Are Merger Objection Suits a Dying Breed?
Much has been written lately about why suits objecting to a merger are so bad. The complaint is that those suits lack any merit and are filed only to get a fee for the plaintiffs bar, after a quick settlement. As evidence of this abuse, the critics point to the prevalence of merger objection suits (occurring in 90 percent of deals) and the speed with which those suits are filed soon after a merger announcement. After all, 90 percent of all mergers cannot be objectionable and a suit filed so quickly could not have followed taking the time to investigate its merits. When the suit is settled shortly after filing, with only some additional disclosures added to the proxy statement and a fee paid to the plaintiffs' attorneys, the litigation looks suspicious. Calls for reform are made almost daily.
Why, then, are merger objection suits still so prevalent? To begin with, the actual players lack an incentive to change the system that benefits them. If the suit settles quickly and a $500,000 fee is awarded to the plaintiffs' lawyers, they are happy. For the defendants, that cost is quite small compared to the millions involved in most mergers and the settlement usually involves what has been described as an "intergalactic" release of the director defendants from every possible claim. That certainty is worth something, as shown by the willingness of defendants to pay.
These merger objection suits also are defended because they are said to have some social benefit. Every once in a while, one of those suits is successfully litigated by showing the merger was a bad deal for stockholders. That threat of a possibly successful claim is said to help keep corporate America honest. For without the ever-present threat of being held accountable, some directors and their advisers would not resist the temptation to abuse their position to profit personally.
Whatever the merits of these various arguments, the critics of merger objection suits are winning the debate. The Delaware Court of Chancery is gradually limiting merger objection litigation. Those reforms take several different paths. To begin with, the Court of Chancery is more often declining to approve settlements of merger objection litigation that do not involve any real benefit to the stockholders. For example, most such settlements are sought to be justified by obtaining supplemental disclosures to the merger proxy statement. More information is said to be valuable and worth paying for by a fee award. But the Court of Chancery is now more closely examining whether those added disclosures really say anything worthwhile. And when they do not, fees are significantly reduced or not awarded at all.
In addition, the Court of Chancery is significantly cutting back on the scope of releases given to the defendants in merger objection litigation. Limiting the release to just the specific claim made in the complaint reduces the value of that release to the defendants and presumably reduces the attorney fee they will agree their company or D&O carrier will pay. In some cases, no release at all will be approved and the claims will be dismissed. That reduces the incentive to bring such suits because no fees are won for the attorneys.
In just a recent 30-day period, the Court of Chancery substantially reduced the fees awarded in a disclosure-only settlement and in another decision dismissed a case without awarding any fees. (See In re Riverbed Technology Stockholders Litigation (Del. Ch.) (reducing fees), and In re Aruba Networks Stockholder Litigation, Del. Ch. C.A. 10765-VCL (October 9, 2015) (transcript) (dismissing case without awarding fees).) These decisions are not to be taken as just rare exceptions to the past parade of merger objection settlements. Instead, each announces that its reasoning will be followed in the future. While there is some risk that these decisions will motivate the plaintiffs bar to file suits outside of Delaware, the increased use of forum-selection bylaws favoring Delaware may restrain that threat to reform.
These trends illustrate that the Court of Chancery will adapt to reform any problems with stockholder litigation. Gradual reform on a case-by-case basis is one of the key benefits of the common law. While the process takes time and demands patience, that is preferable to dramatic changes whose consequences cannot be known. Simply barring all merger objection litigation as some advocate risks fostering abuse by insiders. Our system is working and we should let the Court of Chancery do its job.