Will Close Review Dampen Abusive M&A Suits in Del.?

By Michael Greene

Oct. 30 — The Delaware Chancery Court's increased scrutiny of disclosure-only settlements may not be enough to discourage abusive litigation challenging merger and acquisition deals, an attorney said Oct. 29.

Close review may not be enough to prevent plaintiffs' attorneys from bringing these types of cases, said Andrew Pincus, a partner at Mayer Brown LLP in Washington. Instead, the plaintiffs' bar may push for more than supplemental disclosures in order to get their settlements approved, ultimately costing shareholders and companies more in litigation expenses, he added.

Pincus spoke with other panelists at a Practising Law Institute conference in New York.

Heightened Review

The court's increased skepticism regarding disclosure-only settlements is in response to the “deal tax” problem, in which M&As are ubiquitously challenged and settled for supplemental disclosures that provide little benefit to shareholders.

Over the past few months, the court has issued several transcript rulings and one written opinion expressing its reservations about approving such pacts . Most recently, Vice Chancellor J. Travis Laster in an Oct. 9 bench ruling rejected a proposed disclosure-only settlement arising out of Hewlett-Packard's acquisition of Aruba Networks .

At the PLI panel, Pamela Tikellis, a partner at Chimicles & Tikellis LLP in Wilmington, Del., said that in the past, the chancery court reduced attorneys' fees to discourage the bringing of such settlements. This was a “bust,” she said, because the settlements just “kept coming and coming.”

Tikellis said she expects plaintiffs' attorneys to continue bringing M&A challenges despite the court's closer review. She suggested that moving forward, the defense bar should “take a little bit of responsibility” by not agreeing to such deals.

Instead of trying to get “deal insurance,” defense attorneys should move to dismiss some of these lawsuits, she said. These cases are not brought as appraisal claims and often there is no breach of fiduciary duty argument articulated beyond “the price is too low,” she added.

Appraisal Arbitrage

In other discussions, Lawrence Hamermesh, a professor at Widener School of Law in Wilmington, discussed the viability of “appraisal arbitrage” claims in Delaware.

In appraisal arbitrage claims, hedge funds purchase shares after a merger is announced and subsequently file for a statutory appraisal of their shares claiming that the deal price was too low.

Hamermesh said that for deals negotiated at arm's length, it is difficult for the appraisal value to come out higher than the agreed-upon deal price. He observed that in four appraisal cases decided this year, the chancery court concluded that the deal price was the best indicator of fair value (30 CCW 324, 10/28/15).

He also said that contrary to what has been suggested by some commenters, he didn't believe that the statutorily prescribed prejudgment interest that is accrued while the litigation is pending is driving these types of claims.

Last year, the Delaware State Bar's Corporation Law Council proposed a modification to 8 Del. C. §262 that would allow combined entities the option of limiting the accrual of interest on appraisal awards (30 CCW 125, 4/22/15). However, the legislation was never introduced in the Delaware General Assembly.

Hamermesh told the audience that the Delaware Bar continues to look into whether abuse is occurring with appraisal claims.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com