By Joseph B. Crace and David Killion
(Joseph B. Crace is an attorney atBass, Berry & Sims PLC, concentrating his practice on corporate and securities litigation, shareholder litigation and general commercial disputes. David Killion is an attorney at Bass, Berry & Sims PLC, focusing his practice on corporate and securities litigation, including class action defense and officer and director liability, as well as administrative proceedings on behalf of utility industry clients.)
We last examined the issue of what we referred to as the “flood” of merger litigation approximately a year ago,1 in an article in which we noted that “[o]ver the last two years, practitioners and commentators have focused their attention on the perceived proliferation of shareholder litigation involving mergers and acquisitions.” This proliferation continued throughout 2012 and warrants a reexamination of the state of merger litigation and whether the trend of increased filings in opposition to announced deals will likely continue.
As anyone reading this blog is likely aware, shareholders (and their lawyers) continue to file “merger objection” lawsuits at a rather astounding rate. In a March 2012 report, Cornerstone reported that 96 percent of mergers valued at over $500 million attract at least one lawsuit, and attract on average 6.2 lawsuits per deal. Eighty-five percentof mergers valued from $100-500 million attract a lawsuit (4.1 per deal on average).2 While most shareholder plaintiffs initially file suit looking for a “price bump” in the offered merger consideration, many settle for “supplemental disclosures” – in essence, additional information inserted into the proxy statement, which the plaintiff claims is material, the defendant claims is immaterial, and the conflict is resolved through payment of negotiated attorneys’ fees to plaintiff’s counsel with no monetary benefit to the class.
The stack of “year-end” blog posts and summaries clogging inboxes after the holidays confirms that the proliferation of merger objection lawsuits remains a matter of great concern to courts, commentators, and companies looking to acquire or be acquired. In the case of the latter, there has even been some talk that D&O insurance carriers have taken merger litigation into account when calculating policy terms and premiums for 2013. Some D&O insurers now consider merger litigation a “high-frequency product,” resulting in higher premiums, higher deductibles for M&A-related activity, and even M&A exclusions.3
Accordingly, 2012 was a year that featured some pushback by courts (and court-commentators) against merger litigation activity, especially (but not exclusively) in Delaware.
Injunction Denials: For example, in his review of “Key Delaware Corporate and Commercial Decisions in 2012,” Francis Pileggi reported that the Delaware Court of Chancery declined to enjoin challenged mergers three times in three weeks despite some criticism of the process and the parties to the transactions, preferring instead to let the shareholders make the ultimate decision on whether to accept the premium offered for their shares.4 See In re Delphi Fin. Group S’holder Litig., C.A. 7144-VCG (Del. Ch. Mar. 6, 2012); In re El Paso Corp. S’holder Litig., C.A. No. 6949-CS (Del. Ch. Feb. 29, 2012); In re Micromet, Inc. S’holder Litig., C.A. No. 7197-VCP (Del. Ch. Feb. 29, 2012). In a more recent case, the Chancery Court denied the plaintiff’s attempt to enjoin a merger on the grounds that the board failed to include in the proxy the management-prepared projections upon which the target’s financial advisor relied – an oft-given reason for seeking an injunction due to “inadequate disclosures.” Dent v. Ramtron Int’l Corp., C.A. No. 7950-VCP, at 67 (Nov. 19, 2012) (Transcript Op.). The court reaffirmed that “[t]here is no per se duty to disclose financial projections furnished to and relied upon by an investment banker,” and in order to render disclosures inadequate, “the projections must be material in the context of the specific case.” Moreover, the plaintiff presented “no facts suggesting that the undisclosed information is inconsistent with, or otherwise significantly differs from, the disclosed information.” Id. at 69.
