The percentage of M&A transactions valued over $100 million attracting at least one merger objection lawsuit continued to decline in 2017, according to a recent Cornerstone Research study. The July 18, 2018 study, entitled “Shareholder Litigation Involving Acquisitions of Public Companies: Review of 2017 M&A Litigation” (here), also reports that the average number of lawsuits filed per M&A deal and the percentage of M&A deal litigation voluntarily dismissed declined in 2017, as well. Cornerstone Research’s July 18, 2018 press release about the report can be found here.
The study is based on Cornerstone Research’s analysis of its database of 1,372 deals valued over $100 million and announced between November 19, 2006 and December 18, 2017. The study examines litigation challenging the deals and filed on behalf of shareholders of publicly traded target companies. The lawsuits typically allege that that the target company’s board of directors violated their fiduciary duties, with through failure to discuss material information or through accepting an inadequate price or accepting a price reached through and inadequate process.
Overall, the percentage of deals attracting at least one lawsuit has decreased. As recently as 2013, 94% of all deals valued at over $100 million attracted a lawsuit. The percentage of deals attracting at least one lawsuit began to tail off in 2015, and have fallen off more sharply since the January 2016 Delaware Chancery Court decision in Trulia, in which, as described here, the Delaware court laid out a much more stringent standard for judicial approval of the type of disclosure only settlements that in the past typically characterized the settlement of these kinds of cases. (This heightened standard subsequently has been adopted in a few other jurisdictions, as discussed here).
In 2017, 73% of the deals valued at over $100 million attracted at least one lawsuit, by comparison to an annual average percentage during the years 2013-2016 of 84%. The 2017 percentage was up slightly from the 2016 percentage of 71%.
The lawsuits that were filed in 2017 were filed more slowly as well. In 2017, the first lawsuit was filed an average of 48 days after the deal announcement, compared to 40 days in 2016 and 21 days in 2015.
Not only are relatively fewer deals attracting at least one lawsuit, but for the deals that attract litigation, the average number of lawsuits filed has declined as well. The average number of lawsuits per M&A deal decline to 2.8 from an annual average of 4.2 during the period 2013-2016.
In addition to deals attracting a lawsuit and fewer lawsuits being filed, the percentage of suits filed that are voluntarily dismissed increased in 2017. During the period 2013-2016, an annual average of 26% of merger objection lawsuits filed were voluntarily dismissed. The percentage of suits voluntarily dismissed grew to 39% in 2016. In 2017, 52% of all merger objection lawsuits were voluntarily dismissed. The report states that the increase in voluntarily dismissals “likely is a reflection of the removal of the disclosure-only settlement option post-Trulia.”
Between 2009 and 2014 more than 74 percent of merger objection litigation was resolved before the deal closed. However, the rate of resolution prior to closing has declined from 78 percent in 2012 to a 10-year low of 43 percent in 2017. The report notes that “settlement rates were considerably smaller for cases that were resolved post-closing.”
The 2017 figures reflect a continued shift of cases from state to federal court in the wake of the Trulia decision. The number of deals litigated in Delaware declined 81 percent from 2016 to 2017 (37 in 2016, only seven in 2017). At the same time, the number of deals litigated in the Third Circuit more than doubled, from 15 in 2016 to 33 in 2017. The shift of cases from state to federal court is further detailed in my analysis of 2017 securities class action lawsuit filings, here, as well as in my recent analysis of securities suit filings in the first half of 2018, here.
The majority of M&A litigation (66 percent) was filed in a single jurisdiction, by contrast to earlier years where multiple deal-related lawsuits meant that the target companies were forced to fight a multi-front war. Plaintiffs filed their lawsuits in Delaware for only 6 percent of all litigated transactions in 2017, whereas in 2016 27 percent of plaintiffs filed in Delaware.
As I have previously noted on this blog, while merger objection litigation in Delaware may be declining, there has recently been an uptick in merger-related appraisal litigation. As recently as 2009, there were only 17 appraisal cases filed in Delaware courts. This number jumped to 85 in 2016. While the number declined slightly in 2017 relative to the prior year to 62, the number of Delaware appraisal cases is still well above levels in the recent past. The appraisal litigation has become complicated by a series of Delaware court decisions that “appear to question how to determine fair value of appraisals.”
While the rate of merger objection litigation appears to have declined from recent historically high levels, where 73% of all deals valued at over $100 million attract at least one lawsuit, deal litigation remains a very significant phenomenon, even when over half the cases are voluntarily dismissed. To the extent more courts adopted the Delaware court’s stricter Trulia standard for approval of disclosure only settlements (as the courts of Florida recently did), the numbers of these lawsuits may continue to decline.
In the meantime, however, the costs associated with the kinds of lawsuits continue to increase at an alarming rate, as I detailed in a recent post. The merger objection litigation curse remains a significant problem for companies engaging in M&A transactions, and for their insurers.