Keywords: M&A transactions, shareholder litigation, disclosure,
The Delaware Chancery Court has issued three decisions in 2013 that demonstrate the court's willingness to rein in the excessive and often frivolous litigation challenging public M&A transactions.
Recent trends in shareholder litigation illustrate the magnitude of the litigation issues facing corporations in public M&A transactions. Of the public company acquisition transactions with a value over $500 million that were announced in 2007, 53% were challenged in shareholder litigation. By 2012, 96% of such transactions were subject to shareholder suits, with an average of 5.4 suits filed for each deal. In addition, for Delaware target corporations valued at over $100 million, 65% of the M&A deals announced in 2012 were subject to litigation in Delaware and in at least one other jurisdiction (usually the jurisdiction where the corporation's principal place of business is located). Finally, for shareholder suits in deals over $100 million that were announced in 2012 and ultimately settled, shareholders received only supplemental disclosures in 81% of such settlements (so-called "disclosure-only settlements"), with plaintiffs' attorneys fees and expenses being the only cash paid out by defendants in such suits.
On June 25, 2013, Chancellor Leo Strine, Jr., issued his opinion in Boilermakers Local 154 Retirement Fund v. Chevron Corporation and its consolidated companion case, IClub Investment Partnership v. FedEx Corporation, holding that bylaws that specified the forum for litigation related to the internal affairs of the defendant Delaware corporations and that were adopted by their boards of directors were valid under Delaware statutory law and were facially valid contractual forum selection clauses. Specifically, the bylaw adopted by the FedEx board of directors provided that the Delaware Chancery Court would be the sole and exclusive forum for derivative suits brought on behalf of the corporation, actions asserting a breach of fiduciary duty owed to the corporation or its stockholders by the directors, officers or employees of the corporation and actions asserting a claim arising under Delaware's corporate statute or governed by the internal affairs doctrine. Similarly, the Chevron bylaw provided that the forum for such actions could be filed in any Delaware state or federal court with subject matter jurisdiction and personal jurisdiction over the parties and that the bylaw would not apply unless the applicable court had personal jurisdiction over the indispensible defendant parties.
In its analysis, the court stated that the forum selection bylaws regulate a proper subject matter under Delaware's corporate statute and that, as a contractual matter, the stockholders assented to the forum selection bylaws because the boards of directors had the authority under the corporations' respective certificates of incorporation to unilaterally adopt bylaws. The court also noted that, under applicable law, a plaintiff may defeat the enforcement of a forum selection bylaw by showing that as-applied the enforcement of the bylaw would be unreasonable or that the bylaw should not be enforced because the bylaw is being use for improper purposes inconsistent with the directors' fiduciary duties.
Notwithstanding the issues resolved by the Delaware Chancery Court's holding in the Chevron case, the key factor in determining whether forum selection bylaws will be effective in reducing multi-jurisdictional litigation will be whether judges in states other than Delaware enforce such bylaws. For example, in 2011, a California federal court refused to enforce a Delaware corporation's board-adopted forum selection bylaw on the grounds that the board's adoption of the bylaw amounted to an attempted unilateral amendment of the corporation's bylaws and, as a matter of contract law, was not valid because there was no mutual consent of the plaintiff stockholders to such amendment.1 In the Chevron decision, the Delaware Chancery Court expressly rejected the California court's reasoning as a matter of Delaware law. However, while non-Delaware judges presumably would not reject the Delaware Chancery Court's interpretation of Delaware law with respect to the validity of forum selection bylaws, it is far less clear how such courts might apply the reasonableness requirement for enforcement of forum selection bylaws on a case-by-case basis.
If judges outside of Delaware enforce forum selection bylaws, absent a successful as-applied challenge, stockholder litigation in connection with a public M&A transaction involving a Delaware target corporation with a forum selection bylaw will be heard and decided in Delaware courts. Accordingly, multi-jurisdictional litigation in connection with public M&A transactions could be curbed and the inefficiencies of simultaneously defending the same claim in multiples forums, including wasteful duplication of legal expenses, would not continue to be borne by Delaware target corporations and their stockholders.
