In a series of decision culminating in Chancellor Bouchard’s January 2016 ruling in the Trulia case (about which refer here), Delaware’s courts have shown their hostility to disclosure-only settlements in merger objection lawsuits. These Delaware developments led some observers to speculate that we might have seen the end of the litigation trend in which nearly every M&A transaction attracted at least one merger objection lawsuit.
However, a February 2017 New York court ruling in the Gordon v. Verizon Communications, Inc. (discussed here), in which an intermediate appellate court reversed the lower court’s rejection of a disclosure-only merger objection lawsuit settlement and remanded the case for an award of plaintiffs’ fees, raised the question of whether or not there might yet be life ahead for disclosure-only settlement in merger objection lawsuits.
In a provocative March 20, 2017 post on the CLS Blue Sky Blog (here), Columbia Law School Professor John Coffee takes a look at the New York court’s Verizon decision, concluding that the decision ensures that “the nuisance suit remains alive and well in New York and should bring the worst of the plaintiff’s bar streaming back to New York.”
As Professor Coffee summarizes in his blog post, in the Verizon decision, the New York intermediate court “broadly disagreed with Delaware … and reversed a state Supreme Court judge who sensibly rejected an egregious settlement involving only immaterial disclosures and token corporate governance reform.” On its face, Coffee said, the Verizon decision “slightly tweaks the existing formula for settlement approval in New York,” but in reality, “it establishes that there is now a divine right to settle in New York without meaningful judicial oversight.”
The Verizon decision, in turn, Coffee reports, has set off a debate among practitioners about the New York courts’ motivations in leaving the door open for disclosure-only settlement in merger objection lawsuits. In deciding what may be up with the New York court’s decision, Coffee not only reviews practitioners’ various (somewhat cynical) suppositions, but he also reviews the various very high profile settlements and judgments that have been entered in merger objection lawsuits in Delaware, noting that no comparable settlement or judgments have arisen in merger objection suits in New York. Coffee says, “with confidence,” that these kinds of high value recoveries in Delaware will never arise in New York under its current case law. “Collusive settlements (and other problems in New York)” will “preclude any serious M&A litigation from gaining traction in New York.”
Coffee suggests that the “more realistic” explanation for the court’s decision in the Verizon case it that it was “designed to preserve New York as a world of cheap, collusive settlements with little risk of major liability.” By preserving the status quo, in which there is still room for judicial approval of disclosure-only settlements, Coffee says, the decision “preserves … the quiet life for judges, by placing nearly insurmountable barriers in the path of serious adversarial litigation” and ensuring that “New York judges will not face complex and time-consuming shareholder litigation.”
Coffee suggests that this might mean that we could face two parallel worlds of M&A litigation, with New York “dominated by the kind of ‘feigned litigation’ that occurs in ‘disclosure only’ settlements,” while in Delaware plaintiffs would focus on conflicts of interest and would either proceed to trial or settle for monetary relief.
In reality, this type of “equilibrium” is not likely, because “any time a trial grew near in Delaware and the risk of serious liability loomed, defendants could settle the litigation with a cooperative plaintiffs’ attorney in New York.”
To be sure, forum selection clauses were intended as a way to head off this kind of end run, by ensuring the shareholder litigation only went forward in Delaware’s courts. These kinds of clauses, as Coffee notes, have “one fatal weakness: Under the prevailing template for these clauses, the board of the defendant can waive them and permit a suit to be settled elsewhere.”
The “unpleasant truth,” Coffee says, is that although Delaware and some federal courts have justifiably tried to restrict disclosure-only settlements, “it takes only one state to lead a race to the bottom.” This is so because, while defense lawyers rail against disclosure only settlements, defense counsel “rediscover their virtues once their client is sued in serious litigation.” As much as the defense bar dislikes disclosure only settlements, “their clients want to keep the merger train on schedule.” Less obviously, Coffee note, the availability of a disclosure only settlement in an alternative forum “also blocks more serious litigation, which occasionally results in large recoveries (but only in Delaware and never in New York).”
The Verizon decision, Coffee predicts, will “ensure that the nuisance suit remains alive and well in New York and should bring the worst of the plaintiff’s bar streaming back to New York,” adding that unless the Court of Appeals reversed, New York will become “celebrated as the jurisdiction of the judicial rubber stamp.”
Discussion
There is a note in Coffee’s final comment that is worth emphasizing, which is that as a ruling by an intermediate appellate court, the Verizon decision potentially is subject to further judicial review. The possibility remains that either in the Verizon case itself, or in another merger objection case, the New York Court of Appeals could set aside the principles that the intermediate appeal set out in the Verizon case. Indeed, the high profile criticisms by a well-respected legal scholar like Professor Coffee arguably makes Court of Appeals’ review of these issues that much more likely.
At a minimum, it does seem that there is much more to be told on the merger objection lawsuit story. The hope that the Delaware courts’ disdain for disclosure only settlements might mean the end of the merger objection lawsuit curse seems to have been premature at best.
The facts on the ground, so to speak, actually point in a different direction. As noted in a post on this blog earlier this month, the Delaware courts’ rejection of disclosure-only settlements has in fact only been one part of the “tidal wave of change” in merger-related litigation, to quote the phrase of a recent academic study of the topic. As I have noted in my analysis of 2016 securities litigation lawsuit filing patterns, one obvious large impact from the Delaware courts’ case rulings is that there has been a significant and discernable shift of merger objection case filing from Delaware state courts to the courts of other states and to federal courts. How this shift of litigation to other courts ultimately will play out remains to be seen, as only time will tell the extent to which courts in other jurisdiction will follow the lead of Delaware’s courts in their hostility to disclosure only settlements.
But as Professor Coffee points out, “it takes only one state to lead a race to the bottom.” As long as one state – like New York, for instance – remains hospitable to disclosure-only settlements, litigants will seek out the state’s courts as a way to pursue and resolve these kinds of cases. As Coffee also points out, it will not be just plaintiffs’ lawyers that will seek out these courts of least resistance; defense counsel and their clients, desirous of quick and comprehensive deal litigation settlements, will seek out these courts as well.
All of this means that we likely have not seen the last of the curse of multi-jurisdiction merger objection litigation, as a result of which it appears that corporate defendants and their insurers will continue to have to deal with merger objection litigation as a significant part of the overall corporate and securities landscape.
There is at least one additional note with raising here, having to do with the possibility of collusive settlements – that is, of defense counsel permitting end runs around forum selection clauses in order to secure acceptable merger objection lawsuit settlement in the courts of other jurisdictions. While Professor Coffee and other observers have noted this problem, in the most comprehensive recent academic study of merger objection lawsuit patterns (discussed here), the study’s authors found little evidence of collusive settlements. This seemingly contrary observation suggests that it may be too early to tell how all of the various developments in the “tidal wave of change” in merger objection litigation will play out. Perhaps not all of the evils Professor Coffee cites in his recent article will actually come to pass.
The one thing that is for sure is that there are further developments ahead in this area, and so there is more of this story to be told. Among other things, we will have to watch for what happens next in New York’s courts in the wake of the Verizon decision. Given the huge amount of this litigation now being filed in federal courts, we will have to watch how those cases progress as well.