In recent years, the vast majority of mergers and acquisitions of public companies have been subjected to not just one, but multiple lawsuits claiming that the merger proxy sent to public stockholders omitted material information. Our experience in the SPAC-era suggests that the incidence of these cases will only increase.
Certainly, there is nothing wrong with seeking judicial redress for legitimate allegations of inadequate disclosure or unfair process (and indeed we litigate and try many such cases). But most of these cases are unoriginal, regurgitating the same laundry lists of alleged omissions from one case to the next.
Their ubiquity calls into question the legitimacy of all suits challenging a merger, meritorious or not. Worse, they unnecessarily clog already busy courthouses and act as a “litigation tax” on companies and their stockholders. Reform is needed.
Meaningful Disclosure Lawsuits Are Rare
Disclosure lawsuits are hardly new. In the late 1990s, these lawsuits were often intellectually stimulating and hotly contested. Thanks to the sort of erudite decisions for which the Delaware Court of Chancery has become known, disclosure law has become fairly well-settled. Consequently, meaningful disclosure lawsuits are few and far between.
Yet, the suits remain prolific. Up until a few years ago, these cases were most often resolved through an early settlement in which the defendant company would make additional disclosures and pay attorneys’ fees approved by the court (often in the mid-six figures) in exchange for a release by the plaintiff on behalf of all other stockholders of claims relating to the transaction.
Though subject to confirmatory diligence by the plaintiff and court approval, these settlements were nonetheless viewed with skepticism. As recognized by a 2014 New York trial court opinion in City Trading Fund v. Nye, defendants agreed to these settlements not because the claims had merit, but because settling almost always cost far less than the amount required to litigate and it removed any risk, however remote.
Fed up with the proliferation of these lawsuits and their pernicious effects, Delaware’s Court of Chancery (once the primary forum for these cases) adopted a heightened standard for reviewing settlements in 2016. In In re Trulia Inc. Stockholder Litigation, Chancellor Andre Bouchard required that additional disclosures be “plainly material” rather than simply additional helpful information in order to warrant payment of the plaintiff’s attorney’s fees. Trulia had the desired effect of rendering such lawsuits almost extinct in Delaware.
Unfortunately, Trulia did not stop the lawsuits from being filed elsewhere. Though the fees paid to plaintiffs’ counsel are now less than they used to be and though a smattering of courts, such as the New York opinion referenced above, have rebuked these lawsuits, they continue to flourish.
A recent study by Cornerstone Research reflects that more than 80% of public M&A transactions announced in 2018 were subjected to more than one of these sorts of lawsuits, and my personal experience suggests that number has grown, particularly with the increase in public M&A deals caused by the recent SPAC phenomenon.
As for the most popular forum, it’s federal court, where more than 90% of all such lawsuits are now filed, asserting the same sorts of alleged omissions as were asserted in Delaware only under the federal securities laws (as opposed to the fiduciary duty claims asserted in Delaware).
Today’s resolutions almost never require court approval. Cases are resolved through out-of-court “mootness” settlements in which the defendant makes some additional disclosures and then in some cases pays the plaintiff’s lawyer a so-called “mootness fee.”
Reform is necessary, and there are many ways to do it. Perhaps the easiest would be for the federal courts to require approval of any mootness fee under a uniform, heightened standard akin to Trulia.
A recent Southern District of New York opinion issued in connection with Energy Transfer LP’s acquisition of SemGroup Corp. (a case in which my firm represented the defendants) denied any fee in connection with mooting disclosures based on the court’s finding that disclosures of the sort plaintiffs regularly seek in these cases do not impart a “substantially benefit” to stockholders.
In that case, however, the defendants had to contest the fee request to obtain redress, which many defendants understandably elect not to do based on a cost-benefit analysis. If federal courts made such review mandatory, it would likely lessen the incidence of these cases just as Trulia did in Delaware, while at the same time protecting colorable claims. There is some precedent for this approach in how we currently treat derivative lawsuits, the dismissal of which requires court approval.
Assuredly, there are many options that could further limit filings, including requiring a plaintiff verify complaints under penalty of perjury, providing justification for the voluntary dismissal of such lawsuits, and lowering the bar for defendants to obtain an award of attorneys’ fees with respect to lawsuits deemed to seek only additional, immaterial information.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Michael Holmes is vice chair-elect of Vinson & Elkins and serves as the co-head of its Complex Commercial Litigation practice. He is also a member of the firm’s management committee.