One of the most distinctive recent developments in the litigation environment has been the rise of merger objection litigation, in which nearly every merger attracted at least one lawsuit challenging the transaction. Many of these cases settled quickly based on the defendants’ agreement to make additional transaction-related disclosures and to pay the plaintiffs’ attorneys’ fees. However, in a series of rulings culminating in the January 2016 ruling in the Trulia case, the Delaware Court of Chancery has shown its disapproval of the disclosure-only settlement model. It now appears that as a result of the Chancery Court developments that fewer mergers are attracting lawsuits and fewer lawsuits overall are being filed.
As detailed in an August 2, 2016 report from Cornerstone Research entitled “Shareholder Litigation Involving Acquisition of Public Companies: Review of 2015 and 1H 2016 M&A Litigation” (here), the percentage of merger transactions attracting litigation began to fall to the lowest levels in years during the second half of 2015, and the litigation dropped even further in the first half of 2016, as detailed further below. Cornerstone Research’s August 2, 2016 press release about the report can be found here.
According to the report, for the first time since 2009, the percentage of M&A deals valued over $100 million that were subject to shareholder litigation declined to below 90 percent in 2015 and so far in 2016.
2015 Filings: In 2015, 84 percent of M&A deals valued over $100 million were litigated. The average number of lawsuits per deal declined from 4.6 per deal in 2014 to 4.1 in 2015. The majority of litigation for 2015 deals was filed in only one jurisdiction (65 percent). The number of deals with more than ten lawsuits dropped from nine in 2014 to six in 2015. A total of 174 deals had associated lawsuits in 2015
First Half 2016 Filings: These trends continued in 2016 as during the first six months of the year only 64 percent of M&A deals valued over $100 million were litigated. The average number of lawsuits per litigated deal dropped from 4.1 per deal in 2015 to 2.9 in the first half of 2016. The majority of litigated deals (57 percent) attracted only one lawsuit. There were no deals in the first six months of 2016 with more than seven lawsuits. There were 47 M&A deals associated with lawsuits during the first half of the year.
Fewer Lawsuit Filings in Delaware: The filing patterns in late 2015 and so far in 2016 suggest that as a result of the Trulia decision, plaintiffs are seeking to file fewer lawsuits in Delaware. Plaintiffs filed in Delaware for 61 percent of the litigated deals over the first three quarters of 2015 but only 26 percent of litigated deals in 4Q2015 and 1H2016. This trend toward fewer merger objection suit filings in Delaware holds even with respect to transactions involving the acquisition of companies incorporated in Delaware. For litigation in which the acquired company was incorporated in Delaware, plaintiffs filed in Delaware for 74 percent of litigated deals in 2015. For the first half of 2016, this rate was just 36%.
Case Resolutions: The Delaware Chancery Court’s disapproval of disclosure only settlements appears to be having an impact on case resolutions as well. From 2009 to 2014, between 74 and 78 percent of M&A litigation was resolved before the deal closed. This figure dropped to 57 percent in 2015 and 56 percent in the first half of 2016.
Despite the judicial disapproval of disclosure-only settlements, monetary settlements remain rare. There were “only a handful of monetary awards and settlements reached in 2015 and 1H2016.”
Impact of Trulia in Other Jurisdictions: The Delaware Chancery Court has made its disapproval of disclosure only settlements clear, but it remains to be seen whether or not courts in other jurisdictions will continue to accept disclosure-only settlements. The report suggests that “early anecdotal evidence indicates” that “it is possible” that courts in other jurisdictions will continue to accept disclosure only settlements. This development “has led to cases being litigated with increasing frequency outside Delaware.” However, the report also notes that “to date, only a small number of disclosure-only settlements have been approved in various post-Trulia cases.” If the Trulia standard becomes universal, the share of merger litigation in Delaware may revert to historical levels.
The observation that in the wake of Trulia fewer merger objection lawsuits are being filed has previously been noted elsewhere (refer here and here); however, the Cornerstone Research report’s analysis is much more comprehensive, and it incorporates the data from the first half of 2016, which shows that the downturn has accelerated so far this year.
The suggestion that post-Trulia, not only are fewer merger objection suits being filed but that the suits that are being filed increasingly are being filed outside Delaware is consistent with the phenomenon Cornerstone Research noted in its previously released report about first half 2016 securities class action lawsuit filings.
As discussed here, the prior Cornerstone Research report noted that the number of securities class action lawsuit filings in the first six months of 2016 surged compared to recent levels, largely as a result of an increase in the number of new federal court merger objection lawsuits alleging a violation of the federal securities laws. The increase in the number of federal court merger objection suits is consistent with this latest Cornerstone Research report’s observation that fewer merger objection suits are being filed in Delaware state court and that because of Trulia prospective litigants are choosing to file their lawsuits other than in Delaware.
The question of whether disclosure-only settlements may live on outside of Delaware notwithstanding Trulia is one that others have been asking. As discussed here, one concern is that the net effect of Delaware’s hostility to disclosure only settlements may be that weaker cases are “driven to other jurisdictions.”
It is worth noting that Trulia did not establish that disclosure-only settlements would never survive judicial scrutiny, but rather it established the features the Chancery Court will require in order for a proposed settlement to pass muster. As discussed in a July 29, 2016 Law 360 article (here, subscription required), there are three ways to help a Chancery Court M&A lawsuit settlement survive Trulia. The first is ensuring that the disclosures required by the settlement are meaningful and substantive. The second has to do with the kind of the case filed; cases involving conflicts of interest are much more likely to survive judicial scrutiny. The third feature is to aim to “fast track” the litigation.