One of the most significant corporate litigation phenomena over recent years has been the rise of merger objection litigation, as result of which nearly every public company merger objection transaction has drawn at least one lawsuit. According to the latest study of merger litigation from Cornerstone Research, this phenomenon continued in 2018, with the same percentage of merger transactions as in 2017 attracting at least one lawsuit – in 2018, as in 2017, 82% of public company merger transaction valued over $100 million drew at least one lawsuit. The Cornerstone Research report, entitled “Shareholder Litigation Involving Acquisitions of Public Companies: Review of 2018 M&A Litigation,” can be found here. Cornerstone Research’s September 17, 2019 press release about the report can be found here.
The Cornerstone Research report draws on the firm’s merger transaction database, which contains 1,928 deals announced between November 19, 2006, through December 31, 2018.
Percentage of Deals Drawing a Lawsuit: According to the report, there were a total of 142 public company merger deals announced in 2018 that were challenged by lawsuits, compared with 115 in 2017. However, in both 2017 and 2018, the deals that drew lawsuits represented 82% of all deals announced during the year. The percentage of deals hit with lawsuits had declined slightly during 2016 (the year in which the Delaware Chancery Court issued its Trulia decision, in which the court evinced its distaste for the type of disclosure-only settlement that typically resolved the merger objection lawsuits then), to around 71% of deals announced during the year. However, in 2017 and 2018, the percentage of deals challenged in lawsuits bounced back somewhat, although not all the way to 2009-2015 annual average of 90% of deals.
Number of Lawsuits Per Deal: The average number of lawsuits filed per deal rose slightly to 3.1 in 2018, compared to 2.9 lawsuits per deal in both 2016 and 2017. The number of lawsuits per deal in 2018 remained below the 2009-2015 average number of lawsuits per deal of 4.7. Several of the deals announced in 2018 drew notably more lawsuit filings; for example, both the Finisar Corp. and Pandora Media transactions drew nine lawsuits.
Percentage of Lawsuits Voluntarily Dismissed: One significant change in 2017 and 2018 compared to prior years was the increasing number of merger objection suits resolved through voluntarily dismissal. Thus, while the annual average percentage of merger objection suits voluntarily dismissed was only 17% during the period 2006 through 2015, the percentage rose to 72% in 2017 and stayed at roughly the same level (70%) in 2018. This increase in the number of voluntary dismissals is a result of the plaintiffs’ changing approach to resolving this litigation, in which the defendant voluntarily agrees to make changes to the deal –related proxy statement and agrees to pay the plaintiffs’ counsel a “mootness fee” in exchange for the plaintiff’s counsel’s agreement to dismiss the lawsuit.
Shift of Suit Filings from State Court to Federal Court: The Delaware Chancery court’s 2016 decision in the Trulia case has significantly affected the plaintiff’s counsel’s choice of the forum in which to file the merger objection lawsuits. Thus, during the period 2009 through 2015 (that is, the period before Trulia), the average annual percentage of all deals that were challenged in federal court was26 percent. However, in 2017, the number of deals challenged in federal court rose to 96 percent. In 2018, the number of deals challenged in federal court declined slightly compared to 2017, to 91 percent.
State Court Filings: In addition, in 2018, 34 percent of deals were challenged in state court, which represents a rebound from the 2017 percentage of 18 percent. The number of deals challenged in state court in 2018 also increased , with 49 deals challenged in state court, compared to only 21 in 2017.
Number of Jurisdictions in Which a Deal is Challenged: In 2018, only 45 percent of litigated deals faced challenges in only one jurisdiction, which represents the first time since 2013 that less than half of challenged deals faced litigation in only one jurisdiction. In 2018, 43 percent of deals were challenged in two jurisdictions, compared to 26 percent in 2017. In 2018, 12 percent of deals were challenged in three or more jurisdictions, compared to only four percent in 2017.