Is the Court of Chancery Reforming Merger Litigation?
There is an uproar going on about the practice of filing suit over every merger announced for a publicly traded company. At least 90 percent of merger announcements are followed in a day or two by the filing of complaints alleging the merger is unfair to one or both of the companies involved. Given that these suits are filed so quickly and in almost every deal, they cannot be well researched and may well be meritless. That impression is further confirmed when virtually every one of these suits is soon settled, often for meager, additional disclosures to stockholders and attorney fees for the plaintiffs' lawyers. The whole practice looks too much like legalized extortion. As more than one court has noted, corporate defendants find it cheaper to settle than to litigate these cases.
The problem is compounded when several suits are filed in multiple jurisdictions. That drives up the cost of defense when multiple law firms are retained to cover all the jurisdictions involved. Jurisdictional disputes also occur, again increasing defense costs. Critics have written no end of articles decrying this mess.
What then was to be done about this problem of multiple litigations over every merger of publicly held companies? The first step was for transactional lawyers to actively address the common complaint that the merger was the product of an unfair process or dominated by self-interested, controlling stockholders. As is evident from the most recent decisions, acquirers have quickly adapted the preferred practices that the courts hold leads to a fair process. These include using independent directors on special negotiating committees with the power to say no, independent advisers to those committees, majority of minority stockholder approval requirements and other steps to foster fairness. While it remains to be decided if those practices will cleanse the self-dealing transaction initiated by a controlling stockholder, they do negate unfairness claims in many cases.
But what about the claims the disclosures are inadequate? Again, transactional lawyers are trying to at least minimize those claims by new tactics. Those include quickly producing to the plaintiffs the key documents involved in the merger negotiations, such as the board of directors' minutes, the investment banker analysis and similar materials. The plaintiffs' lawyers are then asked for any additional disclosure they might suggest and almost anything they ask for is sent out in supplemental disclosures.
While these new tactics and procedures may moot many complaints, what about the plaintiffs attorneys' excessive fee requests? This is where the Delaware Court of Chancery is increasingly stepping in to reform the process and curtail excessive fees. This does not mean any fee request is unwarranted. There is some utility to have the disclosures sent to stockholders be reviewed with the critical eye of someone who stands to earn a fee for any deficient disclosure he can find. What some critics fail to acknowledge is that many of the complaints alleging deficient disclosure have led to material, additional information going to stockholders. When the merger's terms and how those terms were set are fully disclosed, the deal is more often seen as fair to all. This is a good business result. Even the mere threat of disclosure litigation encourages more disclosure.
As to those suits where the supplemental disclosures were not really beneficial, recent Court of Chancery decisions both criticize the lawyers involved and cut their fees. This trend perhaps began in earnest in the now-well-known opinion in In re Sauer-Danfoss Shareholders Litigation, Del. Ch. (Apr. 29, 2011), that drastically cut a fee application. That decision was soon followed by the settlement hearing in In re Amylin Pharmaceuticals Shareholders Litigation, C.A. 7673-CS (Transcript, February 5, 2013). There, the court spelled out in painful detail why the supplemental disclosures were not material, why the plaintiffs lawyers' fee request was objectionable and why their fees would be minimal.
The Sauer-Danfoss opinion and the Amylin transcript are no longer unique in their criticisms and refusal to award unwarranted attorney fees. The transcript in In re Transatlantic Holdings Shareholders Litigation, C.A. 6574-CS (February 28, 2013), and In re Interclick Shareholders Litigation, C.A. 7038-VCG (March 27, 2013), confirm the Court of Chancery is serious about its review of fee requests. The court's recent opinion in In re Paetec Holding Shareholders Litigation, C.A. 6761-VCG (March 29, 2013), again evidences this careful scrutiny. Indeed, there are several instances where the Court of Chancery refused to award any fees or approve a settlement that did not benefit stockholders.
In short, the Court of Chancery and transactional lawyers are working to eliminate meritless claims over mergers. Delaware law continues to develop in this area and it seems likely that more steps will be taken to connect any litigation abuses. Plaintiffs lawyers would also be better off if they voluntarily dismissed suits where discovery shows a lack of merit. That practice of dismissal without prejudice or with prejudice to only the named plaintiff did occur in the past and served to preserve the reputations of the lawyers involved. As every good lawyer knows, her reputation is her most important asset. Those lawyers who pursue frivolous claims and bear the sometimes tough criticism of the Court of Chancery only lose out in the long run.