janusWhat is the role of defense counsel in deal litigation? What impact does the involvement of “top” deal litigation firms have on lawsuit outcomes? And what will the impact on deal litigation be from the advent of forum selection by-laws and the recent court crackdown on disclosure-only settlements? These are the questions addressed in an interesting May 2, 2016 paper entitled “Divided Loyalties? The Role of Defense Litigation Counsel in Shareholder M&A Litigation” (here), by C.N.V. Krishnan of Case Western Reserve University; Steven Davidoff Solomon of University of California Berkeley Law School; and Randall Thomas of Vanderbilt Law School. A summary of their paper appears in a May 23, 2016 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation (here).


In order to assess the role of defense counsel in deal litigation, the authors analyzed a database of 1,087 M&A lawsuits filed in connection with 733 M&A deals during the period January 1, 2003 to December 31, 2012. In assembling their database, the authors applied a number of screening factors, the most important of which are that the deal must involve a target company with a listing on a U.S. securities exchange and a deal size over $100 million.


The authors theorized that defense counsel in this type of litigation may have two possible conflicting roles. The first is to defend the target company and its directors and officers from the allegations that the directors breached their fiduciary duties in agreeing to the deal. The second is to ensure that the negotiated transaction is completed on its initial terms and price. These goals may conflict as the defense counsel seeks to settle potentially meritorious claims quickly and cheaply in order to ensure deal completion.


Using the database, the authors identified “top defense litigation counsel” based on the number of their appearances in the lawsuits in the database. The authors found that these top firms are more likely to appear in cases defending transactions with significantly lower takeover premiums, compared to non-top defense firms. Specifically, the authors found that the top defense counsel are involved in a higher proportion of cash deals,  non-same industry deals, and friendlier deals, all of which could lead to a smaller negotiated takeover premium. Perhaps because of the smaller premium, top defense counsel also tend to be involved with deals that attract multijurisdictional litigation.


The fact that the top defense counsel tend to be involved in deals that attract multijurisdictional litigation works to their and their clients’ advantage, as the top defense counsel may be able to conduct “reverse auctions” among the various competing plaintiffs’ counsel in order to extract better settlement results from their clients.


The ability of defense counsel to settle the lawsuits quickly and cheaply may not be the best thing for the target company shareholders.  That is, the lower deal premiums and cheap settlements may be at the expense of the target company’s shareholders’ wealth. Basically, the top defense counsel’s ability to get the cases resolved quickly permits the lower premium deals to close intact.


Obviously, plaintiffs’ counsel have a role in this process as well. The authors found that the presence or absence of top plaintiffs’ counsel had a significant impact on lawsuit outcomes (with top plaintiffs’ counsel measured by the firms’ frequency as lead counsel in the deal litigation in the authors’ database). Plaintiffs’ counsel’s role can represent a “countervailing consideration,” as plaintiffs’ counsel works to try to leverage superior results. The top plaintiffs’ lawyers are, on average, associated with “a higher proportion of lawsuit success, with respect to all outcome variables.” The top plaintiffs’ firms “make a big difference in lawsuit outcomes.” By the same token, while top defense litigation counsel’s involvement on average results in lower average settlements and lower takeover premiums, the data suggest further that top defense litigation counsel “are more likely to be successful when matched against weaker plaintiffs’ law firms,” particularly in multi-jurisdiction litigation.


Two recent developments may undercut some of the advantages that the top defense firms have. First, the advent of forum selection by laws means will have “a direct effect on top defense litigation counsel by sharply reducing top litigation defense counsel’s ability to run reverse auctions to settle difficult cases cheaply with selected plaintiffs’ firms.” (This change, the authors suggest, could also help top plaintiffs’ firms as they will no longer have to worry about getting undercut by other plaintiffs’ lawyers trying to cut a deal in another state.)


The top defense counsel’s advantages may also be undercut by the recent crackdown in Delaware on disclosure only settlements (about which refer here). The courts’ hostility to these settlements will, the authors suggest, reduce “top defense litigation counsel’s ability to offer this form of a quick and cheap settlement to get rid of strong cases, “ which may, along with the advent of forum selection bylaws, lead to more settlements involving cash consideration, particularly in cases between the top plaintiffs’ and defense firms.


In other words, the authors suggest, these more recent changes will “erode” the top defense firms’ “relative strength.” The combined affect of these changes “should be fewer cases filed, with a greater percentage of those filed being brought by top plaintiffs’ firms.” The top defense counsel “may no longer be able to settle cases more cheaply than they previously had, forcing them to pursue other tactics to settle litigation.”


The authors’ analysis of the role of defense counsel is interesting. As the authors themselves note, however, as a result of the recent developments, the role of defense counsel will almost certainly change. Whether the overall effect will be as the authors suggest remains to be seen. Among other things, it is already clear that where possible, plaintiffs lawyers will seek to  pursue their merger objection lawsuits in  states other than Delaware, and even that defendants will try to waive the requirements of their forum selection bylaw in order to try secure a more favorable settlement or a disclosure-only settlement (which, as I noted in a recent post, the courts of other states are continuing to approve.) It also remains to be seen to what extent the recent developments will result in fewer merger objection suits being filed. My own observation is that merger objection suits continue to be filed in significant numbers, although often in federal court or outside of Delaware. In other words, it remains to be seen what all of these various changes ultimately will mean for the role of defense counsel.


More About Website ADA Claims: Some readers may recall my recent post in which I discussed a California state court decision in which the court held that a retailer violated the Americans with Disabilities Act because its website was not accessible to a visually-impaired plaintiff. According to a May 12, 2016 post by Bill Boeck on the Lockton website entitled “The Scourge of Website ADA Claims” (here), there has recently been wave of these kinds of ADA claims, much of it led by a single plaintiffs’ class action law firm.


As Boeck details in his post, the law firm commences its assertion of these kinds of claims with a demand letter sent to companies alleging website ADA violations and seeking a settlement. Companies who do not settle may face litigation. According to Boeck, there were at least 40 of these kinds of lawsuits filed in 2015. The defendants in these cases are not taking these cases lightly, and indeed in two cases companies have filed lawsuits against the plaintiffs’ law firm that has been leading these claims, alleging that the law firm “acted fraudulently by making demands on behalf of unnamed and potentially nonexistent individuals,” or that the purported plaintiff is not an actual patron of the companies’ websites.


Boeck’s interesting article also includes a discussion of the issues concerning insurance coverage for these kinds of claims, including coverage under EPL policies, as well as under Media Liability policy and Cyber Liability policies.