M&A Litigation Undergoing Major Shift After Del. Ruling

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By Michael Greene

Aug. 3— Shareholder litigation involving mergers and acquisitions is moving from Delaware to the federal courts after the Delaware Chancery Court said it will closely scrutinize deal-related settlements.

According to an Aug. 2 Cornerstone Research report, shareholder plaintiffs filed claims in Delaware for only 26 percent of litigated M&A deals in the fourth quarter of 2015 and the first half of 2016, compared to 61 percent of litigated deals during the first three quarters of 2015.

Another Cornerstone report issued July 26 found there were 24 M&A-related filings in federal court during the first half of 2016, a 167 percent jump from the second half of 2015.

The Delaware Chancery Court's “decision in Trulia has no doubt changed the landscape of M&A litigation,” said Ned Weinberger, a Delaware-based partner at Labaton Sucharow LLP who represents shareholders in corporate governance and transactional matters.

“Plaintiffs’ firms that historically have sued on every deal and sought so-called ‘disclosure-only' settlements have had to seek refuge outside of Delaware,” Weinberger told Bloomberg BNA. “So it is not surprising to see an uptick of M&A filings in federal court.”

The open question is whether the shift will remain in the long term, attorneys and academics said.

`Trulia' Ruling

In January, the chancery court made clear in In re Trulia Inc. Stockholder Litig.—a lawsuit challenging Zillow Inc.'s acquisition of Trulia Inc.—that it will be “increasingly vigilant” in reviewing disclosure-only settlements of shareholder class actions challenging M&A deals (16 CARE, 1/26/16). In such settlements, shareholders agree to broadly release the company from their lawsuit in exchange for supplemental disclosures. While they don't receive any money in the resolution, their lawyers are paid attorneys' fees by the defendants.

Delaware is the most influential state in the country with respect to corporate matters, given that 66 percent of all Fortune 500 companies are incorporated there (105 CARE, 6/1/16). Its courts are the main forum in which shareholder litigants bring M&A claims.

Since Trulia, overall M&A-related litigation has substantially decreased. Between 2011 and 2014, shareholders challenged over 90 percent of M&A deals valued at more than $100 million, according to Cornerstone Research. The percentage declined to 84 percent in 2015 and dropped further to 64 percent in the first half of 2016.

Will Other Courts Adopt `Trulia'?

Ravi Sinha, a Cornerstone principal who authored the Aug. 2 report, said the Trulia decision is the probable cause for the decrease of filings in Delaware and the increase of filings in the federal courts.

“I suspect that this trend will continue until it becomes clear whether the Trulia standard for evaluating disclosure-only settlements will be adopted by the federal courts,” Sinha told Bloomberg BNA in an e-mail.

Trulia requires the court to determine whether additional disclosures are of value to shareholders, Sinha said. “This is a subjective standard and it may be difficult for courts that are not as familiar with M&A to make such determinations,” he said. “We have yet to see clear indications one way or the other.”

If other courts do apply Trulia, that may stem the flow of M&A cases out of Delaware. Whether state and federal courts outside Delaware should apply the decision is a complicated question. However, the threshold issue is whether Trulia will even be brought to the notice of other courts. This is compounded by the fact that many trial judges outside Delaware don't handle merger-related cases on a regular basis.

“How is a judge in a trial court somewhere in California or New Jersey supposed to know about Trulia if the parties don’t tell him or her?” asked Sean Griffith, a Fordham University law professor who filed an amicus brief objecting to the Trulia settlement. He warned that courts in other jurisdictions will not be alerted to the decision unless there is an objector to the settlement.

Griffith recently objected to an M&A settlement in New Jersey Superior Court, citing Trulia. In that case— Vergiev v. Aguero, Docket No. L-2276-15—the court in June declined to approve the settlement.

Better Options?

It also remains unclear whether courts outside Delaware provide shareholder plaintiffs with a better option for their M&A claims.

To the extent that a claim is brought based on the federal securities laws, there is no requirement that the court follows Trulia, said University of Pennsylvania law professor Jill Fisch.

However, there are high hurdles in federal securities litigation such as heightened pleading requirements, said Fisch, who teaches and writes about corporate law and securities regulation. In addition, it isn't clear whether plaintiffs' attorneys have enough leverage in other courts to get the kind of settlements they previously obtained in Delaware, she said.

Griffith, Fisch and University of California, Berkeley, law professor Steven Davidoff Solomon co-authored a paper last year that suggested it is more appropriate for M&A claims involving public company disclosures to be policed under the federal securities laws than state law.

Weinberger warned that the shift could abate eventually, as more Delaware corporations adopt bylaws designating the state as the appropriate forum for shareholder disputes, and those provisions are enforced by courts outside Delaware. He added that “where stockholder plaintiffs possess meritorious claims, and intend to actually litigate those claims, the Delaware Court of Chancery remains the forum of choice for M&A litigation.”

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

For More Information

The July 26 Cornerstone report on federal securities class action filings is available at https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2016-Midyear-Assessment.

The Aug. 2 Cornerstone report on M&A-related litigation is at https://www.cornerstone.com/Publications/Reports/Shareholder-Litigation-Involving-Acquisitions-2016.

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