As documented on this site (for example, here and here) and elsewhere, deal litigation has been shifting from Delaware Chancery Court to courts in other states and to federal courts. This shift is largely the result of two Delaware court decisions, the Delaware Supreme Court’s 2015 decision in Corwin v. KKR Financial Holdings LLC (here) and the Delaware Chancery Court’s January 2016 court decision in the In re Trulia Shareholder litigation (here). Though these court decisions are relatively recent, they are already having measurable impact on the amount of litigation in Delaware. Indeed, as detailed in a May 19, 2017 Law 360 article entitled “Delaware Plaintiffs’ Attorneys Fear Exodus of Chancery Deal Suits” (here, subscription required), the effect from these two cases has been sufficiently substantial that plaintiffs’ lawyers active in Delaware are now concerned that the future of deal litigation in Delaware is under threat.
Corwin, the first of these two cases, involved post-transaction deal litigation. In the Corwin decision, the Delaware Supreme Court, in an opinion by Chief Justice Leo E. Strine, Jr. dismissed a shareholder’s challenge to a merger transaction. The Court held that as a result of the shareholder vote approving of the proposed merger, the business judgment rule was applicable to the directors’ conduct in approving the merger. The applicability of the deferential business judgment rule means that directors’ decisions would not be second-guessed by the courts. As the Law 360 article put it, Corwin held that “an informed shareholder vote to approve a deal ‘cleansed’ it of many fiduciary duty claims.”
In the Trulia case, Chancellor Bouchard refused to approve the disclosure-only settlement of a lawsuit a shareholder had filed objecting to the disclosures accompanying Zillow’s acquisition of Trulia. The Trulia decision, and the relatively high standards Chancellor Andre G. Bouchard deployed in rejecting the settlement, basically meant the end of the easily approved settlement of merger objection lawsuits in which the defendants agreed to make additional disclosures and pay the plaintiffs’ attorneys’ fees, in exchange for a comprehensive release.
The Impact in Delaware
These decisions have resulted in what several academic authors previously called a “tidal wave of change,” As discussed here, in a recent paper, Matthew Cain of the SEC; U. Penn. Law Professor Jill Fisch; U.Cal. Berkeley Law Professor Steven Davidoff Solomon; and Vanderbilt Law Professor Randall Thomas have found that as a result of these cases, there has been a decrease the volume of merger litigation; an increase the number of cases that are dismissed; a shift the number of cases that are filed from Delaware’s courts to other states’ courts and to federal courts, and a reduction in the size of attorneys’ fee awards.
These changes have been so swift and significant, that, according to the recent Law 360 article “some on the plaintiffs’ bar worry that the legal landscape is leading to a place where such litigation is snuffed out altogether.” As a result of the Corwin and Trulia decisions, the article says, “plaintiffs’ attorneys’ hand, and ability to make money, is weakened by the new precedents.” One commentator is quoted in the article as saying “Corwin killed a massive amount of litigation in Delaware.” The commentator added that “unless it’s pretty clear that there are significant disclosure violations, you aren’t going to bring a claim in Delaware.”
The Law 360 article notes, with respect to the Corwin decision, that a particular concern is that now as a result of the decision they have only a “diminished ability to get discovery” because now “on the strength of the ratifying shareholder vote,” the defendants “can now block access to that information,” which, the plaintiffs’ lawyers complain, could make “uncovering wrongdoing well night impossible.”
Of course, the different sides disagree with whether or not this is a good or a bad thing. The plaintiffs’ lawyers say that these developments diminish shareholders’ rights and create the potential for director wrongdoing to go unpunished. Defense side advocates, by contrast, assert that the cases that are being driven away were “frivolous lawsuits anyway.”
For now at least, many of these deal lawsuits have not been eliminated, but rather they are being filed in the courts of other states or in federal court, rather than in Delaware. Whether or not the plaintiffs in these cases filed outside of Delaware’s courts will fare better in these other forums remains to be seen. For now, as one commentator noted in the Law 360 article, the drive to other courts has created an “unpredictable ‘Wild West,’ where litigants are rolling the dice on whether the presiding judge has extensive experience with corporate law compared to the stable body of law the Chancery Court has built over the decades, and that makes it even more difficult for parties to come to settlement.”
