Cornerstone Research Releases Report on Legal Challenges to M&A Deals
M&A Deal Litigation Falls in Delaware, Nationwide
Cornerstone Research has released Shareholder Litigation Involving Acquisitions of Public Companies–Review of 2015 and 1H 2016 M&A Litigation. The headline conclusion is that last year–for the first time since 2009–less than 90 percent of M&A deals valued over $100 million were subject to shareholder litigation. In the first half of 2016, the percentage of M&A deals challenged dropped to 64 percent.
Plaintiffs’ choice of jurisdiction changed greatly between 2015 and the first half of 2016. In 2015, plaintiffs brought the vast majority of litigated transactions involving Delaware corporations either in Delaware courts, or in multiple fora that included Delaware. In the first half of 2016, plaintiffs filed only 36 percent of such litigation in the Delaware Court of Chancery. (See page 3 of the report.)
With regard to settlement approval, Cornerstone notes that:
[A] small number of disclosure-only settlements have been approved in various state courts post-Trulia in cases where the settlement was reached before the Trulia decision. It is not clear yet whether such approvals will continue to occur in cases where the settlement was reached after the Trulia decision.
While the number of deals subject to litigation has fallen, over half of all large M&A transactions still draw a lawsuit. The decline in deal litigation is difficult to explain as anything other than a response to Delaware Court of Chancery decisions such as Riverbed¹ and Trulia,² particularly given that litigation rates have fallen much more significantly within Delaware than elsewhere.
Cornerstone’s numbers relating to litigation activity in California and Delaware are particularly striking. In 2015, plaintiffs litigated 91 and 22 cases in Delaware and California, respectively. In the first half of 2016, however, the two jurisdictions were equal at 10 cases apiece. (Cornerstone’s figures do not make clear, however, how state of incorporation affects this trend. It may be that the relatively small decline in California filings is in part a consequence of California litigation involving California-incorporated firms.)
Cornerstone’s new data raise three key questions:
- Is the drop in M&A litigation activity a continuing trend, or a temporary respite as plaintiffs’ attorneys adjust to the post-Trulia environment? If plaintiffs’ attorneys remain able to recover lucrative fees outside of Delaware, they may continue to bring lawsuits in other jurisdictions–and reach disclosure-only settlements–even in cases involving Delaware corporations. They may also bring M&A lawsuits under federal law rather than pursue purely state law claims. The decline in merger litigation may well be short-lived.
- Will courts outside of Delaware address Trulia? Cornerstone’s report suggests that courts outside of Delaware may not continue to approve disclosure settlements that were agreed post-Trulia. While this is a possible outcome, I am aware of no non-Delaware case that approves a pre-Trulia disclosure settlement but indicates that similar settlements reached after Trulia would be disfavored. (Of course, state court decisions are often unreported and difficult to gather, so such a case may exist.) It is possible, however, that non-Delaware courts continue to approve settlements even after Trulia in part because, as I discussed in an earlier article, parties seeking settlement approval do not provide the reviewing court with more recent, and more skeptical, Delaware authority. The absence of adversarial process, itself a cause of the litigation explosion, may thus hinder a decline in litigation outside of Delaware.
- Will Delaware companies adopt, and enforce, forum-selection provisions? If M&A transactions are less likely to face litigation in Delaware than elsewhere, then in theory deal planners can mitigate litigation risk by adding Delaware forum-selection clauses to a corporation’s articles or bylaws. It remains to be seen, however, the extent to which boards will adopt such provisions and whether, when they are sued, directors will choose to enforce the provisions or proceed with litigation in a more settlement-friendly jurisdiction in order to secure a broad release.
¹ In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016).
² In re Riverbed. Technology, Inc. Stockholder Litigation, 2015 WL 5458041 (Del. Ch. Sept. 17, 2015).
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