Attorneys’ Fees: Courts have also pushed back on the issue of attorneys’ fees. The Delaware Chancery Court issued a line of opinions denying (or severely reducing) the fee awards requested by plaintiff’s counsel in cases where the plaintiff filed suit and then swiftly pursued a disclosure settlement. See, e.g., In re Sauer-Danfoss, Inc. S’holders Litig., 2011 WL 2519210, at *8 (Del. Ch. Apr. 29, 2011).5 This past year, courts in other states also denied fee applications in cases where the litigation provided no monetary benefit to shareholders.6
Multijurisdictional Litigation: It will be interesting to see what position courts take on the issue of multijurisdictional merger litigation heading into 2013, particularly where plaintiffs attempt to avoid unfavorable Delaware precedent by filing first in other states where the plaintiff or the company is located. Chancellor Strine recently co-authored an article entitled, “Putting Stockholders First, Not the First-Filed Complaint.”7 The abstract of this article summarizes its position as follows: “The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs’ attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts.” Among other things, the authors propose that “[t]he ‘first-filed’ rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties’ interests and judicial efficiency,” which would include favoring the courts of the state of incorporation by strengthening the “internal affairs doctrine.” It would seem that in order to put such reforms into effect, however, courts in jurisdictions other than the state of incorporation would have to accept the authors’ propositions, and agree to stay litigation in their jurisdictions in favor of another forum regardless of which litigation was first-filed.
D&O Premiums: Apart from anything the courts might do, the possibility of D&O Insurers raising premiums and deductibles may have an impact in and of itself. If companies are forced to bear the cost of paying hundreds of thousands (or millions) of dollars in attorneys’ fees to plaintiff’s counsel out of their own pocket, as opposed to drawing on their D&O coverage, they may be more reluctant to settle and take their chances on a motion to dismiss or in opposing a preliminary injunction, drawing on the emerging body of caselaw dismissing many of the more routine allegations made by shareholder litigants challenging deals. On the other hand, such increases may simply be regarded as yet another cost of doing business, with the cost of settling eventual litigation built into the price of the deal.
It should be interesting to see whether any of the aforementioned trends continue into 2013, and whether any of these developments reduce the number of deals that prompt litigation, or at a minimum reduce the number of lawsuits filed per deal.
1 Britt K. Latham & Joseph B. Crace, Jr., “Navigating the Flood of Merger Litigation,” Law360 (Feb. 24, 2012).
2 Discussed at http://www.dandodiary.com/2012/05/articles/shareholders-derivative-litiga/cornerstone-research-releases-updated-study-of-ma-litigation/, and available at http://www.cornerstone.com/files/Publication/2af469a2-f24a-4435-96c0-a36d24541e/Presentation/PublicationAttachment/876cdfd2-d105-408e-aee0-a37fe880c07a/Cornerstone_Research_Shareholder_MandA_Litigation_03_2012.pdf.
3 See Kara Altenbaumer-Price, “Guest Post: Courts Reject Fee Awards in Non-Cash Class Settlements,” The D&O Diary, December 6, 2012, available at http://www.dandodiary.com/2012/12/articles/securities-litigation/guest-post-courts-reject-fee-awards-in-noncash-class-settlements/.
4 Available at http://www.delawarelitigation.com/2013/01/articles/annual-review-of-cases/key-delaware-corporate-and-commercial-decisions-in-2012/
5 While Courts have “pushed back” somewhat, this line of opinions is limited in scope. See Alison Frankel, “Don’t Mess with Texas (if you’re a lawyer for plaintiffs in an M&A case)” (Oct. 9, 2012) (noting that “[f]or all of the Delaware Chancery Court’s tough talk about attorneys’ fees in merger class actions in which investors get no cash, the judges haven’t exactly stopped rewarding plaintiffs’ lawyers for bringing the cases. In fact, the Delaware bench regards a fee of $400,000 to $500,000 as the going rate for a settlement that provides one or two ‘meaningful’ disclosures in a proxy statement.”), available at http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=58630&terms=%40ReutersTopicCodes+CONTAINS+'ANV'.
6 See Altenbaumer-Price, supra (discussing denial of fee awards in non-cash class settlements by Texas and California courts).
7 Available at http://wwrn.com/abstract=2200499 (Jan 10, 2013).