The State of Play Outside of Delaware
As the courts outside of Delaware have dealt with this newer wave of diverted cases, they have reached diverging results. On the hand, some courts have followed Delaware’s lead in applying the same hostility to disclosure only settlements as Chancellor Bouchard in Trulia. Indeed, in the recent decision in the Walgreen’s case (discussed here), Seventh Circuit Justice Richard Posner expressly adopted Trulia’s reasoning a decision rejecting a disclosure only settlement. On the other hand, as discussed here, in a February 2017 opinion in a case involving Verizon, an intermediate New York appellate court reversed a trial court’s rejection of a disclosure-only settlement, which at a minimum raises the question the whether or not there might yet be life ahead for disclosure-only settlement in merger objection lawsuits, at least in New York.
The Impact of Forum Selection Bylaws
Whenever I talk about the shift of merger objection litigation away from Delaware’s courts, one frequently recurring question I get is – wait a second, weren’t forum selection bylaws supposed to ensure that deal litigation stayed in Delaware’s courts and prevent plaintiffs’ lawyers from shifting lawsuits to the courts of other jurisdictions?
Readers will recall that as the merger objection lawsuit wave grew, corporate reformers suggested that companies could at least avoid litigating merger objection lawsuits in multiple forums by adopting forum selection bylaws, specifying a designated forum (presumptively, Delaware Chancery Court) for litigating shareholder disputes. The adoption of these kinds of bylaws has been upheld by Delaware’s courts and is now expressly permitted by Delaware statue. Many companies have adopted forum selection bylaws. So, with so many companies having now adopted these kinds of provisions, how are the plaintiffs’ lawyers getting away with filing lawsuits elsewhere?
The first factor undermining the effectiveness of the forum selection provisions, and the reason for the plaintiffs’ lawyers recent pronounced preference for filing federal court lawsuits alleging violations of the federal securities laws (rather than state court lawsuits alleging violations of state law), is that Section 27 of the Securities Exchange of Act of 1934 gives the federal courts exclusive jurisdiction over actions alleging violations of the Act. A company’s forum selection bylaw is ineffective with respect to action subject to the ’34 Act’s exclusive jurisdiction provision. The typical federal court merger objection lawsuit alleges that the company’s proxy materials omitted material information in violation of Section 14 of the Act and Rule 14-a-9 thereunder, and is subject to Section 27’s exclusive jurisdiction provision.
There is a second reason why the forum selection clauses have proven to be less than effective in keeping this kind of litigation in Delaware, and that is that the provisions are not self-executing. In order for the provision to be enforced, somebody has to bring it to the attention of the presiding court.
As Fordham Law School Professor Sean Griffith points out in his January 2017 paper (here), defense counsel “must be seen as complicit in the out-of-Delaware dynamic because they have failed to exercise Exclusive Forum bylaws to bring the litigation back to Delaware.” As Griffith explains, the defendants’ failure to invoke the provision “must be seen as a revealed preference,” one that “demonstrates defendants’ continued interest in retaining the option of a cheap settlement and a broad release in an alternative jurisdiction.” Not only are defendants failing to assert the forum selection clauses, but they are also refraining from bringing the Trulia decision to the court’s attention, even where the law of Delaware is the substantive law applicable to the action.
These considerations about federal court jurisdiction and the possible impact of what Professor Griffith calls the complicity of the defense bar complicate the question of how the deal suits will fare in forums outside of Delaware. To the extent plaintiffs lawyers succeed in moving forward in these other courts without having to wrestle with the Trulia standards, it may well be that the days of deal litigation in Delaware are done. It remains to be seen which outcome will prevail in these other jurisdictions – that is, whether Judge Posner’s skepticism in the Walgreen’s case knocks down these suits, or whether the plaintiffs find a more receptive environment, as happened in New York with the Verizon case. Only time will tell, but in the meantime, the interesting question about the future of deal litigation in Delaware remains.
Update: For a quick update on the state of play post-Trulia for disclosure-only settlements in California, please see Keith Bishop’s May 24, 2017 post on his California Corporate and Securities Law blog (here).
U.S. Supreme Court Declines to Take Up Responsible Corporate Officer Doctrine Case: Readers may recall the recent post in which I discussed the petition for writ of certiorari in the case of DeCoster v. U.S. in which the petitioners sought to have the Court take up the question whether the imposition of a sentence of imprisonment for a supervisory liability offense in reliance on the corporate officer doctrine violates constitutional due process requirements. Were the Court to have taken up the case, it could have been the most important responsible corporate officer doctrine case before the Court in over 40 years. However, in its May 22, 2016 order (here), the U.S. Supreme Court declined to take up the case. Consistent with its customary practices, the Court provided no commentary on the rejection of the petition.