Individual Merger Suits Replacing Class Action in Strategy Shift

Investors who sue merging companies for insufficient disclosures are reinventing their approach, increasingly forgoing class actions in favor of individual lawsuits that tend to invite less scrutiny.

A class action settlement requires a judge’s approval, while a settlement or voluntary dismissal in individual lawsuits doesn’t. Plaintiffs likely are also increasingly wary of a 1995 law that, among other things, limits the number of times an individual can serve as lead plaintiff in securities class actions.

About 75% of the companies sued in federal court in 2017 by investors objecting to their merger or acquisition were sued solely in a would-be class action, Bloomberg Law data show. That number flipped in 2021, when over 90% of the mergers targeted in federal litigation were challenged exclusively through an individual action.

The trend is more pronounced this year. Through June, just one merger was objected to in federal court through a would-be class action, data show. In comparison, plaintiffs brought objections to almost 90 transactions—including deals involving Twitter, RedBox, and Activision Blizzard—solely through individual actions, data shows.

Legal scholars and defendants companies have criticized merger disclosure suits as often being frivolous attempts by a handful of plaintiff law firms to extract settlement fees while providing little value to investors.

The changing trend in the types of suits investors file reflects a strategic shift by plaintiffs and their law firms, at a time when some federal judges have become increasingly skeptical of merger objection suits.

Recent court decisions questioning the benefits of these suits also have given companies more leverage in negotiating fee payments.

“These law firms have been very creative and resourceful in changing tactics to respond to judicial crackdown or even the potential for judicial crackdown,” University of Richmond law professor Jessica Erickson said.

Lawyers who routinely file cases challenging merger disclosures have defended the suits as obtaining valuable information for shareholders.

Additional disclosures following an investor’s lawsuit in Microsoft’s acquisition of Nuance Communications, for example, “provided a substantial benefit to Nuance shareholders by correcting” misleading information, the plaintiff’s counsel, Monteverde & Associates PC, wrote in a recent court filing.

Rise of the Individual

The investor who sued in the Nuance deal, Albert Serion, alleged that information was missing from summaries of the financial analysis that a Nuance adviser conducted ahead of the deal.

Serion wanted to block a shareholder vote until the information was disclosed.

The complaint was in many ways representative of merger disclosure cases, which often seek details about financial forecasts and analyses, and other facets of the deal, attorneys say.

Plaintiffs often dismiss the cases after companies make the requested disclosures. The plaintiff’s law firm is paid a “mootness fee”—typically ranging from $50,000 to $150,000—for obtaining the information, according to a 2019 study by researchers at UC Berkeley, Vanderbilt and the University of Pennsylvania law schools.

Several attorneys and legal scholars said the shift from class actions to individual actions is likely an attempt by plaintiffs—and their law firms—to avoid a 1995 law, the Private Securities Litigation Reform Act (PSLRA).

The PSLRA prevents an individual from being lead plaintiff in more than five securities class actions in a three-year period, among other rules aimed at frequent filers of securities class actions.

“If the purpose of the lawsuit is to try to generate a fee for the lawyer to make the case go away, it’s a lot easier to do that in an individual action,” said Jill Fisch, a law professor at the University of Pennsylvania and one of the authors of the 2019 study.

The suits have routinely been filed by a handful of law firms, including Melwani & Chan LLP, Halper Sadeh LLP, and Rigrodsky Law PA. Most of the plaintiffs also are repeat players.

Attorneys from the law firms didn’t respond to requests for comment.

Leaving Delaware

Plaintiffs have recently opted for federal courts over their traditionally preferred venue, the Delaware Court of Chancery.

Plaintiffs started looking elsewhere after a 2016 Chancery decision, In re Trulia, Inc. Stockholder Litigation. In that ruling, the court criticized disclosure settlements that obtain disclosures but don’t provide meaningful benefits for shareholders.

Federal courts saw a marked influx of merger objection class actions the following year. In their suits in federal courts, plaintiffs staked their claims on a federal securities law provision that prohibits “material misrepresentations and omissions in proxy statements” sent to stockholders.

Individual lawsuits against mergers first started appearing from a group of frequent-filer plaintiffs around that same time, according to a recent study of those plaintiffs conducted by Fordham law professor Sean Griffith.

Other plaintiffs have increasingly moved toward that same approach, data shows. Between 2018 and 2020, many challenged mergers faced both class and individual actions. More recently, those lawsuits have been almost exclusively individual actions.

For law firms and attorneys filing the cases, an individual action has a similar value as a class action, Griffith said in an interview.

“Which is to say these are actions that companies will just pay to get rid of,” Griffith said.

Judicial Pushback

Many of the individual merger objections have been filed in the Southern District of New York or the District of Delaware. Most are quickly, voluntarily dismissed. Individual actions filed in 2022 were open, on average, for 40 days.

Judges typically have little involvement when these suits are voluntarily dismissed. But they’ll occasionally preside over companies’ pushback on paying fees.

Nuance balked at paying a mootness fee, prompting Monteverde to ask a judge to award $250,000 in attorneys’ fees.

Judge Paul Oetken in the US District Court for the Southern District of New York denied the fee request earlier this year, finding the disclosures didn’t “confer a substantial benefit on shareholders.”

Judge Ronnie Abrams from the same court last year also denied Monteverde’s request for $400,000 fees in cases brought against SemGroup Corp., citing similar reasons. Monteverde, in another Southern New York case, was awarded about $55,000 after requesting over $350,000.

Litigation costs discourage many companies from fighting requests for mootness fees in courts. But judges’ decisions rejecting high fees have emboldened companies to negotiate for a lower fee, attorneys said.

But judges’ pushback could also drive plaintiffs to look for other federal districts to file their case.

“Since the Delaware Court of Chancery and certain federal courts have seemingly cracked down on the routinely alleged disclosure violations that plaintiffs often challenge in public mergers, plaintiffs have attempted to find other jurisdictions that do not see these types of suits as often with the hope that their mootness fee requests are received more favorably,” Troutman Pepper Hamilton Sanders LLP partner Christopher Chuff said.

That’s part of the reason critics of merger disclosure litigation don’t see an easy judicial fix, and say it may be up to lawmakers.

The PSLRA could be amended to include limits on individual actions or merger objection lawsuits, Erickson said. The law could also be changed to require a plaintiff own a certain number of shares before filing, she said.

“I think it’s a problem we’re stuck with until [lawmakers] decide that they’ve had enough,” Erickson said.