M&A-related shareholder litigation has dried up in Delaware as
plaintiffs have moved to federal courts and those in other states.
By David Marcus
Andre
Bouchard ended an era in Delaware corporate litigation with his Jan. 22
decision in shareholder litigation arising from the $3.5 billion sale of Trulia
Inc. to Zillow Inc. (Z) The judge said that the Court of Chancery’s “historic
predisposition toward approving disclosure settlements” was dead. No
longer would members of the Court of Chancery allow target companies to settle
shareholder suits by disclosing additional information about a potential sale
without changing the terms of the transaction or increasing the consideration
paid to shareholders. Nor would the plaintiffs’ lawyers receive $500,000 or so
in fees as part of the typical settlement, which had become a standard way of
resolving cases where stockholders allege that a target company’s board
violated its fiduciary duties in approving the sale of the company. And the
company would not get a broad release from future litigation over matters
relating to the deal.
At
the time, it was unclear what would replace the disclosure-only settlement
regime, which was so lucrative for plaintiffs lawyers that they sued to
challenge more than 90% of all public company deals, up from about a third a
decade earlier. Over the intervening eight months, an answer has emerged.
Trulia has had its intended effect, and there is far less M&A litigation
being brought in Delaware. Instead, plaintiffs are suing in other state and
federal courts. Delaware practice is evolving toward fewer, larger matters. Law
firms large and small are adapting accordingly.
According
to a recent report issued by Cornerstone Research Inc., “Plaintiffs filed
in Delaware for 61% of the litigated deals over the first three quarters of
2015 but only 26% of litigated deals in the fourth quarter of 2015 and the
first half of 2016.” The economic incentive to do so has largely
disappeared. Delaware Vice Chancellor J. Travis Laster has made it clear that
he will not approve disclosure-only settlements or approve the payment of fees
to plaintiffs lawyers. Bouchard and Vice Chancellor Sam Glasscock III have
approved those fees when a defendant company moots a case by making additional
disclosures in response to a shareholder complaint, but the so-called mootness
fees have been far less than what plaintiffs lawyers generally received before
Trulia.
Trulia
isn’t the only reason for the decline in litigation. In Corwin v. KKR Financial
Holdings LLC, the Delaware Supreme Court held in October 2015 that an
uncoerced, fully informed, disinterested stockholder vote reduced the standard
of review in arm’s length merger to the business judgment rule, which is highly
deferential to the target’s directors. The Court of Chancery has interpreted
the decision broadly, which reduces the likelihood that plaintiffs lawyers will
succeed with a claim after the closing of a third-party deal.
With
Delaware a far less appealing place to sue, plaintiffs lawyers are going
elsewhere. Federal court is one possible destination. According to Cornerstone,
securities law class action suits involving a merger rose to 24 in the first
half of this year “compared to a range of five to nine filings per
semiannual period in 2012 through 2015.” But an August decision from Judge
Richard Posner of the Seventh Circuit Court of Appeals provided a powerful tool
to defendants who want to get such suits dismissed and to individual plaintiffs
who want judges to reject proposed disclosure-only settlements.
Posner,
one of the most prominent members of the federal judiciary, reversed a U.S.
District Court judge and rejected the proposed settlement of shareholder
litigation arising from the reorganization of Walgreen Co. as part of the
drugstore operator’s 2014 combination with Alliance Boots GmbH. The $22 billion
merger created Walgreens Boots Alliance Inc. (WBA).
He
wrote that the six additional disclosures were “only a trivial addition to
the extensive disclosures already made in the proxy statement: fewer than 800
new words - resulting in less than a 1% increase.” The judge wrote,
“The type of class action illustrated by this case is no better than a
racket. It must end. No class action settlement that yields zero benefits for
the class should be approved, and a class action that seeks only worthless
benefits for the class should be dismissed out of hand.” At the end of his
ruling, Posner quoted at length from Trulia.
State
court judges outside of Delaware may not be as implacable when faced with
disclosure-only settlements. Statistics on settlements of M&A litigation
outside of Delaware are hard to come by. Still, Cornerstone wrote, “More
cases are being litigated outside of Delaware.” Even before Trulia came
down, company-side litigators were saying that they were spending more time in
state courts outside of Delaware. Most state court judges have very full
dockets and little interest in scrutinizing a settlement that both parties have
agreed to or giving a hearing to an individual shareholder who may oppose the
settlement as a waste of corporate funds.
In
February, Judge James Gale of the North Carolina Business Court approved the disclosure-only
settlement of litigation arising from the $27.4 billion sale of Lorillard Inc.
to Reynolds American Inc. (RAI). James Snyder, the former general counsel at
Family Dollar Stores Inc., mentioned Trulia in his written objection to the
settlement, and Sean Griffith, , a professor of corporate law at Fordham Law
School who has written several law review articles in which he’s criticized
disclosure-only settlements, submitted an affidavit in favor of Snyder’s
objection.
With
the decline in M&A-related shareholder litigation, the Court of Chancery
has more time to focus on cases arising from management buyouts, buyouts of
public subsidiaries by controlled companies, and deals with conflicts of
interest. The court has also seen an increase in appraisal actions in recent
years, matters in which a stockholder who believes he is receiving an unfair
price for his stock asks a court to determine the value of his shares.
Appraisals can take two years or more to litigate from start to finish, and
shareholders can end up doing very well. In July, for example, Laster found
that the $13.88 per share that Michael Dell and Silver Lake Partners paid for
the company Dell founded in 1984 undervalued it by 27%.
The
changes in Delaware law will likely affect lawyers in different ways. Elite
plaintiff-side litigators such as Joel Friedlander of Friedlander & Gorris
PA, Stuart Grant of Grant & Eisenhofer PA, Mark Lebovitch of Bernstein
Litowitz Berger & Grossman LLP and Darren Robbins of Robbins Geller Rudman
& Dowd LLP already focus their efforts on cases arising from troubled deals
that can often lead to multi-million-dollar judgments and generally don’t end
with disclosure-only settlements. Other plaintiffs lawyers are bringing cases
in other jurisdictions or pursuing other kinds of litigations. Plaintiffs shops
tend to be small and often have low overhead, so mergers aren’t likely.
Shifts
in the defense bar may be more subtle. Lawyers at Wilmington powerhouses such
as Richards, Layton & Finger PA and Morris, Nichols, Arsht & Tunnell
LLP tend to handle a range of matters, and the nature of litigation practice
makes it easier for them to transition to other kinds of cases than it highly
specialized corporate lawyers to switch fields.
But a
decade of disclosure-only settlements on almost every public company deal did
mean that some lawyers in Wilmington and at large corporate firms in New York,
Silicon Valley and elsewhere came to specialize in such litigation, and they
will need to retool.