In the January/February issue of IR Update, a National Investor Relations Institute’s premier magazine, the article “The Uphill Battle to Take Down the ‘Merger Tax'” analyzes recent trends in “meritless” merger objection lawsuits that have hampered U.S. public companies for nearly a decade.
From 2009 through 2015, between 84 and 94 percent of all merger transactions over $100 million were challenged by at least one shareholder class-action lawsuit. The Delaware Court of Chancery gradually moved to rein in non-meritorious merger suits, culminating in January 2016 with its rejection of a proposed settlement in the acquisition of Trulia Inc. by Zillow Inc. In the Trulia case, the Chancery Court declared that future disclosure-only settlements “are likely to be met with continued disfavor” unless the supplemental disclosures provide a “plainly material” benefit to the shareholders and “the proposed release is sufficiently narrow.”
While the Trulia case sparked an initial decrease in these merger litigation filings in Delaware, it did not curb them altogether. Plaintiffs’ lawyers simply changed their strategy. “Cases that had been funneled into Delaware were now funneling out of Delaware” and into federal courts and courts in other states, said Smith Anderson Partner Cliff Brinson. According to financial consulting firm Cornerstone Research, over the fourth quarter of 2015 and the first two quarters of 2016 combined, just 26 percent of M&A-related litigation was filed in Delaware, down from 61 percent over the first three quarters of 2015.
In the article, Smith Anderson Partner Don Tucker explained that depending on whether a company has adopted an “exclusive forum” provision in its articles or bylaws, a litigant suing for breach of fiduciary duty in connection with a merger transaction may have more than one option in deciding where to file suit. A lawsuit may be filed in the defendant’s state of incorporation, or the plaintiff may be able to file in other jurisdictions, such as where the company has its principal place of business. Or, a plaintiff may avoid state court entirely and attempt to recast their state law breach of fiduciary duty claims as “failure to disclose” claims under the federal securities laws.
“Traditionally, plaintiffs’ lawyers have not liked securities law claims [in merger cases] because there are all sorts of defenses under federal law against them,” said Cliff. “But they’d rather do that than take their chances in the Delaware Court of Chancery.”
The Delaware Court of Chancery has approved a small number of disclosure settlements since its 2016 decision in the Trulia case, but plaintiffs’ lawyers continue to seek, and in some cases receive, six-figure fee awards outside the state. The willingness of courts to continue to sanction such large fees in cases where there is no monetary recovery for the shareholder class remains to be seen, and it is possible that some courts will respond by more carefully scrutinizing fee applications and by awarding a lesser fee (or no fee at all), where the value of the disclosures obtained through the lawsuit are questionable.
Don has more than 30 years of complex commercial litigation experience, including significant experience in mergers and acquisition-related litigation, multi-party cases, class actions, claims under the federal securities laws, shareholder and partnership disputes and contract disputes of many types. He appears frequently in the North Carolina Business Court and has represented a wide variety of corporations, including financial institutions and insurance companies; pharmaceutical and other life sciences companies; contract research organizations; issuers of securities; and buyers and sellers of both businesses and of goods and services.
Cliff assists clients with a full range of commercial litigation matters, including corporate and securities litigation, contract disputes, and business-related tort and statutory claims. He also assists companies in internal investigations.
Read the full IR Update article here.