As I have noted elsewhere on this site (for example here), the number of federal court merger objection class action lawsuits declined significantly during 2021. But as I and others have also noted, the decline in class actions had not necessarily meant less merger objection litigation overall. The merger objection suits are still being filed; they are just being filed as individual actions rather than as class actions. In the following article, Gregory Markel, Vincent Sama, Daphne Morduchowitz, Andrew Escobar, and Matthew Catalano of the Seyfarth Shaw law firm take a closer look at these changing merger objection lawsuit patterns and discuss the implications. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.
Seyfarth has conducted a thorough analysis of the litigation filed in 2021 arising out of mergers and acquisitions for the year.[i] While there is, as reported elsewhere, a marked decrease in class action filings arising from M&A deals in 2021,[ii] federal M&A litigation has not gone away. Rather, a handful of plaintiffs’ firms have continued to file M&A challenges but have brought the suits on behalf of individual-investors rather than on a class-wide basis. These plaintiffs’ firms have continued the pattern identified in 2020 of quickly voluntarily dismissing the case often following relatively immaterial supplemental disclosures used to justify attorneys’ fees. As compared to 2020, where the bulk of such litigation was brought by a single plaintiffs’ firm,[iii] 2021 saw a number of plaintiffs’ firms enter the fray, with any given M&A deal spurring separate actions by multiple plaintiffs’ firms. As in 2020, the majority of the cases filed appear to be intended to generate mootness fees for plaintiffs’ counsel. As we noted last year, we expect this abusive litigation trend to continue unless there is wider recognition of the problem followed by reform.
As laid out in more detail in Seyfarth’s 2021 article entitled Abusive M&A Litigation Highlights Need for Securities Reform,[iv] prior to the Delaware Court of Chancery’s 2016 decision in In re Trulia Stockholder Litigation[v] M&A challenges were routinely brought in Delaware state court and resolved in early settlements with “corrective disclosures” that appeared to offer little, if any, meaningful benefit to investors.[vi] After the Delaware Chancery Court warned that such meritless settlements would no longer be tolerated, plaintiffs’ firms changed tactics, instead filing cases in federal court with the sole intent of obtaining attorneys’ fees—known as mootness fees—in exchange for voluntary dismissals and non-material supplemental disclosures.[vii] This arrangement allows plaintiffs’ counsel to bypass court approval and the potential analysis of the settlement by courts under Trulia because settlements before class certification or settlements of individual actions typically do not require court approval. The arrangement also typically avoids public scrutiny because mootness fees are generally immaterial to the paying company and are often not widely disclosed.
M&A Challenges in 2021
Overall, approximately 50[viii] transactions faced class action challenges in 2021, which, while a marked decline from the 122 identified by Seyfarth in 2020, remains a substantial number.[ix] These complaints, which are largely cookie-cutter, allege that defendants omitted certain details regarding financial projections and deal background that purportedly render proxy or registration statements misleading. Generally, they hardly differ in substance from the disclosure suits criticized by the Delaware Court of Chancery in its 2016 Trulia decision.[x] Notably, approximately 45 of the 50 cases (or approximately 90% of them) were voluntarily dismissed within months of their filings, comparable to the 95% of M&A class actions subject to voluntary dismissal in 2020. Furthermore, as in 2020, many of these voluntary dismissals followed the issuance of supplemental disclosures that do not appear to reveal any significant new information. The dismissals and related settlements, which occur before class certification, rarely get reviewed by a court for fairness to the proposed class of shareholders and appear to be without material benefit to the class. The quick timing of the voluntary dismissals and lack of discernable value to the shareholders strongly suggest that these cases are being filed for the benefit of plaintiff’s counsel, rather than the shareholders they represent.
