiffs’ attorneys appear to be more vigorously litigating cases and more cases are continuing after deal completion, which in turn has led to a sharp drop in the number of settlements involving “non-disclosure elements.” Only 3.8% of settlements of 2015 cases involved components other than disclosures.


The fees that the plaintiffs’ attorneys are achieving in disclosure only settlements also continued to decline in 2015; the mean attorneys’ fee that plaintiffs’ counsel received in connection with disclosure-only settlements in 2015 declined to $362,000, down from an annual high median of $1.1 million in 2009. The declining fees “likely reflect sustained and building judicial skepticism towards these settlements.”


The authors’ report also notes that dismissals (both voluntary and otherwise) were up significantly in 2015 – from 32% in 2014 to 46% in 2015. The 2015 dismissal rate in Delaware’s courts was even higher – 68%. The authors also note that after the October 2015 ruling in which Vice Chancellor Laster rejected the disclosure only settlement in the H-P/Aruba merger case, at least four settlements were withdrawn.


Perhaps because of the judicial hostility to these kinds of cases in Delaware the rate of their filing in Delaware has declined. Delaware attracted 52.9% of all litigation that could conceivably have been filed in Delaware, down from 63% in 2014.


The authors suggest that because of the hostility of Delaware’s court to disclosure-only settlements, there will be fewer merger objection lawsuit filings in Delaware. The authors suggest that this could mean “more filings in other states to the extent forum selection clauses permit,” and also suggest that to allow settlements to occur outside Delaware in order for companies to obtain full releases, companies may choose not to enforce their forum selection bylaws.


In conclusion, the authors note that “the takeover litigation market has been substantially disrupted and we can expect to see fewer filings and perhaps more vigorous litigation of those actions which are filed as well as a possible up-tick in out-of-Delaware settlements.”