The easy money business of merger and acquisition lawsuits may be getting more difficult for the plaintiffs’ law firms that specialize in these questionable class actions, according to new data from Cornerstone Research* and some recent legal decisions.
In the nearly three years since the Delaware Court of Chancery first signaled its hostility to the proliferation of so-called disclosure-only merger lawsuits (culminating in the landmark In re Trulia, Inc. Stockholder Litigation decision), the sector has undergone considerable turmoil. (See my previous blog post.)
In 2015, the first year impacted by the Delaware court’s change of heart, the percentage of M&A deals valued at more than $100 million that attracted shareholder lawsuits dropped to 84 percent from the incredible 90-94 percent level of the 2010-2014 period. The rate fell further to 71 percent in 2016, then recovered slightly to 73 percent in 2017 – still high by pre-2009 standards.
To keep the racket going after Trulia, plaintiffs’ law firms funneled cases out of Delaware and into more hospitable federal courts and, less often, other state courts. The number of deals litigated in Delaware decreased from 37 in 2016 to just seven in 2017. Conversely, federal M&A filings, which never topped 34 in any of the four years prior to 2016, surged to 85 in 2016 and 198 in 2017. The latest Cornerstone report shows 93 federal filings in the first half of 2018.
In addition, the plaintiffs’ bar appears to have adopted a new strategy – mootness dismissals – designed to evade Trulia-type scrutiny of fees by the judiciary and potential dissenting stockholders. In a mootness dismissal, the defendants moot plaintiffs’ claims with supplemental disclosures. In return, plaintiffs voluntarily dismiss their case and then apply to the court for mootness fees as compensation for the (usually dubious) disclosure benefit they have provided. There is no formal settlement for the judge to approve.
Through the first 10 months of 2017, 75 percent of merger-objection cases were resolved in mootness dismissals compared with 22 percent in 2016, according to the legal essay “The Shifting Tides of Merger Litigation.”
As Delaware defense attorney Anthony Rickey of Margrave Law LLC notes in a recent post, “Plaintiffs’ counsel frequently receive six-figure payouts from these mootness dismissals, even though the plaintiffs voluntarily dismiss their complaints. Plaintiffs’ counsel were paid $280,000 in fees following the voluntary dismissal of a lawsuit concerning the Amazon/Whole Foods merger.”
Much as most corporate boards and their legal counsel abhor “these holdup cases,” few want to take a chance on derailing a transaction. So absent federal legislation, the best hope for taking down the so-called “merger tax” is for more state courts and federal circuit courts to get on board with Trulia. And on that front, there is good news.
Over the past nine months, courts in four states – California, Florida, North Carolina and New York – have taken action to make it more difficult for plaintiffs’ counsel to receive fees for settlements that yield only immaterial disclosures and provide no monetary compensation to stockholders.
- On July 13, Florida’s Second District Court of Appeal applied the Trulia standard for trial court review of M&A class action disclosure settlements in Florida on an appeal from an objecting shareholder.
- On June 20, a North Carolina Business Court judge established a new standard when he found a disclosure-only settlement “to have yielded (almost) immaterial disclosures.” He slashed the attorneys’ request for fees by more than half and the request for expenses from $20,000 to zero.
- In February, a New York trial judge did not let a more lenient New York standard stop her from rejecting a proposed disclosure-only settlement in a remanded case, calling the supplemental disclosures “utterly useless to shareholders.”
- In California, the influential Santa Clara County Superior Court’s embrace of the Trulia standard seems to have had an impact. According to Cornerstone, only two deal suits were filed in California state courts during 2017, down sharply from 16 in 2016.
And some objecting shareholders are keeping up the pressure. On July 30, the same individual who appealed in Florida asked California’s Sixth District Court of Appeal to overturn a disclosure-only settlement in the 2015 Pharmacyclics/AbbVie merger, saying it provided over a half-million dollars to plaintiffs’ attorneys and “nothing but worthless disclosures to shareholder class members.”
You may never hear it pass the lips of a plaintiffs’ attorney inside a court, but the word about Trulia seems to be getting around. If enough federal and state courts hold these settlements to a heightened standard or slash the fees for worthless disclosures, plaintiffs’ attorneys might stop filing meritless cases.
Has your company run into issues as a result of a merger transaction lawsuit? Email me with your thoughts.
* Cornerstone Research is the source for all data points in this article unless otherwise attributed.