However, an analysis of M&A class actions tells only part of the story. As in 2020, an array of plaintiffs’ firms in 2021 brought a substantial number of non-class “individual plaintiff” claims challenging various M&A transactions. Indeed, our review of these non-class action filings indicates that approximately 210 M&A transactions were hit with the filing of individual complaints.[xi] While these numbers represent a decrease from the approximately 450 non-class action federal challenges to M&A deals identified by Seyfarth in 2020,[xii] they show that M&A litigation and threats of litigation have not disappeared. As with the class action complaints, a large number (approximately 75%) of the individual complaints brought were voluntarily dismissed, many very soon after the complaint was filed. Furthermore, like the class action suits, many of these dismissals follow the filing of what appear to be superficial supplemental disclosures and most likely involve confidential mootness fees paid to plaintiffs’ counsel.
Finally, while un-trackable, anecdotal evidence suggests that a number of M&A deals in 2021 were challenged by demand letters without lawsuits being filed and were also resolved with minor and immaterial additions to the disclosures (and likely mootness fees) without litigation.
This analysis strongly suggests that frivolous and abusive M&A litigation has not gone away. There is a clear need for legislative reform in this area to prevent what amounts to a burdensome deal tax imposed on companies which likely is in part passed on as a cost to consumers. Another likely effect of this deal tax is that it results in increases in D&O insurance premiums.
The continued large-scale filing of M&A litigation in 2021 highlights that the public policy issues underlying the Trulia court’s criticism of disclosure only settlements remain a concern with respect to the current mootness fee settlements. Like the settlements criticized in Trulia, the federal court mootness fee settlements provide no benefit to the company shareholders and serve as a deal tax on almost every M&A transaction involving a public company. Even more egregiously, the federal court mootness fee settlements, unlike those at issue in Trulia, seldom involve court review. These actions, which are being filed on behalf of purported classes of shareholders have been shifting to individual plaintiffs, who have taken up the cudgels in collecting a deal tax. Because there is little incentive for an individual defendant to risk litigating these suits, we expect these various forms of a deal tax to continue unless the issue is remediated by court action or through congressional reform of securities laws.
Seyfarth associates Andrew Cohen and Cassandra Frias contributed to this article.
[i] For Seyfarth’s analysis of 2020’s M&A litigation trends, see Abusive M&A Litigation Highlights Need for Securities Reform (Law360, March 4, 2021), https://www.law360.com/articles/1361125/abusive-m-a-litigation-highlights-need-for-securities-reform.
[ii] See, e.g., Cornerstone Research, Securities Class Action Filings 2021 Year in Review at 1
https://www.cornerstone.com/wp-content/uploads/2022/02/Securities-Class-Action-Filings-2021-Year-in-Review.pdf (finding 82% reduction in M&A class action filings from 2020 to 2021); NERA Economic Consulting, Recent Trends in Securities Class Action Litigation: 2021 Full-Year Review, https://www.nera.com/content/dam/nera/publications/2022/PUB_2021_Full-Year_Trends_012022.pdf (finding 85% decrease in merger-objection filings from 2020 to 2021). Seyfarth’s analysis differs from these other reports even in the class action space as, as Seyfarth’s analysis includes litigation arising from M&As where other claims, such as 10b-5 allegations, are made and; unlike other reports, is not considering M&A litigation relating to SPACs in a different category.
[iii] Supra, n. 2.
[v] In re Trulia Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016).
[vi] See supra n. 2.
[viii] Seyfarth’s analysis differs from other reports tracking M&A class actions such as those noted in note 2, supra, because we have included class action litigation arising from M&A transactions even where other claims, such as 10b-5 allegations, are also made and we are also considering M&A litigation relating to SPACs, both of which fell into different categories in other analyses. As such, we have identified a higher number of M&A class actions than reported elsewhere.
[ix] Notably, Rigrodsky, which had brought 76% of class action deal challenges in 2020, appears to have largely abandoned its strategy of bringing putative class actions (turning its focus to complaints by individual plaintiffs).
[x] Trulia, 129 A.3d at 884.
[xi] This figure reflects that the same M&A transaction generated anywhere from one to ten near-identical complaints brought by different firms.
[xii] See supra n. 2.