The Shifting Landscape in M&A Litigation
Recent reports indicate that the number of mergers that were challenged by stockholders during the fourth quarter of 2015 dropped significantly, with estimates ranging from 34% to 21%.1 This is a seismic shift from prior years, when almost 95% of public company transactions resulted in litigation. The drop in lawsuits is attributable to a series of rulings by the Delaware Court of Chancery during the second half of last year. In these rulings, the court expressed significant concern with the routine approval of settlements in stockholder litigation and, in some cases, the court refused to approve the settlement. These rulings demonstrate the Delaware judges’ dissatisfaction with the current state of M&A litigation.
As Vice Chancellor J. Travis Laster put it in the Aruba Networks case,2 “we have reached a point where we have to acknowledge that settling for disclosure only and giving the type of expansive release that has been given has created a real systemic problem.” We describe below the four court rulings issued between July and October of 2015 that led to the current state of play. We also offer some observations on the shifting landscape of M&A litigation.
• Unsubstantiated Attorney’s Fees. Chancellor Bouchard also characterized the “level of actual work that was done” by the plaintiffs’ counsel as “pretty minuscule.” He described the two depositions and roughly 2,500 pages of reviewed documents as a “modest” effort for a “modest” benefit. Ultimately, Chancellor Bouchard awarded $150,000, in attorney’s fees, inclusive of expenses, which was far less than requested by plaintiffs’ counsel.
• The Case Was Not Meritorious When Filed. Plaintiffs originally challenged only the adequacy of the consideration, which Vice Chancellor Laster concluded was not a viable claim. He opined that the litigation was a “harvesting-of-a-fee opportunity … because there wasn’t a basis to file in the first place.” Even though plaintiffs’ counsel eventually discovered a litigable claim, “it was just dealt with through the disclosure and the fee.”
• Stockholder objections may be seen more frequently. In particular, Fordham law professor Sean Griffith has objected in his capacity as a stockholder to numerous disclosure-only settlements.
1 See Liz Hoffman, Judge Makes Merger Lawsuits Disappear, WALL STREET JOURNAL, Jan. 11, 2016, at C1 (reporting that just 34% of mergers involving Delaware corporations after October 1, 2015, were challenged); Matthew D. Cain & Steven Davidoff Solomon, Takeover Litigation in 2015 (preliminary) (finding that M&A lawsuits dropped to 21.4% during the fourth quarter of 2015).
2 In re Aruba Networks, Inc. S’holder Litig., C.A. No. 10765-VCL (Del. Ch. Oct. 9, 2015) (TRANSCRIPT).
3 OLGA KOUMRIAN, CORNERSTONE RESEARCH, SHAREHOLDER LITIGATION INVOLVING ACQUISITIONS OF PUBLIC COMPANIES: REVIEW OF 2014 M&A LITIGATION (2015). Of the cases filed in 2014, 52% have settled, 30% are pending and 13% were voluntarily dismissed. See id. at 4.
4 Acevedo v. Aeroflex Holding Corp., C.A. 7930-VCL (Del. Ch. July 8, 2015) (TRANSCRIPT).
5 In re TW Telecom, Inc. S’holder Litig., C.A. 9845-CB (Del. Ch. Aug. 20, 2015).
6 In re Riverbed Technology, Inc. S’holder Litig., C.A. 10484-VCG (Del. Ch. Sept. 17, 2015).
7 The court applied the Sugarland factors. See Sugarland Indus., Inc. v. Thomas, 420 A.2d 142, 149-50 (Del. 1980) (“These factors are: (i) the amount of the time and effort applied to the case by counsel for the plaintiffs;
(ii) the relative complexities of the litigation; (iii) the standing and ability of petitioning counsel; (iv) the continent nature of the litgation; (v) the stage at which the litigation ended; (vi) whether the plaintiff can rightly receive all the credit for
the benefit conferred or only a portion thereof; and (vii) the size of the benefit conferred.”).
8 In re Aruba Networks, Inc. S’holder Litig., C.A. No. 10765-VCL (Del. Ch. Oct. 9, 2015) (TRANSCRIPT).
9 See, e.g., In re Trulia Inc. S’holder Litig., C.A. 10020-CB, amicus br. (Del. Ch. Oct. 16, 2015).
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