In a transcript ruling on February 28, 2013, in In re Transatlantic Holdings Inc. Shareholders Litigation, Chancellor Strine rejected a class action disclosure-only settlement that had been proposed by plaintiffs and not objected to by the defendants. Stating that additional disclosure should "contradict or meaningfully affect the flow of information in a way that's different from what the board is suggesting," Chancellor Strine concluded, that, despite having been given multiple opportunities, the plaintiffs had failed "to explain in any rational way why the disclosures that they had obtained were in any meaningful way of utility to someone voting on the merger." The court also refused to certify the proposed plaintiff class because the two named class representatives, one of whom did not vote on the merger and owned only two shares and the other who could not remember whether he had voted on the merger and did not keep any records, would not be adequate class representatives.
While the Chancellor was sympathetic to the desire of the defendants to settle non-meritorious litigation and put it behind them, he could not approve the class certification and foreclose the possibility, however unlikely, that a more diligent plaintiff could come forward with a damages claim in the future.
On March 19, 2013, Vice Chancellor Sam Glasscock III issued a letter ruling in In re PAETEC Holding Corp. Shareholders Litigation regarding the award of attorneys fees for a previously approved disclosure–only settlement in which, as the court noted is customary for such settlements, the defendants agreed not to oppose a fee request by plaintiffs' counsel up to a specified amount. The supplementary disclosures that plaintiffs' counsel extracted from the defendants were (i) that certain employees of the acquiror's financial adviser working on the transaction had previously worked for PAETEC and had access to its confidential information, (ii) that PAETEC's CEO stated to the acquiror on two occasions that he did not expect to have a continuing role in the combined entity after the merger, (iii) the reasons why PAETEC hired each of its financial advisors, (iv) the fact that PAETEC's entry into an exclusivity agreement with the acquiror precluded it from negotiation with two other bidders during the exclusivity period, (v) certain information regarding the valuation that each of PAETEC's financial advisors assigned to PAETEC's net operating losses, (vi) the reasons why PAETEC did not pursue a potential proposal from another bidder and (vii) the effect of synergy realization on the cash flow accretion/dilution analysis for the acquiror.
Before addressing the substance of the plaintiffs' fee request, the court rejected the plaintiffs' argument that, absent collusion, judicial scrutiny of unopposed fee requests was not appropriate. The court noted that the agreement of the defendants not to oppose a fee award of a certain level was not an agreement by the defendants as to the amount of attorneys fees requested by the plaintiffs up to a specified level or an expressed desire that the defendants wanted their decision not to oppose a fee of a specified level to be a substitute for the court's independent judgment of an appropriate fee. In addition, the court stated that judicial scrutiny of fee requests in disclosure-only settlements is particularly warranted because in such settlements there is a risk that the plaintiffs and the defendants have agreed to trivial additional disclosures that generally do not expose the defendants to liability for money damages and that both sides have chosen the path of "least resistance" to obtain a release of claims for the defendants and fees for the plaintiffs' attorneys. Accordingly, the court concluded that it is proper for the court to scrutinize a disclosure-only settlement substantively and to determine whether the settlement confers any benefit on the plaintiff class.
The court held that, with the exception of the disclosure regarding the acquiror's financial advisor, none of the other supplemental disclosures provided for in the settlement justified any amount of fees to be awarded because such disclosures were of "such doubtful materiality." The court noted that such disclosures either went to a level of detail not required to be disclosed under Delaware law or were trivial and only of marginal utility. Accordingly, the court's entire fee award was based on the single item of supplemental disclosure regarding the existence of a conflict of interest for the acquiror's financial advisor, which, based on recent cases, the court recognized as an important area of disclosure. Aside from the conflict disclosure, however, the court stated that the remaining supplemental disclosures did not warrant an award of any amount of attorneys fees in the case.
The Delaware Chancery Court's 2013 decisions thus far offer an encouraging sign that wasteful multi-jurisdictional litigation and weak disclosure-only settlements may be less likely to succeed in the future. It remains to be seen if these recent decisions will have any deterrent effect and begin to turn the tide on the filing of non-meritorious lawsuits in connection with public M&A transactions.
Originally published September 5, 2013
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